How TNB (and the public) got a raw deal

With an electricity tariff hike due to be announced on Monday, it might be useful to recall how the first generation of ‘independent power producers’ (IPPs) profited at TNB’s (and the Malaysian public’s) expense.

There’s a been a lot of talk, and rightly so, about the gas subsidies given to the IPPs, but not enough about the high price TNB has to pay to the IPPs for the electricity it has to take up – whether it needs it or not.

How did this Malaysian model of IPPs come into being, while TNB’s own expansion plans were cold-storaged in the early 1990s? As former TNB executive chairman Ani Arope says, “Ask our previous prime minister (Mahathir).” (Incidentally, Ani Arope studied at St Xavier’s Institution in Penang.)

This interview is from The Star:

Tuesday June 6, 2006
Ani: TNB got a raw deal

WHEN the Government decided to approve the request from Tenaga Nasional Bhd (TNB) to raise electricity tariffs, the plight of the national utility took centre-stage. Naturally, the knee-jerk reaction among consumers was not favourable. The 12% rise in tariffs appears to have re-ignited the debate on how good the going is for independent power producers (IPPs) at the cost of the national utility’s cashflow. The imbalance between the generation side of the business and that of transmission and distribution has put a strain on TNB. To understand the privatisation of the power generation sector, one needs to take a look back in history to understand that the country’s IPPs came about as a result of the Government’s effort to address the issue of stable power supply after the landmark 1992 blackout. Lending a historical perspective to the issue of IPPs is former TNB executive chairman Tan Sri Ani Arope, who headed the national utility from 1990 to 1996. It was during his tenure that the first generation IPPs were created. StarBiz deputy news editor JAGDEV SINGH SIDHU has the story.

STARBIZ: What happened after the first major blackout in 1992?

Ani: TNB had plans in place to pump out more energy by building plants in Pasir Gudang and Paka. Financing was no problem and our credit standing was very high. We had the land acquired and were ready to move in and plant up.

But we were told by the Economic Planning Unit (EPU) that it had its own plans. We cautioned EPU that if those plants, which would take two years to complete, were not built, Malaysia would get another major blackout. When you have a place with 250 engineers, it does not make sense to say (the blackout) is because of poor planning. But the EPU said it had its own plans and we were told to surrender the land.

Then it surfaced that it wanted to privatise the power plants. I am not anti-IPPs per se. It is good to have other players but it has to be done fairly. It has to be fair to the consumers, not just TNB, which is a conduit. TNB, because of the electricity hike, has been treated as the whipping boy. The focus should be on the consumers.

When the generous terms were given to the IPPs, all my other peers around the world asked what was happening. They said they would like to have a share in the IPPs. They said (the contracts to IPPs) were “too darn generous.” (The terms) were grossly one sided.

How was the Malaysian model of IPPs created?

Ask our previous Prime Minister.

How was the process of negotiations with IPPs conducted?

There was no negotiation. Absolutely none. Instead of talking directly with the IPPs, TNB was sitting down with the EPU. And we were harassed, humiliated and talked down every time we went there. After that, my team was disappointed. The EPU just gave us the terms and asked us to agree. I said no way I would.

What about the pricing and terms of the contracts?

It was all fixed up. (They said) this is the price, this is the capacity charge and this is the number of years. They said you just take it and I refused to sign the contracts. And then, I was put out to pasture.

Why did you disagree with the terms?

It was grossly unfair. At 16 sen per unit (kWh) and with the take or pay situation, actually it was 23 sen per unit. With 23 sen, plus transmission and distribution costs, TNB would have had to charge the consumer no less than 30 sen per unit. If mixed with TNB’s cost, the cost would come down but that was at our expense because we were producing electricity at 8 sen a unit. We can deliver electricity at 17 sen per unit.

And then there is a capacity charge. Nobody produces excess electricity like Malaysia and it goes to waste because there are no batteries to store that power. TNB only needs a reserve of 15% to 20%.

TNB was producing electricity at 8 sen a unit. What should have been the right price for IPPs to sell to TNB?

Twelve sen. They could not beat our price as we had already amortised our assets. But for the new guys or even ourselves to come in then and (having) to meet interest charges and to make a small profit, it would cost 12 sen a unit.

This was what we told one IPP. The IPP agreed to it but the EPU said that unless the IPP raised its price, the contract would not be given to the IPP. So he got it for 14 sen per unit.

And then, there is the cost pass-through. If the price of fuel went up, the extra cost is passed through to us. And in other words, it is passed on to the consumer.

Under what terms would you have agreed to the IPPs being set up?

Have an independent buyer for the electricity and in one way, let TNB come in and bid for the plants. Get other people to come in. Get a commission to see (to) our needs and TNB can be one of the producers.

It is argued that the IPPs’ contracts are too lucrative but there are IPPs in other countries in Africa or Asia that have better terms.

There are IPPs charging 50 to 60 US cents per unit but they use diesel. Take our own situation and compare oranges with oranges. Then it is fair. Do whatever is fair.

How were you affected by the process of awarding the IPP contracts?

I felt sick. It was morally wrong and not fair. If it is legal and not fair, I will not do it. If it is fair and illegal, I still won’t do it. It has to be legal and fair.

We work for the consumers, workers and shareholders. TNB is morally obligated to these three, but the consumers come first, otherwise we won’t be around. It is then the workers and the shareholders.

When I said that, they said ‘Dia ingat bapak dia-punya’ (He thinks this is his father’s company). This job is an amanah (trust). You are entrusted with this responsibility and you carry it out to the best of your ability. I do not want somebody to come and urinate on my grave. In the Malay culture, that is about the worst insult they can do to a man.

Do you think you did the right thing by not signing the agreements?

Absolutely.

How should a contract with the IPPs work?

In Australia, they call the IPPs and ask “what is your price”. They will pay the IPP that offers the best price. What they could have done is to throw the net wider and ask everybody (if they) are good, it would be awarded to them. But in our case, the contracts were ready-made and we were asked to sign.

What is your view on the impending renegotiation with the IPPs?

It has to be legal and fair. If we were to negotiate unfairly and illegally, the whole world will be looking at us and they will say “don’t sign anything with Malaysia because if things go against the country, the Government will void the agreement”.

We have to look at this very carefully.

But what we can do now is to say, can we bring down the capacity charge. Anything above the 15% reserve margin, we will call for bids.

The second thing is that the IPPs would have by now paid up their whole capital investments in their plants and it is all gravy (or profit) from now. Could we not bring this down a bit? Instead of paying a small amount to (a special fund), why not increase the (payment) for future planting up? In that manner, we can control the price of electricity. Otherwise, it’s going to escalate.

Who in your opinion should get involved in the negotiations?

The consumers should be there. For me, you should get a very independent body. Then, you can bring in TNB, the IPPs, the consumers and Energy Commission. But these bodies and consumers should not make a judgment.

So, pray tell, who is subsidising whom?