HOT NEWS !!! WONG CHEN FROM PKR TRIES TO BULLSHIT ON TARIFF RATE !!! MUST READ !!!

PKR’s investment and trade bureau chief Wong Chen is playing the bullshit game like his counterpart Rafizi Hashim he said PR would reduced IPP’s return of investment from present 19 percent to just 10 percent if it came to power.Speaking to reporters on 7 Dec at the party headquarters,Wong said even if the ROI was at 10%, which is the global benchmark,it was still a lot of money for them.“What we want is to cut their obscene profit,” he added.However, many people in the field of IPP said Wong’s and Pakatan’s notion that PPA renegotiations was a silver bullet to ensure power prices remain at current rates in the future was wrong and off the mark.They said Wong’s analysis was probably driven by poor understanding of the industry which was flawed and incorrect. 

“It is incorrect for example,to take a general approach by taking TNB’s 2011where capacity payments as a proxy for IPP earnings and divide that by IPP total capital expenditure, resulting in an ROI figure of 19% for the following reasons Capacity Payment is a composition of revenue but not profit. So it is wrong to treat it as earnings.Capacity Payment is primarily used to service debt obligations of the power plant developer, so earnings is derived only after deducting debt servicing payments and other fixed costs such as insurance and taxes.The time value of money, which is basic in financial economics, is ignored in the analysis – there is a need to consider capital investment made in Year (n) and annual earning streams recurring for 21 years to work out the true return on investment, not just a snapshot payment in one particular year divided by total investment,” said one IPP senior manager.They said Pakatan’s proposal to force IPPs to take a 50% cut on revenues which was used primarily to service their debt obligations had the following serious implications: 

•A sanity check with the analyst community, ratings agencies and simple investigation of the terms of bonds issued by IPPs, will inform that such a move will, with certainty, trigger defaults in the IPP bonds, causing substantial uncertainty in the capital markets 

•This in turn will send very negative signals to the investment communities and raise the cost of doing business for the entire Malaysian economy 

•It is also highly likely that such financial turmoil would translate into operational issues in the ESI such as capacity shortages and supply interruptions 

•The value destroyed to TNB and the nation arising from the unstable ESI will be nothing short of a catastrophe. One of them said: “Tariffs do need to go up. This is due to increasing fuel cost and the capital intensive nature of the industry. Globally, fuel cost has also been increasing substantially. “For example oil has increased from below US$30 per barrel in year 2000 to now above US$90 per barrel (over 200% increase for the period). “To get an inkling into the capital intensive nature of the industry, just look up the TNB website and discover the capital expenditure of TNB each year (in the range of RM4 - 7 billion). “If the opportunity cost of gas were to be added to the present gas price, that alone will raise TNB’s fuel cost by more than RM10 billion annually,” he said. 

One of them added majority of the developed and developing world and in almost all recognized academic/research papers by leading universities and institutions, a common theme for sustainability of the electricity industry was for tariffs to reflect the underlying primary costs of supply. “We believe it is critical for the long term benefit of consumers and the industry that a fuel cost tariff pass through mechanism is instituted. “We can’t continue to artificially keep gas price low and hence electricity prices at status quo as artificially suppressed energy prices encourage inefficiency because: 

•Cheap source of energy will discourage investment in energy efficient technologies, encourage energy intensive industries and promote wastages, 

•Under-priced fuel also discourages investments in ensuring supply adequacy and security. If unchecked, this will result in higher risks of blackouts/brownouts, and “Even on individual level, the more electricity one consumes, the more one is subsidised, promoting wastage. “These distortions in energy prices will then filter through the entire economy, resulting in an economic structure and a population addicted to cheap energy; clearly an unsustainable future – as Malaysia moves from a net exporter of fuel to a net importer over the next 10 years,” he added. 

Therefore, they said instead of spending RM10billion per annum on keeping electricity prices low, distributing the RM10Bn to every Malaysian through better education, improve security, improved public transport, safer roads, enhanced healthcare services, more resources to combat corruption, or even just cash-back to every citizen will deliver a more efficient outcome. “Let each and every Malaysian decides whether they would like to waste the resource or spend it on those other essentials,” said another senior manager of an IPP. All the senior managers said it was important that Malaysians understand and plan mitigation steps to manage the impact of an eventual tariff increase.“Perpetuating the ‘ostrich’ strategy of keeping one’s head in the ground,serves nobody in the long run. “PPA renegotiations is not the silver bullet – even if capacity payments to IPPs is totally waived, it is still not enough to cover the incremental cost of gas. We sincerely believe, Malaysians, armed with the facts and guided by responsible leaders will chose the path of long term sustainability, albeit with some short term pain. “Let us not, for the sake of expediency, promote fictitious quick-fixes that continue to waste-away our future,” one of the senior managers concluded. 

GAZE-PONDER !!!