15/12: Tenaga asks Malaysia for 10 years of price increases

By Soraya Permatasari and Angus Whitley

(Bloomberg) -- Tenaga Nasional Bhd., Malaysia's biggest power utility, wants the government to let it raise electricity prices every year for a decade to compensate for a planned reduction in fuel subsidies.

After the natural gas subsidy to Tenaga is removed, the state-controlled company should be allowed to sell electricity at rates that reflect the cost of the fuel, Chief Executive Officer Che Khalib Mohamad Noh said in an interview yesterday.

A gradual increase in power prices ``would be easier, less painful'' for customers, Che Khalib said in Kuala Lumpur. The gas ``price in Malaysia is far too low. We have to correct that.''

A surge in prices of crude oil, gas and coal has swelled Tenaga's costs and increased Malaysia's annual fuel subsidy to more than 30 billion ringgit ($9 billion). The utility's shares have lagged behind the benchmark index this year partly on concern earnings may be eroded by higher fuel costs.

``It makes perfect economic sense instead of a one-off removal of the subsidy,'' said James Ratnam, an analyst at TA Securities Holdings Bhd. in Kuala Lumpur with a ``buy'' rating on Tenaga. ``Unless there's a clear policy, it will still weigh on the share price.''

Tenaga rose 5 sen, or 0.5 percent, to 9.40 ringgit at the close of trading on Bursa Malaysia Securities, the first gain in four days. The stock has fallen 14 percent this year compared with the 28 percent gain on the benchmark index.

Public Protests

Energy price increases had triggered public protests in Malaysia. A gasoline price hike in March 2006 led to street demonstrations in Kuala Lumpur. In May last year, police used water cannon to disperse crowds protesting against higher electricity rates. Opposition parties held protests in February after road-toll prices climbed.

Ten years of consecutive electricity price increases is ``politically, not realistic,'' TA's Ratnam said.

Malaysia fixes diesel, gasoline and power prices to keep inflation in check. Tenaga, more than half-owned by the state, needs government approval for any rate increase.

At an average price of 26.2 sen per kilowatt-hour, Malaysian power rates are the cheapest in Asia after Taiwan, with 25.4 sen, and Indonesia, with 23.2 sen, Che Khalib said on May 24 last year.

Under Tenaga's proposal to the government, prices should be reviewed every three months after the decade of annual increases expires, Che Khalib said.

Buying Gas

The effect on Tenaga ``should be neutral if gas prices are also increased gradually over the same period,'' said Tursina Yaacob, an analyst at OSK Securities Sdn. in Kuala Lumpur. ``If it's a gradual increase, consumers won't feel it that much.'' She has a ``buy'' rating on Tenaga stock.

Under an agreement with Malaysian state oil and gas company Petroliam Nasional Bhd., power producers in the Southeast Asian country buy gas at 6.40 ringgit per million British thermal units. That's about 70 percent below the market price, Prime Minister Abdullah Ahmad Badawi said Sept. 24.

A surge in prices of natural gas, which is used to generate half of Tenaga's electricity, has increased the government's total gas subsidy by 9.1 percent to 15.6 billion ringgit in the year ended March 31, according to Petronas, as the oil and gas company is known.

Crude oil has surged 52 percent in New York this year and reached a record $99.29 a barrel on Nov. 21.

Tenaga generates almost half of Malaysia's electricity and is also the country's transmission monopoly, while so-called independent power producers including Tanjong Plc and YTL Power International Bhd. generate 51 percent.

Tenaga uses gas to produce half of its power, coal to generate 31 percent and oil-products for the rest.

Coal Prices

The utility said on Oct. 25 that higher fuel prices, mainly coal, and increased payments to buy power from independent generators will hurt profit in the year ending Aug. 31.

Tenaga currently buys coal at 40 percent below market prices under contracts that will expire mostly in August next year, Che Khalib said in the interview.

The company is in talks to extend the contracts for another year, he said. Tenaga has agreed to buy coal at 20 percent below market prices from two new mines in Kalimantan, Indonesia, stretching supplies until August 2009, he said.

Prices of thermal coal shipped from Australia's Newcastle port, an Asian benchmark, reached a record in the week through Dec. 7, according to the globalCOAL weekly index, amid rising demand from power utilities, export bottlenecks in Australia and surging consumption in China.

Tenaga is prepared to spend $2 billion for more power plant projects in the Middle East to expand overseas, Che Khalib said. The company has been pre-qualified to bid for some projects, he added, declining to elaborate. It has a joint venture with Malakoff Bhd. to build power and water plants in Saudi Arabia.

The utility is in talks with the Japan Bank for International Cooperation to accelerate payments on some of its yen-denominated loans that account for almost 15 percent of the company's total debt.

Tenaga is considering a government offer to take a 20 percent stake in a project to lay 700 kilometers (435 miles) of undersea power cables from the Bakun hydroelectric plant in the eastern state of Sarawak to the Malaysian peninsula, Che Khalib said.