Tariff hike not a cure-all solution for Tenaga, say analysts


  • Business
  • Monday, 19 Dec 2005

IS an electricity tariff hike on the cards next year? 

That is the question that pops into everyone’s minds when they talk about the power sector. 

Mayban Research is expecting a tariff increase of as much as 5% in the first quarter next year. 

“However, we will not be surprised if there is none since the Government might want to contain inflation.  

“An increase in tariff could have multiplier effect – increase in the price of goods and services – thus translating into higher inflation. With the recent hike in interest rate, this will look bad on the economy,” said analyst Tursina Yaacob. 

ECM Libra Securities Sdn Bhd research analyst Lucius Chong feels the market was too preoccupied with Tenaga Nasional Bhd’s tariff increase.  

“Although it is to a certain extent, necessary, it is not the end-all solution to its problems,” Chong said.  

He pointed out that Tenaga generated one of the best earnings before interest, tax, depreciation, amortisation margins in the region for a utility but recorded the lowest profitability and returns on invested capital. 

And the problem, according to Chong, is not revenue but just too much debt and assets.  

“This is a legacy issue left over from the period before the Asian financial crisis where Tenaga spent a lot of money on capital expenditure (RM5bil to RM8bil a year) and funding it with too much foreign debt,” he said. 

Chong believes at the end of the day, what Tenaga really needs is a regulatory regime that guarantees a level of cash flow and earnings.  

Once this is achieved, Tenaga can then work on solving its debt and asset problems.  

“Instead of a one-off big tariff increase, I would much rather see a modest but transparent tariff formula in place where irregardless of coal or gas prices, interest rates or cost inflation, Tenaga can be certain of generating a certain level of cash flow and fixed returns,” Chong said.  

He added that this would make any restructuring effort – whether it is refinancing debt or selling assets – by Tenaga much easier. 

Chong said Tenaga was at the heart of the Government-linked companies restructuring effort, and success would obviously be positive for the industry especially since it was effectively the only paymaster for all the independent power producers, and a key customer of Petroliam Nasional Bhd (Petronas) for gas. 

A guaranteed rate of return and its corresponding cash flow would also help Tenaga cope with rising fuel costs, be it the loosening of gas subsidies or higher coal prices. 

“Whether it is gas or coal, the current commodity boom puts a lot of pressure on the system and Petronas and the Government cannot continue to subsidise the economy at these market rates forever,” Chong said. 

Chong believed that the subsidy on gas alone was expected to exceed RM9bil next year. 

It was reported that Tenaga planned to borrow up to RM700mil to fund its operational expenses for the current financial year ending August 31, 2006.  

And it may need to borrow more next year if it does not get a tariff increase soon. 

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