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
Minister,                                                                                                 26 May 2006.
Energy, Water and Communications Ministry,
Block E 4/5, Parcel E,
Kompleks Kerajaan Putrajaya.    
Malaysia.                                                                                                BY HAND

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 pay IPPs.

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 years.

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 previous position.

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.

One, 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.

Two, 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.

Three, 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.   

Four, 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.

Five, 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 interest.

Six, 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..

Seven, 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.

Eight, 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.

Nine, 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%.

Ten, 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.      

Such 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.

The 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 economists                                                                                                      

DAP 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.

Yours faithfully,

LIM GUAN ENG

SECRETARY-GENERAL