Review on

Electricity Tariff in Peninsular Malaysia

under the Incentive-based Regulation Mechanism
(FY2014-FY2017)

Suruhanjaya Tenaga
19th December 2013
1

OVERVIEW ON INCENTIVE-BASED REGULATION

CONCEPT AND IMPLEMENTATION

The move towards better regulation:

Suruhanjaya Tenaga is moving towards the Incentive-based regulation

(IBR) in order to strengthen the following:
the economic regulatory framework for regulating TNB;
the tariff setting mechanism and principles for tariff design;
incentive mechanisms to promote efficiency and service standards;
the process of tariff reviews; and
the creation of regulatory accounts and its annual review process.

11 Regulatory Implementation Guidelines were developed for the

implementation of IBR

What is incentive-based regulation (IBR)?

A mechanism or methodology for the electricity tariff
determination, focusing more efficiency gains and a structured process in
tariff evaluation
An effective mechanism that being used globally, sometimes called as
performance-based regulation
Only the efficient cost (CAPEX and OPEX) in electricity supply will be
accounted in the tariff calculation
Setting key performance indicators for the utility
Introduction of incentives or penalties on the operational performance
Efficiency gains will be shared between consumers and utility
4

How will an efficient utility benefit from IBR?

3000
2600

2500

500

2000
1500

1200

1000

1200

1500

1600

2000

Allowable Opex
Actual

0
2012

2013

2014

If the utility manages to effect further savings:

Total saving over 3 years RM 700 million

All the savings will accrue to the utility

5

How will these benefits be shared with consumers?

OPEX (RM mill)

5000

Next Regulatory Period Reset

4500
4000
Without
Efficiency Gain
With Efficiency
Gain
New Reset

3500
3000
2500
2000

Benefit to
Consumer

1500
1000
500
0
2012

2013

2014

2015

2016

2017

The efficiency carry-over allows utility to keep the benefit of gains for three years (before the next
regulatory period starts)
6

Incentive-based Regulation benefits in terms of service quality

Wide recognition that a trade-off exists between:
The Service Quality and the Cost of Service
Generally higher service quality costs more; lower expenditure will over time lead to
reduced service quality levels

Under incentive regulation, there is an incentive to maximize profit.

Profits can be increased by reducing service quality.

Hence, the Regulator also has a societal obligation to regulate service quality to
ensure: Profits are not taken at expense of quality
All customers receive a reasonable quality of service (not only those where it is
profitable)
Acceptable service levels are maintained
7

Salient Components of IBR

Separation of TNB business entities accounts

Determination of reasonable return to licensee (WACC of 7.5%)

Imbalance cost pass-through mechanism for uncontrollable costs (changes in

forecast vs actual cost of generation)

Setting of performance targets with incentive/penalty mechanism by regulator

Efficiency sharing scheme between utility and consumers in the next tariff review

Structured tariff determination and decision-making process

Regulatory period from 2014 2017
Establishment of regulatory accounts and reporting mechanism

TNB Business Entities under the Incentive-based

Regulation Mechanism (Accounting Separation)
Electricity Customers
(Connected to the Distribution System)
Average Electricity Tariff

Distribution & Retail

Distribution / Customer
Services
Transmission Tariff

Transmission
System Operations

Transmission
Single Buyer Tariff
(generation +
operations)

Generation

System Operation
Tariff

Single Buyer Generation

Single Buyer Operation

TNB Generation

IPPs

Electricity Tariff Review = Base Tariff + Imbalance Cost Pass-Through (ICPT)

Base Tariff is set to reflect:

the construction cost of transmission
and distribution system;
Base fuel and purchasing cost;
Operation, maintenance and
administration costs;
with certain assumptions related to fuel
prices, inflation rates (or CPI), exchange
rates.

ICPT:
adjustment to reflect the change in
uncontrollable costs from Base Tariff i.e
change in fuel and purchasing cost

10

Revenue Requirement Building Block Model Under

the IBR Framework

WACC (Return)
+

Revenue
Requirement

Depreciation

Tax

Regulated asset
base (RAB)

Return on Assets

Efficiency

OPEX

Efficiency
carryover
amount

Will only form part of the

revenue requirement from
the 2nd Regulatory Term

testing for efficiencies through benchmarking and trend analysis

review of historical cost performance
efficiency and prudency of asset management policies
consistency with capex and sales forecast
11

Summary of Tariff Setting Framework under IBR

Revenue Requirement = WACC x Regulated Asset Base
Single Buyer Generation
Actual Cost Adjustment

Single Buyer
Operational

Generation Specific Cost

(Capacity Charge, Energy
Payment etc)
Other Gen Specific cost
(Other PPA/SLA Charges
etc)
Renewable Energy Cost
(displaced cost)

Operation and
maintenance
Staff cost
Depreciation
Taxes

Operation and
maintenance
cost
Depreciation
Staff cost
Taxes

System
Operation

Customer
Services

Operation and
maintenance
Depreciation
Staff cost
Taxes

Distribution
operation and
maintenance
cost
Depreciation
Staff cost
Taxes

Adjustment in the next regulatory period

Adjustment every 6 months

(imbalance cost pass
through)

Cost recovery based on Actual

Cost:
Fuel cost pass-through
Adjustment of other specific
generation costs

Transmission

Cost recovery
based on
Revenue Cap

Cost recovery
based on
Revenue Cap

Cost recovery
based on
Revenue Cap

Incentive to be given or penalty to be imposed in the next

regulatory period
Efficiency gains to be shared in the next regulatory period

Cost recovery
based on Price
Cap

12

Decision on Electricity Tariff Review

in Peninsular Malaysia
Average electricity tariff rate in Peninsular Malaysia to be increased by 4.99 sen/kWh (14.89%)
from 33.54 sen/kWh to 38.53 sen/kWh, from 1st January 2014, to cover:
Tariff Components

sen/kWh

%
increase

Current Tariff

33.54

TNB Base Tariff

0.90

2.69

0.51

1.52

Fuel Components:
Piped gas regulated price
(from RM13.70/MMBtu to RM15.20/MMBtu
@1,000 mmscfd)
Coal (market price)
(from USD85/tonne to USD87.5/tonne
CIF@CV 5500kcal/kg)

0.17

0.51

LNG RGT market price at RM41.68/MMBtu

3.41

10.17

38.53

14.89

NEW AVERAGE TARIFF

18% on
Return on
Ratebase
(Asset) and
OPEX

82% on
fuels

13

Average Fuel Price Trend In RM/mmBtu as of Sept 2013

RM/MMBtu
70

60
LNG CIF Japan

50

MFO Price
LNG ex-Bintulu

40

LNGs market
price plays a
major role in
the electricity
supply cost

30

Gas Price to PGB

20

~70%
subsidy

Applicable Coal Price (ACP)

Gas Price to GMSB

10
Gas Price to Power Sector

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Jan 11
Feb 11
Mar11
Apr 11
May 11
June 11
July 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
Jan 12
Feb 12
Mar 12
Apr 12
May 12
June 12
July 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
Jan 13
Feb 13
Mac 13
Apr 13
May 13
June 13
July 13
Aug 13
Sep 13

14

Cost Components in Electricity Tariff TNB FY 2013 (Historical)

Generation Cost
(75%)

Transmission Cost
(7%)
Distribution Cost

Capacity Payment
(32%)
Fuel Payment (68%)

(18%)

Average Electricity Tariff (sen/kWh)

40

38.53

35

32.5

33.54
31.31

30
26.32

Average Electricity
Selling Price FY 2013
(33.88 sen/kWh)

25

23.5

20
15

Fuel Price (gas and coal) is regulated by the Government in

current tariff setting
Capacity Payment is minimised via the competitive bidding
process

10
Before Jun-06
Jul-08
2006
Mac -09 Jun-11

Jan-14
15

Electricity Tariff Structure as of 1st January 2014

under Incentive-based Regulation (IBR) mechanism
TNB Generation
Service Level
Agreements

IPPs
Power Purchase
Agreements
Average T & D losses is 8.5%

Single Buyer
Generation
Tariff
26.38 sen/kWh

Single Buyer
Operation
Tariff
0.19 sen/kWh

Transmission
Tariff
3.66 sen/kWh

System
Operation
Tariff
0.05 sen/kWh

Imbalance Cost Pass-Through

in every 6 months
(cost variation of forecast vs actual cost procuring electricity)

Distribution /
Customer Services
Tariff
8.25 sen/kWh

Subject to
Government
Approval

i.e.
Fuel Cost : natural gas, coal, LNG
and distillate
Renewable energy displaced cost

All costs incurred by the SB under the PPAs and

SLAs ( incentive or bonus payments, liquidated
damages, savings etc)

Average Electricity Tariff : 38.53 sen/kWh

Average Domestic
Tariff
31.66 sen/kWh

Average Commercial
Tariff
47.92 sen/kWh

Average Industrial
Tariff
36.15 sen/kWh

Average Overall
Tariff
38.53 sen/kWh

16

PERFORMANCE INCENTIVE SCHEME

INCENTIVE SCHEME

+0.5% of annual
revenue requirement

Actual performance
compared to target

Revenue
incentive scale
Upper bound
cap

0% of annual revenue
requirement

Lower bound
target
Lower bound
cap

Upper bound
target

Performance
indicator
scale

Incentive / penalty
capped at +/- 0.3% to
0.5% of annual revenue
requirement
No incentive or penalty
if performance between
the upper and lower
bound targets

-0.5% of annual
revenue requirement

18

Example : Total incentive or penalty caps for TNB business entities

Business entities

Total Incentive
and
Penalty Cap

Example :
Amount of Incentive or
Penalty Cap Annually
Revenue
Requirement

Total Incentive
/(Penalty) Cap

RM

RM

Customer services /
Distribution

0.3% ARR

10,670,937,304

32,012,812

Transmission

0.3% ARR

4,345,455,379

13,036,366

System Operator

0.5% ARR

56,954,047

284,770

Single Buyer Operation

0.5% ARR

336,151,090

1,680,755

15,409,497,820.39

47,014,704

Total
ARR = aggregate revenue requirement

Equivalent to 0.045 sen/kWh incentive or penalty

Note: Single Buyer operation ARR only refers to revenue required for operation of Single Buyer
*excluding power procurement costs of both IPPs (PPA) & TNB Plants (SLA)

19

Code

Performance Incentive Scheme

Customer Services
CSPI1
System Average Interruption
Duration Index (SAIDI)
CSPI2
Average of Minimum Service Level
Compliance Performance
CSPI3
Weighted Average Guaranteed
Service Level (3, 4 and5)
Transmission
TXPI1
System Minutes
TXPI2
System Availability
TXPI3
Project Delivery Index
System Operator
SOPI1
Wide Area Loss of Supply Event

SOPI2.1
Voltage Limit Compliance
SOPI2.2
Frequency Limit Compliance
SOPI3
Dispatch Adjustment
Single Buyer
SBPI1
Dispatch Deviation
SBPI2
Compliance to Timely Settlement of
Generators Invoices
SBPI3
Compliance to Malaysian Grid Code
SBPI4

Compliance to Single Buyer Rules

Unit

Weightage Lower Bound

Target
(%)

Upper Bound
Target

Mins./cust./year

50

70

55

25

84.11

94.11

25

86.32

95.50

Minutes
%
Delayed month

40
30
30

5.1
99.04
5.47

1.5
99.48
0

No. of wide area

system blackout
incident
%
%
%

25

25
25
25

90
90
0.4

96
96
0.2

%
%

25
25

0.4
99.55

0.2
99.85

25

98.10

100

25

95.00

100 20

FAIR RATE OF RETURN

AND
WEIGHTED AVERAGE COST OF
CAPITAL (WACC) DETERMINATION

Suruhanjaya Tenagas Approach

In reaching the recommendation on whether TNBs capex and

opex forecasts are efficient and prudent, we:
analyzed TNBs revenue requirement proposal, tariff setting and other
supporting information
analyzed data and information provided by TNB during the review
process
analyzed forecast of total capex and opex, in terms of:
Meeting expected demand
Complying with all applicable regulatory obligations and requirements
Maintaining the quality, reliability and security of supply

considered initial views expressed by KeTTHA

conducted consultation sessions with TNBs working level
compared with data/information submitted under license conditions
considered consistency of TNBs proposal with government policies
22

Fair Rate of Return (ROR)

Fair ROR is a level of profit that utility is allowed to earn as determine by the Suruhanjaya
Tenaga based on the following consideration:

Maintain service to its customers;

Maintain and expand the infrastructure to provide the services to customers. The
return should be able to attract capital from investors. Low return - insufficient
capital for growth - consumer unable to receive sufficient level of electricity service;
Make a fair payment to capital providers i.e interest to bondholders and adequate
dividend to shareholders
conforms to the return of similar investments.
Promote efficient used of energy, prices should reflect marginal costs;
Ensure the utility's long-term stability.
Ensure fairness to all stakeholders. The utility could get capital to provide services
to consumer and at the same time the capital providers receiving fair profits on
their investment.

23

How Average Rate Base (ARB) is Determined

The objective is to identify the amount of appropriate
capitals/assets and working capital that are prudently required
by the utility company in order to provide the regulated services.
ST use Original or Historical approach to determine the value of
the Rate Base (RB).
The figures is adjusted to exclude consumer contribution and
consumer deposit from RB
The ARB is calculated by taking the average of the opening and
closing value of the rate base/assets
24

Determine the Fair Rate of Return

The fair Rate of Return is base on Weighted Average

Cost of Capital (WACC) which are determine using
Capital Assets Pricing Model (CAPM).
1. Risk free rate Yield of MGS
The risk-free rate of return will be used as a floor of acceptable levels of
expected return from any given investment. Any equity investment should
exceed the risk-free rate of return. There is no reason for investor to take any
investment with inferior to Risk free rate.

2. Market premium to reflect the risk of the utilitys as

compare to the risk free rate.
25

Regulatory WACC for TNB Under IBR (FY2014-2017) is 7.5%

WACC Parameters

Actual market Parameters

TNB's Proposal

Recommendation
1.435 [[4]

Stock TNB Beta

0.92[1]

1.435

Market Return (Rm)

8.8%[2]

12.3%

8.8%

Risk free (Rf )

4.0%

4.0%

4.0%

Market Risk Premium (Rm - Rf)

4.8%

8.3%

4.8%

Debt Margin (Dm)

2.19%

2.24%

2.24%

Tax Rate

25.0%

25.0%

25.0%

Weighted Cost of Capital Calculation

Actual market Parameters
Capital Weighted
Structure
Cost

TNB's Proposal

Capital Weighted
Capital Weighted
Cost
Structure Cost
Structure Cost

Capital Structure

Cost

Cost of Equity (Ke)

8.38%

60.5%

5.1%

15.91%

45.0%

7.16% 10.85% 45.0%

4.88%

Cost of Borrowing (Kb)[3]

6.18%

39.5%

1.8%

6.24%

55.0%

2.57%

2.57%

Weighted Cost of Capital

6.9%

Cost

Recommendation

9.7%

6.24%

55.0%

7.5%

Note:
[1] Based on beta for the period 2004-2012
[2] Rm - Market return of 10 yrs KLSE Index
[3] Average Gearing (2004-2011) is 39.5%
[4] Adjusted to reflect optimal gearing.

26

IBR - REVIEW OF TNBS PROJECTED

CAPEX AND OPEX
27

Review of TNB Capital Expenditure Proposal (RM Million)

Initial Proposal
35000

339

30000

25000

25000

20000

20000

108

339

23,810

8,482

Total

0
Total

0
Joint Cost

5000

System Operation

5000

Single Buyer Operation

10000

Distribution

10000

Transmission

15000

9,978

Transmission

15000

14,881

Joint Cost

30000

18%

29,027

System Operation

108

Single Buyer Operation

18,601

Distribution

35000

Recommendation

28

Capital Expenditure 2014-2017 (RM Million)

Transmission Capex

Distribution Capex

6,000

6,000

5,000

5,000

4,000

4,000

20%

4,035

3,813

3,577

2,504

2,263

1,992

1,722

2,521

2,475

2,496

2,487

1,000

3,456

2,000

4,605

2,000

4,573

3,000
4,870

3,000

4,553

15%

1,000

TNB's Initial Proposal

2014

Recommendation
2015

2016

2017

TNB's Initial Proposal

2014

Recommendation
2015

2016

2017

29

Average Rate Base (RM Million)

2014

2015

60,000

60,000

50,000

20,264 41,131

21,630

43,393

30,000

20,818

30,000

46

20,000

21,704

56

Syatem Operation

40,000

Transmission

40,000

50,000

20,000
10,000

2
Total

Distribution

Total

Distribution

Syatem Operation

Transmission

Single Buyer Operation

Single Buyer

Single Buyer Operation

Single Buyer

10,000

30

Average Rate Base (RM Million)

2016

2017

60,000

60,000
22,983 45,856

50,000

50,000

22,802

30,000

69

30,000

20,000

24,096

107

Syatem Operation

40,000

Transmission

40,000

24,347 48,551

20,000
10,000

1
Total

Distribution

Total

Distribution

Syatem Operation

Transmission

Single Buyer Operation

Single Buyer

Single Buyer Operation

Single Buyer

10,000

31

TNBs Revenue Requirement 2014-2017 (RM Million)

201

36,541

170,054

Total

849

16,189

Syatem
Operation

116,273

Single Buyer
Operation

140,000

Single Buyer

160,000

Transmission

180,000

Distribution

200,000

120,000
100,000
80,000
60,000
40,000
20,000
-

32

Single Buyer Revenue Requirement (RM million)

10,000
5,000

17,255
18,484

17,423
2,106
2,158
1,561
1,615

15,000

8,834
9,748
10,064

20,000
9,120

RM Million

25,000

17,905

30,000

30,164

35,000

28,897
28,564

28,649

40,000

Capacity Payment Variable cost and

fixed O&M

Fuel Cost
2014

Total
2015

2016

2017
33

62.5

System Operation Requirement (RM million)

36.1
39.6
43.6
48.9

60.0
50.0
40.0
30.0

1.1
-

10.0

1.0
1.8
2.8
5.6

20.0
3.4
4.2
5.2
8.0

RM Million

40.6
45.6
52.7

70.0

Return on
Assets

Depreciation

OPEX

Regulatory Tax
2014

2015

Total
2016

2017
34

181.6
200.2
223.8
239.9

300.0
250.0
200.0
150.0
100.0

Return on
Assets

Depreciation

0.0

1.0
0.9
0.9
0.5

50.0
0.2
0.2
0.1
0.1

RM Million

182.8
201.3
224.8
240.5

Single Buyer Operation Requirement (RM million)

OPEX

Regulatory Tax
2014

2015

Total
2016

2017
35

3,725
4,010
4,117
4,337

Transmission Revenue Requirement (RM million)

5,000
4,000

821
855
896
973

Depreciation

OPEX

1,000

375
505
430
410

967
1,021
1,081
1,147

2,000

1,561
1,628
1,710
710
1,807

RM Million

3,000

Return on
Assets

Regulatory Tax
2014

2015

Total
2016

2017
36

8,107
8,896
9,392
10,146

Distribution Revenue Requirement

12,000
10,000

2,000

4,448
4,688
4,868
5,357
126
374
404
353

4,000

2,014
2,213
2,396
2,610

6,000
1,520
1,622
1,724
1,826

RM Million

8,000

Return on
Assets

Depreciation

OPEX

Regulatory Tax
2014

2015

Total
2016

2017
37

Average tariff

System Operation

38.53

Distribution

0.19

8.25
3.66

Transmission

26.38

0.05

Single Buyer
Operation

45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00

Single Buyer
Generation

Conclusion : Average Tariff in sen/kWh

38

Thankyou
39