Friday, January 23, 2009

Media Statement: Petronas and the IPPS must help reduce power tariffs

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!


Anonymous said...

Yes, Petronas and the IPPs should do national service. And they better not cry poor. YTL, for eg has billions.

On risk taking, given the capacity payments, there is actually very little to no risk to the IPPs. I also want a contract like that too.

Anyway have an OX-cellent Chinese New Year.

- Collateral Damage -

adi said...

Dear Mr Teh Chi-Chang,

I believe are there things that you've mentioned here that needs to be re-examined further since you are after all the Advisor to DAP Sec-Gen and that holds some credibility issue.

It's funny when TNB is the one who's having accounting losses & outgoing cashflow as you mentioned, others are required to assist. Wouldn't improving TNB itself first is required? It's always easy to look at external matters while the internal improvement should be of higher priority. Or it has been a DAP policy to look at others first for solutions before seeking self-correction?

Most of the arguments you've made is directed to the IPPs while not much has been said on PETRONAS itself, but your media statement has been made to address both PETRONAS and IPPs. If you want to target IPPs, then just state IPPs. Unless, you're just another politician playing cheap populist trick to get the crowd going but when they realise your cheap tricks, you'll lose your crowd immediately.

You've said yourself that power prices should reflect the cost of production. I totally agree with this. Wouldn't then paying the feed stock ie the gas feed at market price is also reflecting the actual cost of production? No? Perhaps you should study this a bit more in details.

We, Malaysians are one bunch of people who have been enjoying subsidies far too long. It is far too much to a point where even when the raw materials are expensive, we continue to cry for more and more subsidies! Don't go with your argument that gas is locally produced thus should be subjected to a cheaper price! You'll only further dent your credibility.

We never care to ask, why are the raw materials' prices sky rocket high in the world market. The subsidised mentality somehow has blocked the ability to think anymore.

Asking for gas prices to be as low as you can only solve the problem in a short term basis. I don't think the calibre of an Advisor would look things at a very short term basis, would you? How would you then solve issues of wastage and the behaviour & mindset that the commodities would be there forever?

Furthermore, you must be kidding when you are asking PETRONAS to contribute to national interest! In case you not been keeping things on your toes, PETRONAS contributes circa 40% to national coffers and you want to further depend on only one source of income? You've got to be kidding me.

I expect more and better if DAP is to be part of a coalition that would govern the Federal government. This is certainly below par and not well thought. Stop cheap media statements if you want to be taken seriously. Do what is right and never go for cheap tricks. Then, surely you'll have the backing of the Rakyat.

Happy Chinese New Year...

Chi-Chang said...

Thanks Adi, for your comments:
1) TNB has made dramatic improvements in its internal efficiency. Just compare its costs now with 5 years ago in 2004. And the cost savings have been made even while service reliability has improved. So TNB is doing more with less. The tariff hikes have gone towards Petronas, the IPPs and higher fuel payments, not TNB itself.
2) On Petronas and gas prices - the fact is that the gas fields off Terengganu were developed in the 1980s, when gas was at US$1.50/mmBTU and there were no expectations that the price would rise dramatically. Gas fields are developed with 20-30 year time-frames in mind, and at US$1.50/mmBTU those fields were deemed profitable enough to exploit. So, I would appreciate transparency and clarity from Petronas when it says it is losing money by supplying gas at below-market rates. Is Petronas really suffering cash outflow, or is it really just an opportunity loss (ie it could make more if it sold the gas at a higher price, but it is not actually losing money selling at the current price, which is about US$4/mmBTU)?
3) Agree that Malaysians have relied on subsidies for far too long. And I am against blanket subsidies. But I believe targeted subsidies can be justified - for example, Petronas/IPPs can contribute to a fund which will help specific, key industries move towards more energy-efficient practices. Of course, there must be transparency in the execution. Do check out my earlier blog posts. Media statements are, of necessity, concise.

Anonymous said...

Dear Mr Chi-Chang,

I agree with you and the DAP that the terms of the power purchase agreements with the IPPs ought to be dissected, for I blame these for the distorted state of affairs we are facing with regards to the country's energy tariffs.

Asking Petronas to continue bearing the subsidy, in my humble opinion, is extremely unfair. Since the gas price was fixed by the government in 1997, the cost to Petronas up to last year was more than RM87 billion. And due to the artificial low prices of gas, demand went up monumentally, to the tune of 97% since 1997. About 23% of the demand is met through purchases from Malaysia-Thai and Malaysia-Vietnam joint areas, as well as from Indonesia. The gas from these producers is bought by PETRONAS at market prices and sold at subsidised prices. This doesn't make sense to me. Even with the revised price of RM14.31/mmbtu, Petronas is still subsidising...

As for helping key industries move towards energy-efficient practices, what have they themselves been doing for the past 10 years, when gas prices were kept low and they were making billions???

Chi-Chang said...

Dear Anonymous,

There are many industrial users of gas in Malaysia. Specifically for the power sector, under the National Depletion Policy, 1,350 mmscfd (million standard cubic feet per day) is allocated from the Terengganu fields, which were developed back in the 1980s when gas was at US$1.50/mmBTU. So, I don't understand when Petronas claims it it is losing money selling to the power sector at the current price of RM14.31/mmBTU. An opportunity loss perhaps, but not a cash loss. Petronas should be making windfall profits given that RM14.31/mmBTU is well above the US$1.50/mmBTU pricing used when Petronas decided to go ahead with developing the Terengganu fields. And if it is making windfall profits, then some should be diverted to national interests, similar to windfall taxes on plantations when palm oil prices hit exceptionally high levels.

I agree with your observation that demand for gas shot up significantly due to its artificially low pricing - check out my blog on rubber glove manufacturers which exited Indonesia and focused on Malaysia to enjoy cheap gas prices, but then employ foreigners! This is the type of low-margin, low value-add industry which we must not subsidise. And it's even worse when Petronas has to buy gas at market prices from other countries and sell cheap to them.

In an ideal world, I would, like you, say the key industries should themselves invest in energy-efficient practices without looking for subsidies, and have said so in previous posts. Unfortunately, our country under the BN government has grown addicted to subsidies. The best time to have removed them was when the global economy was booming. The BN government missed that opportunity. Now, times are hard, and taking away subsidies completely is akin to forcing a very weakened drug-addict to go cold-turkey - he could die. But we need to ensure the subsidies are specific and very targeted. Not just blanket cheap fuel prices for everybody.