Memorandum sent by the DAP
Secretary General, Lim Guan Eng, to the Minister of Energy, Water and
Communications on 26.05.2006 at Putrajaya
YB Datuk Seri Dr Lim Keng Yaik
26 May 2006.
Energy, Water and
Block E 4/5, Parcel E,
Yang Berhormat Datuk Seri,
Unfair And Unacceptable
Tenaga Nasional Bhd(TNB) 12% Tariff Hike When The RM 1.5 Billion
Increase In Revenue Employed To Pay Independent Power Producers(IPPs)
- 12 Reasons Of The Sell Out Of Consumer Interests As No Need For Any
Increase If Reserve Margin Reduced To 16%.
On behalf of 27 million
Malaysians, DAP strongly objects to the Cabinet accepting your
recommendation for a 12% electricity tariff hikes for TNB effective on
1 June 2006. This 12% tariff hike affecting 41% of its 6.2 million
consumers (2.54 million) or 2.1 million households is grossly unfair,
unjustified and unacceptable when the RM 1.5 billion increase in
revenue resulting from the increase will be utilized principally to
By seeking to protect the
exorbitant profits of IPPs at public expense, this is clearly a sell
out of the national interests as well as 27 million Malaysian consumer
as there is no necessity for any tariff hike if reserve margin is
reduced from the present high of 40% to 16%(in accordance with
international benchmarks of 15-20%).
One, the extra cash of RM1.5bil
from the higher tariff would eventually be used to pay RM1.3bil to
Malakoff’s Tanjung Bin plant once the IPP reaches maximum capacity.
About RM630mil in capacity payment is scheduled be paid to Malakoff by
the end of this year
The national utility company
would also have to pay more to IPPs in the near future as two new
power plants come on stream between September and early 2009. TNB
pays about RM 4 billion a year to existing IPPs and the new power
plants would add another RM2.13bil in cost for the company.
Secondly payment for excessive
reserve margins to IPPs maintained at 40% costing TNB between RM 2.5
billion to RM 3.3 billion yearly. Under the current structure, TNB
pays IPPs a “capacity charge” and an “energy charge”. A capacity
charge is payment made for making available a certain level of
capacity, while the energy charge is payment for electricity actually
supplied to TNB.
This means TNB would have to pay
for spare capacity or reserve margins, even if unused. It has to bear
between RM2.5 billion to RM 3.3 billion (according to various reports)
for the reserve margin of about 40 per cent in the system, and the
cost is expected to increase to RM5 billion in the next two to three
It is crystal clear to everyone
except TNB, the Cabinet and your goodself that paying for power you do
not need or above capacity is not only financially unsound but
economically stupid. The reluctance to ask IPPs to sacrifice first
before getting Malaysian consumers to do so shows that the financial
interests and profitability are more important.
If the reserve margin were
reduced from the present 40% to 16%, TNB would save between RM1.5
billion to RM 2 billion annually. Consequently there would be no
necessity for any tariff hike. Why should consumers be asked to
sacrifice but not the IPPs who are allowed to continue to enjoy high
rates of returns and hefty profits unaffected by high fuel prices?
Prime Minister Datuk Seri
Abdullah Ahmad Badawi claimed that he can not act unilaterally against
the IPPs, but DAP wishes to remind him that he was elected with a huge
mandate of 91%of the Parliamentary seats to defend and safeguard the
interests of ordinary Malaysians and not that of the IPPs. DAP regrets
that the Prime Minister has allowed you to betray his mandate and sell
out the interests of consumers.
Lest you have forgotten as late
on 15-09-2005, you had shot down TNB’s request for tariff hike its
efficiency levels were still lacking, there was still wastefulness,
frequent power distruptions, late power installation and poor quality
of power supplied. We doubt that TNB had improved on all performance
indexes in a short space of 8 months. Clearly your sudden interest in
a clients charter of good service by TNB to consumers is a pathetic
and desperate attempt to distract attention of the reversal of your
Apart from the above 2 reasons,
there are 10 other reasons why this 12% tariff hike is a sell out of
consumer interests without addressing the real problem affecting TNB
and its unequal relationship with the IPPs.
TNB recorded a profit of RM 1.28 billion during its 2005 financial
year and its first half 2006 financial year profits rose to RM 993
million from the previous RM 303 million. Such an increase in profits
proves that TNB can generate revenue from efficiency gains through
proper financial planning, funds matching and cutting costs as well as
increasing market share, not by increasing electricity tariffs.
Tenaga Nasional Bhd success in securing a RM1 billion fixed-rate term
loan facility earlier this year from Malayan Banking Bhd to finance
Tenaga’s capital expenditure. With this RM 1 billion loan, there is
less financial pressure on Tenaga as its debts were reduced to RM28.88
billion as at Nov 30, 2005 from RM 29.98 billion on Aug 31, 2005.
Tenaga saved hundreds of millions of ringgit when Lim Keng Yaik failed
to perform his duty as a Minister by breaking his promise to make
Tenaga pay compensation to the public for losses caused by the 3-hour
blackout on 13 January 2005.
Keng Yaik had rejected earlier Tenaga’s demands for a tariff hike
saying that it depended on the company’s efficiency and the price of
oil. Keng Yaik even said that a petrol price increase is not a ground,
and most of the fuels like gas have fixed prices and are subsidized.
Clearly Keng Yaik has shown that he is not a reliable, trustworthy
and a responsible Minister.
It is true the average price
paid by Tenaga for coal jumped 69 per cent and fuel prices by 230%
since 1997 when the last tariff hike was raised by 8.3%. However, most
of Malaysia’s power plants run on natural gas. Since May 1997,
Petronas has supplied processed gas to Tenaga and the independent
power producers (IPPs) at a regulated price of RM6.40 per mmbtu
(British thermal unit) as compared to the current market price of more
than RM 30/-.
Noting that 70% of power plants
were gas-fuelled, Lim Keng Yaik had said the market demand for natural
gas of 2,500 million metric British thermal units (mmBtu) was above
Petronas’ production capacity of 2,000 mmBtu. Petronas imports the
additional 500 mmBtu from Indonesia and Thailand at RM30 per mmBtu but
sells it to Tenaga Nasional Bhd (TNB) at RM6.40 per mmBtu. As long as
Tenaga enjoys such subsidies there is no reason why such savings can
not be passed on to consumers.
Petronas has subsidised the power sector more than RM25 billion since
1997, of which RM14 billion or 55% went to the IPPs, whilst the
remaining RM 11 billion is enjoyed by Tenaga. For Tenaga to seek a
tariff hike when it has enjoyed direct subsidies of RM 11 billion is
unacceptable, ungrateful, irresponsible and not in the national
Petronas’ subsidies to the IPPs of RM 14 billion since
1997 must be abolished. The RM 14 billion subsidies to the IPPs could
be better spent on funding the capital expenditure and maintenance
requirements of Tenaga. As the IPPs are private companies enjoying
special rates for generating electrical power that Tenaga is forced to
purchase, there is no reason for IPPs to enjoy such huge subsidies of
RM 14 billion to profit at Tenaga and Malaysian consumers’ expense..
Tenaga has no justification for increasing electricity tariffs when it
has increased its profits why should Malaysians pay higher tariffs
when we have sacrificed and lost so much when Tenaga and the IPPs have
made huge profits from the Petronas gas subsidy of RM 25 billion. DAP
strongly opposes electricity tariff increase by Tenaga Nasional Bhd as
unfair when Tenaga recorded a
57% net profit increase to RM 1.28 billion in the year to August as
compared to RM 813.7 million the previous year.
Tenaga identified the 57% net profit increase to improved efficiency,
a fall in general expenses losses and foreign exchange (forex) gains
of RM 141.8 million as compared to a loss of RM 571.8 millon last
year. Clearly Tenaga can reap profits by improving its efficiency and
not by increasing tariffs.
why should Tenaga get a tariff hike when it is not required to
subsidise SESB (Sabah Electricity Sdn Bhd). Every year, TNB gave more
than RM200mil to SESB. Now the Government has agreed to subsidise the
diesel cost amounting to RM339mil, which have already been billed to
the government. Such savings should be passed on to consumers.
reducing the Tenaga’s high reserve margin of 40% by reviewing unfair
compulsory power purchase agreements of power generated by IPPs to
Tenaga contracted at higher than market rates. Such IPP agreements
which were made not for the benefit of Malaysians but for the few
cronies of BN.
Tenaga’s rate of return is amongst the lowest amongst utility
companies in South-East Asia. TNB’s net profit of RM1.28 billion for
2005 was only 2% of return on assets (ROA) of RM60 billion in assets.
This is caused by its high costs especially payments to Independent
Power Producers (IPP) comprising 40.5% of its total costs. Staff 9.9%,
fuel 19% and depreciation 17% are the other main components of costs.
Clearly the high and unreasonable payments to IPPs are the main
obstacles to higher net profits for Tenaga and not increasing
electricity tariffs. Forcing Tenaga to purchase power from IPPs and
guaranteeing payments for power generated that Tenaga does not need
has caused Tenaga’s costs to rise. Guaranteeing purchase of power
produced by IPPs which Tenaga has allowed some IPPs to enjoy rates of
return of more than 12% as compared to Tenaga’s 5.2%.
increasing electricity tariffs
would only serve to increase inflation and further increase the
financial burden of Malaysians. Inflation was the highest in 7 years
at 4.8% in March 2006 as a result of the fuel hike resulting in Bank
Negara increasing interest rates to 3.5% recently.
a hike in interest rates would definitely affect economic growth and
place serious doubts whether the 9MP’s objectives of 6% economic
growth from 2006-2010 can be achieved. 6% economic growth over the 9MP
is crucial to help Malaysia to achieve the 6.5% economic growth from
2010-2020 necessary to be a developed nation.
International Monetary Fund (IMF) had recently cut its 2006 economic
growth forecast for Malaysia to 5.5 percent from 6 percent, citing
increasing inflationary pressure. The 5.5% economic growth is in line
with estimates by both the by the Malaysian Institute of
Economic Research and a
Reuters quarterly poll of
remains concerned at the persistent attempts of TNB taking the easy
way out to increase earnings by increasing electricity tariffs and not
accept its poor and inefficient management and unfair contracts with
IPP as the underlying cause. The burden on businessmen can be best
shown by the comments of a foreign investor in The Star. Stephen
Blackburn, the General Manager of Haco Asia Pacific Sdn Bhd said,
“An increase of up to 12% is unacceptable and not in line with the
current inflation rate in the country. It is not justifiable and I had
expected the hike to be no more than the inflation rate. Once the hike
sets in, it will increase our operational cost.”
Clearly the failure of the
Cabinet and yourself to stand up to IPPs will only result in
increasing operational costs, inflation and higher standard of living
for businessmen and consumers. In line with the principle that all
hardships should be borne equally, it is unfair that the majority has
to bear it for the benefit of the few. DAP protests the latest tariff
hike based on the above-stated 12 reasons and urges the government to
listen and take heed of the sufferings of the people by withdrawing
the fuel hike.
The time has come for IPP to
bear the burden to give back to society what it has profited in
billions of ringgit since 1997.
LIM GUAN ENG