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UNIVERSITY OF MALAYA
CFGB6101: ECONOMICS OF MANAGER
The Market Structure – Automobile
Proton Malaysia Sdn Bhd
PARISA AFSHIN CGA080121 AMUTHA MANIKAM CGA080075
MOHAMMADREZA MOALEMI CGA100059
Table of Contents
ELECTRICITY INDUSTRY STRUCTURE................................................................4
TYPE OF MARKET STRUCTURE.............................................................................5
MALAYSIA AND ELECTRICITY..............................................................................6
TNB BACKGROUND..................................................................................................8
TNB AS A MONOPOLY.............................................................................................9
CHARACTERISTICS OF MONOPOLY AND TNB................................................11
TNB SWOT Analysis..................................................................................................12
PRODUCT DIFFERENTIATION..............................................................................14
PRICING STRATEGIES............................................................................................14
MARKET SHARE......................................................................................................15
BARRIER TO ENTER THE MARKET.....................................................................16
CRITICAL EVALUATION OF MICROECONOMICS THEORY...........................18
CONCLUSION...........................................................................................................23
REFERENCES............................................................................................................23
Economics for Managers- TNB, Market Structure Page 1
ELECTRICITY INDUSTRY STRUCTURE
Nikomborirak, Deunden & Manachotphong, Wanwiphang (2007) raised the
issue of the regulatory reform in their paper and continued by mentioning that this
kind of act has usually been directed toward the assertion of the regulation’s fully
responsiveness in economic changes, social and environmental policy positions, and
reflecting technological advances that adjust the nature of which the sectors operate
in. According to their study, in the mid to latter years of the 1900s, electricity was
thought of as (1) a national strategic asset, and (2) a natural monopoly industry.
The common assumption was that retaining a reliable national energy supply required
public ownership and operation. Hence, state departments have played a twofold
function in supplying electricity services, and besides acted as policy-advisor and
regulator.
In any case, now in principle this approach has been broadly discarded. In the
last decade, competition is being introduced into this sector and more or less the
majority of governments have accepted that energy is a service that it is better to be
delivered through competitive markets.
TYPE OF MARKET STRUCTURE
Electric Generation and Infrastructures
The electric power industry has four processes that are: electricity generation
such as a power station, electric power transmission, electricity distribution and
electricity retailing. In many countries electric power companies own the whole
infrastructure from the beginning to the end of the processes. (“Electric Power,”
2011) Owning the whole infrastructure is very expensive and it is not possible
for many companies and investors to build such infrastructures, therefore in
most countries only one company (electric power company) can survive this
situation and it can be said that electric power is a natural monopoly. In many
Economics for Managers- TNB, Market Structure Page 2
countries it is owned and controlled by the government which has enough
resources and money to build electric plants and electricity networks and grids.
Why Natural Monopoly occurs?
A natural monopoly does not exist because there is intervention from the
government, but it is due to the nature of a special industry. This is also where
the largest supplier in an industry has cost advantage over others, and this
usually happens in industries where capital costs is too high and there are high
barriers to entry; such as water services and electricity. In order to get a
significant ROE the natural monopolist need to have large number of customers
and this is where economies of scale become important due to the fact that the
fixed cost is divided among a large number of customers and results in a lower
ATC (average total cost). (Johnson P., 2000)
However, some free-market-oriented economists argue that natural monopolies
exist only in theory or that they exist only as impermanent states. (Dilorenzo,
Thomas J., 1996)
Now there is a movement towards separating the monopoly parts such as
transmission and distribution sectors from generation and retailing parts of the
industry across the world and it has started with the reform of electricity supply
industry in England and Wales in 1990. According to that, generators, wholesale and
retail electricity markets trade electricity similar to shares and currencies. (“Welcome
to efficient lighting and electric,” 2011)
When using electricity, if consumers face the price which is determined by
government, then they will be price elastic and will not change their consumption in
times where the actual cost of producing electricity is high. But if they face the actual
prices, they will regulate their consumption regarding the price.
Something different about electricity is that its consumption and production should be
balanced all the times. If not the electricity grid will be unstable and there will be
Economics for Managers- TNB, Market Structure Page 3
high voltage fluctuations. Therefore, demand response is usually to reduce the peak
demand so that it would not exceed the capacity of the plant, and if it exceeds there
would be a need to use expensive sources of electricity that are from inefficient
power plants.
In times demand is too low the strategy is to increase the demand. If a nuclear plant is
used to generating electricity, it should be considered that they work in their full
capacity, and since it is difficult to store the electricity, the consumers should be
motivated to consume more with lowering the prices. (“Demand Response,” 2011)
MALAYSIA AND ELECTRICITY
Malaysia is under the reform process since 2000, in advance to that the
National Electricity Board was government-owned and it supplied % 80 of the total
population electricity of Malaysia. The NEB was corporatized in 1990 to be Tenaga
Nasional Berhad or TNB and partially privatized in 1992. Independent Power
Producers (IPPs) have been offered in the generation sector, yet TNB sustains the
market dominance via its control over the majority of the generation capacities, the
transmission networks and some distributions.
Based on the paper of Nikomborirak, Deunden & Manachotphong, Wanwiphang,
2007, the lessons from the Malaysian case study are:
“In some developing economies, the potential benefits of opening energy
markets to full competition must be balanced against competing political,
social and economic policy objectives, such as extension of electricity
networks to all communities, and maintenance of tariffs at prices poorer
consumers can afford.”
Some of the developed countries like Australia, New Zealand and United
States are currently moving towards fully competitive wholesale and retail electricity
markets, while some emerging economies, like Chile, Korea, Malaysia, and
Singapore are well advanced concerning either planning or implementing reform.
Having an eye in optimizing the economic performance of this rich sector, it can be
Economics for Managers- TNB, Market Structure Page 4
• Per capita
– Primary Energy Supply (toe): 2.53
– Final Energy Demand (toe): 1.50
– Electricity Demand (kWh): 3,174
highlighted that all APEC member nations have some sort of electricity sector reform
in mind.
Current Market Structure of Electricity in Malaysia
TNB – Peninsular
Sabah Electricity Sdn Bhd (SESB) – took over from Sabah Electricity Board
in 1998. TNB now holds shares in SESB
Sarawak Electricity Corp (SESCo)
Energy Statistics
• Primary Energy Supply (ktoe): 67,878
• Final Energy Demand (ktoe): 40,318
• Electricity Demand (ktoe): 7,331
(GWh): 84,517
FY2007 Total RM 2.20 million
Economics for Managers- TNB, Market Structure Page 5
TNB BACKGROUND
Tenaga Nasional Berhad (TNB) which is listed on the main board of Bursa
Malaysia with close to 28,000 staffs and a estimation of RM 71.4 billion worth in
asset, is the largest electricity utility company in Malaysia. TNB has over seven
million customers in Peninsular Malaysia & Sabah. Its core business compromises of
generation, transmission and distribution of electricity by the contribution of its
12,000 MW generation capacity. It has a good reputation of being reliable and
trustworthy in providing efficient products and services. According to their main
website, TNB supplies %55 of the total industry capacity through six thermal stations
& three major hydroelectric schemes in Peninsular Malaysia. In addition, TNB
manages & operates the National Grid, a comprehensive transmission network that is
also interconnected to Thailand & Singapore.
TNB core business is divided into three main sections, Generation Division-
developing, operating and maintaining TNB’s portfolio of power generating units,
Transmission Division- Managing and operating transmission network of TNB
known as the National Grid and Distribution Division- Distribution Network
Operations & Electricity Retail Operations.
The government continued to be a major shareholder (via vehicles such as Kazanah
Nasional) of many of the privatized incumbent entities such as Telekom Malaysia
Berhad %34 and Tenaga Nasional Berhad %35.6. Despite widespread privatization
across many sectors, the government continued to hold a significant level of shares in
many of the major privatized entities such as Tenaga Nasional Berhad (power) and
Telekom Malaysia Berhad (telecommunications).
By 1984 the government of Malaysia which was enjoying the fistful and
healthy margin from the high revenue of approximately RM 2.2 billion profit through
the introduction of significant reduction in tariffs in its electricity segment, this sector
was recognized by the World Bank as a well-run and financially sound entity.
However this enjoyment didn’t last long as globalization, high wages and the ever-
increasing borrowing from government made then Prime Minister Dato Seri Dr.
Economics for Managers- TNB, Market Structure Page 6
Mahathir Mohamad to announce the government's decision on a policy of
privatization. Accordingly, privatization started with four main objectives – to relieve
the administrative and financial burden of the government, improve the effectiveness
and quality of the public services, encourage the spread of private entrepreneurship in
the public sector and last but not least, contribute to the attainment of the goals set for
the New Economic Policy (NEP).
Following the above issues and the consideration of public interest, made the
government to replace National Electricity Board of the States of Malaya (NEB)
which dates back to June 1965 by TENAGA NASIONAL BERHAD (TNB) due to
the then Electricity Act and offering the establishment of a new corporation. Based on
the TNB website, first of September 1990, was the day which Dato Seri Dr. Mahathir
bin Mohamad officially declared TNB as the successor to NEB and subsequently,
TNB became a private company wholly-owned by the government of Malaysia.
TNB AS A MONOPOLY
In the annual report of TNB it is mentioned that: “In 1995 TNB’s monopoly in
electricity generation sector ended with the establishment of five independent power
producers (IPPs) which supplied 30.99 per cent of electricity supply to the National
Grid. The five were YTL Power Generation Sdn. Bhd., Segari Energy Ventures Sdn.
Bhd., Port Dickson Power Bhd., Powertek Bhd. and Genting Sanyen Power Sdn.
Bhd.” (TNB annual report- 2010) However the business model of TNB seems to be
still a Monopoly.
One may argue that TNB cannot control the price of electricity and cannot
adjust their tariff and therefore they are not a real monopoly. Or when the cost of
producing electricity is increasing they are not able to change the price easily. Well,
that is right to some extent, but as it was discussed before, the nature of electricity
industry is a little different, especially when it comes to demand and supply. It means
that increasing the price is not that easy, and it is helpful only in peak times where the
company wants the people to decrease their consumption. But in fact in other
Economics for Managers- TNB, Market Structure Page 7
situations the story is different and they should try to motivate the consumers to use
more in order to stabilize the electricity grid. Critics also say that you as an investor
in TNB cannot expect the stable dividends when there are many losses in the
business. What they have forgotten is that as it is compulsory to lose in some periods,
the usage of electricity is also compulsory nowadays. For example in Malaysia it is
difficult to scape using air cons, or stopping a factory from working whatever the
price is, and this can assure a sustainable demand of electricity. Experience from past
also shows that TNB has been always ready to burden the cost to consumers. A look
at the price list could easily prove that:
Home Use (Monthly Usage < 400kWh)kWh Tariff (cent)
1-200 21.80
200-400 34.50
Home Use (Monthly Usage > 400kWh)
kWh Tariff (cent)1-500 30.00
501-600 39.00
601-700 40.00
701-800 41.00
801-900 43.00
>901 46.00
Resource: (Ahyap, 2008)
Sometimes shareholders may just receive low dividends but at the end because the
government has always protected TNB, they now has a dividend policy. And due to
this safety element, TNB has stock in many mutual funds. The other reason is that the
banks are required to do national service to government linked organizations such as
TNB, Celcom, and Telecom. All these beside the fact that electricity is an issue of
national security, makes government to help TNB by any means possible. (Ahyap,
2008)
Economics for Managers- TNB, Market Structure Page 8
CHARACTERISTICS OF MONOPOLY AND TNB
In a monopoly situation there is a single seller which has market power.
Single Seller: In this case, TNB is that single seller that produces all the output which
is electricity and it serves the whole market alone.
Market Power: TNB has also market power and can affect the price of electricity and
the price is not imposed by the market as in perfect competition. As it is a
government-linked organization and in effect the price is determined by the
government, in pricing we should consider the government position and limitations.
They cannot impose whatever price they want as it may causes dissatisfaction among
people; consequently, the national security issues and political instability may arise.
Representing the Industry: In a monopoly, the firm represents the industry itself. So
we can say that here TNB represents the electricity industry.
Price Discrimination: The other characteristic of the monopolist is that it can change
the price of the product and charge different prices for various groups of customers.
To implement price discrimination the company must have market power. As
mentioned before, TNB has this condition. Second condition is that the company
must be able to divide customers into different groups that have different price
elasticity of demand. TNB can gather any information and statistics of Malaysian
people by asking the other governmental organizations and easily sort the data and
have a good understanding of the current demand of the people. Other condition in
price discrimination is the ability to prevent customers to resale the product. This
situation would never occur for TNB as electricity is not such a good to be bought
and resold easily. (Farnham, 2010)
Economics for Managers- TNB, Market Structure Page 9
TNB SWOT Analysis
Strengths
As the sole provider of electricity and the monopoly organization, TNB’s strength
cannot be ignored in Malaysia. This factor has great significance in being the
forefront producer of electricity in Malaysia, hence being back up by government and
its policies.
Another factor which aids to its leadership is the integrated business portfolio of
TNB. From electricity to most of its supplementary products or services is being
offered by TNB. Accordingly, integrated business portfolio helps in TNB’s strength.
Strong growth prospects can be named another TNB’s strength.
Weaknesses
Meanwhile the weakness of TNB cannot disregard. Its dependence solely on
Malaysian market and the small return on equity due to the economies of scale and
scope are the weaknesses of TNB. Although it has a strong portfolio and is the
monopoly in Malaysia, it is not active regionally and its main source of revenue
comes from Malaysia only. This has an impact on the return on equity as of the
limited volume and the scope which is covering. It doesn’t possess the power of
which it has in Malaysia as the market leader and monopoly organization in the other
parts of Southeast Asia.
Opportunities
The opportunities which are ahead of TNB are the development of Renewable Energy
Power by the contribution of developing Biomass Plants, Solar Hybrid Projects. The
global trend in renewable energy is so fast that TNB should make a move right now
to seize the opportunities of close future and move away from fossil fuels.
TNB needs regular efforts in increasing its plant efficiency by exploiting advanced
technology, besides the establishment of Nuclear Energy unit for future energy
requirement or the low carbon initiative is highly supported by the government.
Economics for Managers- TNB, Market Structure Page 10
Another initiative would be going regional and collaborate or merge with the regional
producers of electricity to have presence in other countries of Southeast Asia and get
the knowledge and power of the regional market.
The last but not least can be the green technology projects and its infrastructure; e.g.
solar wind, mini hydro.
Threats
Because of the high cost of production and its suitability, offering a competitive price
in Malaysia is hard to manage for TNB. This consideration will affect the revenue of
the company in the long run. On the other hand, the alteration of the governors and
the decided policy might change the competitive advantage of the current situation of
TNB as the monopolist and the market leader. Technology and digitization as the
game changer might soon or late affect this industry.
The glimpse to the future and the implementation of the renewable energy still has
some limitations which can be the unreliability of the renewable energy fuel
resources as alternative for fossil fuels and the dawdling growth and its high cost.
In the meantime, TNB should invest in its R&D and keep it strong and firm to retain
its front position in developing new and customized products and services in order to
sustain its market leadership and profitability. TNB should make use of its allocated
resources to the most and give back the best to the society.
PRODUCT DIFFERENTIATION
As the characteristic of the monopoly market structure the product in this market are
unique and have no substitute. In the case of TNB apart from lateral products the
main product is supplying the electricity of Peninsula Malaysia.
PRICING STRATEGIES
Monopoly firms are price-setters. Therefore the managers of these companies must
set the optimal price to maximize the profits. For this aim, the company in this market
Economics for Managers- TNB, Market Structure Page 11
structure will produce output quantity where marginal revenue is equal to marginal
cost that is a standard rule for profit maximization. For the case of TNB pricing
strategies were presented by its chief financial officer in company report as well as
the website.
According to Dato’ Izzaddin Idris, chief financial officer of TNB, the pricing strategy
of TNB is with four main objectives:
1. Efficient allocation of Economic Resources, that includes considering about
marginal costs and cost supply and so on.
2. Fairness and Equitability, which is about having stable and no fluctuated
price.
3. Meeting sufficient revenue requirement, which is ability to raise fund for
electricity supply infrastructure development.
4. Socio-economic factors such as consideration of other economic and political
requirements like subsidies to certain sector.
Three Basic Pricing Principles as explained by Dato Izzaddin Idris for TNB are as
follow:
1. Accounting Cost of Supply: This involves the capacity, energy and customer
related costs. It is also including recovery of all cost except future ones.
2. Financial Revenue Requirement: this demonstrates the specific pricing to
recover return over and revenue requirement over a period of time.
3. Marginal Costing Pricing: Based on incremental cost of supply. This will be
distorted by externalities such as subsidies, taxation etc
TNB also has implemented some tariffs for its pricing strategies in order to cause
benefit for different level of society. Therefore, TNB developed some tariffs which
are based on Accounting Cost of Supply and Financial Revenue Requirement pricing
basis with some degree of subsidies (input and end-use price) over the years.
Some of the key features of these tariffs are as follow according to TNB:
Protection to poor or low income customers:
• According to this rule there has been no impact or charge for the poor and low
income customers whose consumptions are less than 200 kWh per month.
Encourage efficient consumption of energy that includes two main sections:
Economics for Managers- TNB, Market Structure Page 12
• Maintain Sunday Tariff Rider and Peak/Off-peak Tariff Rider
• Maintain Thermal Energy Storage (TES) tariff
Special Rates/Discounts
• Special Industry Tariffs – for specific sectors currently focus by the Government
• Maintaining discount to religious homes, government schools/colleges & welfare
homes
• Cost-based tariffs (customized tariff) for customers who demand for higher quality
service
Introduction of Specific Agricultural Tariff in 2006
Pass-through Formula
• Incorporation of automatic pass-through formula to mitigate fluctuations in
uncontrollable costs, hence avoiding unexpected changes in tariffs due to costs
escalation
Above, the overall pricing strategy of the TNB was explained as a monopoly firm
that possesses the whole activity of the electric industry of Malaysia with regard to
the fact that as a semi-governmental firm it considered the wellbeing of society
member in accordance with obtaining sufficient fund to continue its operation.
MARKET SHARE
According to the Bursa Malaysia, TNB has published 5,450,690,000 outstanding
shares in the currency of Malaysian ringgit. And the share type is ordinary share of
RM1.00 per share.1 and poses closely held shares of 2,699,667,906.2 the ordinary
share bring voting write to its owner with some regulations added by TNB to this
theme. Branches of the TNB are trading their shares both nationally and in cases
internationally. For instance, according to their 2010 annual report, TNB REMACO
Sdn. Bhd. (REMACO), a business unit of Generation Division, expand its market
share in the national as well as global energy related industries. For fiscal year of
2010, REMACO achieved revenue of RM333, 475,000, an increase of 52% from the
revenue of RM219, 926,348 in 2009 fiscal year. The sell in the market has fluctuation
as all market shares but yet is expanding.
Economics for Managers- TNB, Market Structure Page 13
BARRIER TO ENTER THE MARKET
The market structure in which TNB is operating is Monopoly model. This means that
the market is occupied with only a single firm that is TNB and there are no substitutes
for it. In such a market there are many barriers for other firms to enter. Six major
barriers to entry were defined generally:
Economics of scale: that is lower costs of production when larger scale of
operation exists. Economics of scale can be a barrier in different industries as
only large scale companies can accomplish the cost-reduction benefits of
these economies. This may be applicable in the case of TNB as they are
financed by large scale. They financed themselves also by issuing bonds for
the long run.
Barriers created by government: These barriers are regulations and rules set
by government for different public policy purposes and are including licenses,
patents, and copyrights to name some of these rules. This is the fact that
results in being the only single provider of the country electricity for the TNB.
As the government rule does not allow entry of any other company. They will
support the TNB in the economic terms as well when it is needed. Hence
government policy and support is a important factor in making TNB the only
company operating in this market.
Input barriers: inputs are also a barrier for the firms and it may includes
control over raw materials or financial capital and other inputs in a production
process. This may not be the case of the TNB as the major reason that other
companies cannot enter to this is the government support and rules.
Brand Loyalties: as is clear by the names brand loyalty can be a barrier as
customer may not switch to the new brand due to the heavy advertising and
brand equity building of the former brand and the sense of satisfaction and
loyalty that the customers have. The brand loyalty also is not the case for the
TNB as the brand does not matter for the customer in terms of electricity
supply.
Economics for Managers- TNB, Market Structure Page 14
Consumer lock-in and switching costs: various reasons may cause the
consumer lock-in to the certain company such as durable purchase or search
costs and brand specific training. These will also lead to incurring switching
cost for the customer that will form a barrier for other companies ultimately.
As the legal rules won’t allow the entry of any other competitors this will not
be any concern for TNB that they work on as a barrier.
Network externalities: These barriers exist as the value of a product to
consumers depends on the number of customers using the product. In such
case one brand of product becomes the industry standard and increase its
value.
On the whole, All the barriers mentioned above may exist in any types of market
structures. These barriers exist variedly and strongly in monopoly market that many
including legal restrictions which block any entry of other firms. For TNB the
government regulations will not allow the entry of any other firm in the production of
the electricity for the country for the benefits of the country and encompassing
integrity. These regulations protect the market in different divisions that TNB is
operating.
CRITICAL EVALUATION OF MICROECONOMICS THEORY
TNB and Demand Elasticity
TNB is a monopoly firm in the electricity industry in Peninsula Malaysia. As
monopoly firm, TNB needs to fulfill all demands in the industry. What is the shape of
the demand curve of TNB? TNB has a very inelastic demand curve as shown in the
graph 1 below. The quantity demanded is only change a little when the change in the
price is very high. In other words the consumer is very unresponsive towards the
changes in the price.
Economics for Managers- TNB, Market Structure Page 15
Graph 1: Inelastic Demand Curve
When the price increase from P2 to P1, quantity demanded will decrease from Qe to
Q1. However the percentages changes in price will be higher than the percentages
changes in quantity. This shows that consumers still need to consume electricity
although the price increase drastically. They can reduce the consumption but they are
not able to stop from using it because of a few reasons as explain below:
1. No substitute product. Does electricity have a substitute? Generator?
Although there is other substitute for electricity like fuel, cold, generator and
so on. The substitutes are very inconvenient and costly. For example,
consumers need to allocate some space to keep the generator in their back
yard and the maintenance for generator is not cheap since the spare parts are
very expensive.
2. Monopoly. TNB is the sole supplier of electricity in Peninsula Malaysia, as
such consumer still need to purchase the electricity from them although the
price increases. They can reduce the consumption but not able to stop from
using it.
3. Basic Necessity – Since electricity is one of the basic necessities, the changes
in price will have a limited effect the quantity demanded.
TNB is likely to increase the price of electricity to improve the total revenue. Price
reduction on the other hand will cause TNB revenue lost. Since they have look into
the social welfare as semi government firm, they are practicing price discrimination
as explained below.
Economics for Managers- TNB, Market Structure Page 16
TNB as a Monopoly and Corporate Social Responsibility
TNB claim that they are conducting and practicing a lot of activities which are
producing a lot of positive outcome to society. They have established University
Tenaga National (UNITEN) to produce well-rounded individuals and also offering
sponsorships through Yayasan Tenaga National. Their CEO had been awarded as
CEO of the year 2008 by the Prime Minister because TNB are organizing
environmental project and activities that resulted in building the nation. They have
also won a lot of award on their corporate social responsibility’s activities.
Are TNB really contributing to the wellbeing of the society? If we look at the
economic point of view, the answer is definitely no. The graph 2 below explained the
comparison between monopoly and perfectly competitive market. Perfectly
competitive market are considering social wellbeing since it achieved allocative
efficiency (P=MC) and productive efficiency (AC minimum). On the other hand
TNB which is monopoly in the electricity industry in Peninsula Malaysia is definitely
not offering their services at the point where the maximum social wellbeing is
achieved.
Graph 2: TNB as monopoly
This is because of a few reasons as below:
Economics for Managers- TNB, Market Structure Page 17
1. TNB is not producing at the point where P=MC, as such TNB do not achieved
allocative efficiency whereby the allocation of resources is not done efficiently.
2. TNB can supply the electricity at Qpc and only charge consumers at Ppc,
however TNB is producing less than its capacity at Qm and charging consumers
more than what they supposed to which is at the point Pm.
3. Consumer Surplus, the benefit that the consumers are obtaining through the
difference between the price that consumers willing to pay and actually paying
reduces when TNB charging at Pm and producing at Qm. Part of the consumer
surplus transferred to TNB which is the area A and part of the consumer surplus
is wasted which is also known as deadweight loss (area B).
4. Above all TNB is also not achieving productive efficiency since TNB is not
producing at the point where AC is at minimum. This is because TNB still
enjoying a lot of profit although it is not using efficient way and process to
conduct the production since TNB is the only firm in the industry.
TNB and Price Discrimination
Price discrimination is a practice of charging a different level of pricing for different
customers. TNB are able to practice this because TNB obtain the market power as a
monopoly in this industry. TNB is also practicing two types of price discrimination
which is the inverse second degree price discrimination and third degree price
discrimination.
Third degree price discrimination
TNB have divided the consumers in seven different groups as per below.
Domestic customer Commercial customer Industrial customer Mining customer Street Lighting customer Specific Agriculture customer Top-Up and Standby customer
Economics for Managers- TNB, Market Structure Page 18
Each group has different demand elasticity. For example industrial customer will
have more inelastic curve compared to the domestic customer as shown in the graph 3
below. This is because industrial customer still needs to continue producing to sustain
in the market although the price of the electricity increases. They are not able to stop
any production line to reduce the amount of electricity used. This will affect their
productivity and their business in long run.
Graph 3: Third degree price discrimination
Since Industrial customers (factory users) have more inelastic curve and
domestic users (household users) have less inelastic curve, industrial users are paying
more for same amount of electricity supply. Please refer to table A and B in
Appendix for information on the pricing. As such the profit maximization is achieved
and also avoids inefficiency inherent in monopoly pricing.
Inverse of second degree price discrimination
Second degree discrimination normally practices by monopoly by dividing the
customers in two different groups based on the purchased quantity. As shown in the
graph 4 below, those who are purchasing in the range of Q1, will have to pay at P1
and those who are buying at the range of Q2 , will have to pay at P2. The more the
quantity demanded the less the consumers need to pay. This will avoid area E to be
deadweight loss and avoid the transfer of area D to be as a producer surplus. Both
area E and D will remain as a consumer surplus.
Economics for Managers- TNB, Market Structure Page 19
Graph 4: Second degree price discrimination
However TNB are practicing an inverse strategy of the above means TNB is charging
less for less consumption, charging P1 pricing for Q2 consumption and charging
more for more consumption, charging at P2 for Q1 consumption. For example
domestic users need to pay RM21.80 per kWh up to 200 kWh per month. If their
consumption increases to 201kWh to 400kWh per month, they have to pay RM 33.40
per kWh.
Most probably TNB are practicing inverse second degree price discrimination
to help the poorer consumers which are consuming less electricity monthly and also
encourages people to save more energy. This pricing strategy is most probably
advised by government since TNB is a semi government firm.
CONCLUSION
Tenaga National Berhad or shortly known as TNB are monopoly firm in the
electricity industry in Peninsula Malaysia. As a monopoly firm, TNB have most of
the characteristic of monopoly such as a single firm, have a market power, barrier of
entry by government, natural monopolist who own the resources like the Power Plant
and also practice price discrimination.
TNB obtained most of the negativity owned by monopoly such as inefficiency
in productivity because of no competitors. However, government of Malaysia took a
Economics for Managers- TNB, Market Structure Page 20
smart decision to privatize TNB in 1992. Although this reduces the productive
inefficiency, the inefficiency still exists through red tape and decentralization.
TNB claim that most of their pricing structures are socially fair and beneficial
to society. However any monopoly firms are not able to fully achieve this because
they are not operating in free market to test their claim. Their structural pricing and
price discrimination might be able to minimize inefficient pricing and reduce the
effect of monopoly’s pricing structures, but they are not able to produce a totally fair
pricing to society.
Economics for Managers- TNB, Market Structure Page 21
REFERENCES
1. TNB Website; http://www.tnb.com.my/, visited 27/03/2011
2. Nikomborira D. & Manachotphong W. (2007). Electricity Reform in Practice:
The Case of Thailand, Malaysia, Indonesia and the Philippines.
Intergovernmental Group of Experts on Competition Law and Policy, Geneva.
3. Electric Power. (2011). Retrieved March 29, 2011, from
http://www.evoc.com/solutions/Electric-Power/default.aspx
4. DiLorenzo, Thomas J. (1996), The Myth of the Natural Monopoly
5. Demand Response. (2011). Retrieved March 29, 2011, from
http://en.wikipedia.org/wiki/Demand_response
6. Johnson P., 2000, Dept. of Political Science, Auburn University
7. Welcome to efficient lighting and electric. (2011). Retrieved March 29, 2011,
from http://www.electricalcontractorslosangeles.net/
8. Ahyap. (2008). Retrieved March 29, 2011, from
http://www.ahyap.com/blog/tenaga-nasional.php
9. TNB annual report- 2010
10. www.bursamalaysia.com
11. Paul G. Farnham, (2010), Economics for Managers. Pearson Education, Inc.
2nd Edition.
Economics for Managers- TNB, Market Structure Page 22
APPENDIX
Domestic Consumer” means a consumer occupying a private dwelling, which is not used as a hotel, boarding house or used for the purpose of carrying out any form of business, trade, professional activities or services.
TARIFF CATEGORY UNIT RATES
1. Tariff A - Domestic Tariff
For Monthly Consumption Between 0-400 kWh/month
For the first 200 kWh (1 - 200 kWh) per month
sen/kWh 21.8
For the next 200 kWh (201 -400 kWh) per month
sen/kWh 33.4
The minimum monthly charge is RM3.00
For Monthly Consumption More Than 400 kWh/month
For the first 500kWh (1-500kWh) per month
sen/kWh 28.6
For the next 100 kWh (501-600kWh) per month
sen/kWh 37.8
For the next 100 kWh (601-700kWh) per month
sen/kWh 38.7
For the next 100 kWh (701-800kWh) per month
sen/kWh 39.7
For the next 100 kWh (801-900kWh) per month
sen/kWh 41.7
For the next kWh (901 kWh onwards) per month
sen/kWh 44.6
The minimum monthly charge is RM3.00
Adopted from: www.tnb.com.my
Economics for Managers- TNB, Market Structure Page 23
Industrial Users
TARIFF CATEGORY UNIT RATES
1. Tariff D - Low Voltage Industrial Tariff
For Overall Monthly Consumption Between 0-200 kWh/month
For all kWh sen/kWh 32.5
The minimum monthly charge is RM7.20
For Overall Monthly Consumption More Than 200 kWh/month
For all kWh (From 1kWh onwards) sen/kWh 34.8
The minimum monthly charge is RM7.20
Tariff Ds – Special Industrial Tariff (for consumers who qualify only)
For all kWh sen/kWh 32.7
The minimum monthly charge is RM7.20
2. Tariff E1 - Medium Voltage General Industrial Tariff
For each kilowatt of maximum demand per month RM/kW 23.40
For all kWh sen/kWh 26.6
The minimum monthly charge is RM600.00
Tariff E1s – Special Industrial Tariff (for consumers who qualify only)
For each kilowatt of maximum demand per month RM/kW 18.10
For all kWh sen/kWh 25.8
The minimum monthly charge is RM600.00
3. Tariff E2 - Medium Voltage Peak/Off-Peak Industrial Tariff
For each kilowatt of maximum demand per month during the peak period
RM/kW 29.30
For all kWh during the peak period sen/kWh 28.1
For all kWh during the off-peak period sen/kWh 17.3
The minimum monthly charge is RM600.00
Tariff E2s – Special Industrial Tariff (for consumers who qualify only)
For each kilowatt of maximum demand per month during the peak period
RM/kW 25.20
For all kWh during the peak period sen/kWh 25.8
For all kWh during the off-peak period sen/kWh 14.7
Economics for Managers- TNB, Market Structure Page 24
The minimum monthly charge is RM600.00
4. Tariff E3 - High Voltage Peak/Off-Peak Industrial Tariff
For each kilowatt of maximum demand per month during the peak period
RM/kW 28.10
For all kWh during the peak period sen/kWh 26.6
For all kWh during the off-peak period sen/kWh 16.0
The minimum monthly charge is RM600.00
Tariff E3s – Special Industrial Tariff (for consumers who qualify only)
For each kilowatt of maximum demand per month during the peak period
RM/kW 22.20
For all kWh during the peak period sen/kWh 24.3
For all kWh during the off-peak period sen/kWh 13.4
The minimum monthly charge is RM600.00
Adopted from: www.tnb.com.my
Economics for Managers- TNB, Market Structure Page 25