Here's my first "official" statement for the DAP ....
Media Statement by Teh Chi-Chang, Economic Advisor to DAP Secretary-General, in Petaling Jaya on Thursday, 22nd January 2009: Petronas and the Independent Power Producers (IPPs) Must Help Reduce Power Tariffs
Our national utility company, Tenaga Nasional Berhad (TNB), has just reported a RM944m net loss in its latest quarterly result for the three months ended November 2008, after accounting for a RM1.4bn translation loss on its foreign liabilities.
TNB reported the loss despite the 24% tariff hike in June 2008. The additional revenue from the tariff hike was utilised to cover higher fuel costs including gas payments to Petronas and higher payments to independent power producers (IPPs).
Therefore, Petronas and the IPPs, not TNB, were the biggest beneficiaries of the June 2008 tariff hike. The 24% tariff hike adds about RM5.5bn per year to TNB's revenue:
1.The bulk of the additional revenue, 76% or RM4.2bn per year, goes to Petronas which more than doubled the price it charges TNB for gas to RM14.31/mmBTU from RM6.40/mmBTU;
2.The other major beneficiary is the IPPs. Capacity payments to new IPP Jimah alone will take another RM700m per year (13%). TNB has to pay these capacity payments even though it has no need for the new capacity at present.
Various parties are now clamouring for power tariffs to be cut to help mitigate the poor economic environment. It is clear TNB cannot afford to lower power tariffs. Not only is it making accounting losses, it is also suffering cash outflow. For the same three months ended November 2008, it suffered a RM164m cashflow deficit.
We are concerned that TNB will have to cut corners on maintenance and upgrading work if it is forced to lower tariffs. Unreliable power supply and frequent breakdowns will adversely affect the economy and business confidence.
Therefore, we call on Petronas and the IPPs to contribute to national interest. We agree that power prices should reflect the cost of production. In Malaysia, the cost of production is inflated by high gas prices and by power purchase agreements (PPAs) which have been termed “grossly unfair” by Tan Sri Ani Arope, executive chairman of TNB between 1990-1996.
Some IPPs have earned returns on capital as high as 40% per year. This is equivalent to recovering their total capital in less than 3 years. The PPAs are for 21-year periods. The IPPs earn pure profit for the next 18 years. We recognise that private enterprises deserve fair returns for the risks they take. However, returns of 40% per year are excessive for IPPs which can usually expect to make only 10-15% in competitive environments.
The DAP calls on the Barisan Nasional federal government to renegotiate these PPAs in the interests of the Malaysian public. Certain PPAs already have clauses allowing government takeover in the event of power industry restructuring. In the event that new, fairer contracts cannot be amicably renegotiated, the DAP calls on the government to invoke this clause to protect Malaysian consumers from further monopolistic pricing. The management of these IPPs can then be outsourced via transparent and competitive open tenders.
I'm taking a Chinese New Year break. Next post will be in February. Happy holidays!