tnb market structure 3rd draft (1)

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


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


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


• 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


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.


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


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)


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)


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.


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


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:


• 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.


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.


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.


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.


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:


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


http://www.tnb.com.my/tnb/business/for-industrial/pricing-tariff.html


http://www.tnb.com.my/tnb/residential/apply-for-streetlights/charges-and-tariff-rates.html



http://www.tnb.com.my/tnb/business/for-commercial/pricing-tariff.html

http://www.tnb.com.my/tnb/residential/pricing-and-tariff/tariff-rates.html

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.


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


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.


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.


http://www.bursamalaysia.com/

http://www.electricalcontractorslosangeles.net/

http://www.mises.org/journals/rae/pdf/rae9_2_3.pdf

http://www.evoc.com/solutions/Electric-Power/default.aspx

http://www.tnb.com.my/

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


sen/kWh 38.7


sen/kWh 39.7


sen/kWh 41.7

For the next kWh (901 kWh onwards) per month

sen/kWh 44.6


Adopted from: www.tnb.com.my


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


For Overall Monthly Consumption More Than 200 kWh/month

For all kWh (From 1kWh onwards) sen/kWh 34.8


Tariff Ds – Special Industrial Tariff (for consumers who qualify only)



2. Tariff E1 - Medium Voltage General Industrial Tariff

For each kilowatt of maximum demand per month RM/kW 23.40



Tariff E1s – Special Industrial Tariff (for consumers who qualify only)

For each kilowatt of maximum demand per month RM/kW 18.10



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




RM/kW 25.20





4. Tariff E3 - High Voltage Peak/Off-Peak Industrial Tariff


RM/kW 28.10






RM/kW 22.20




Adopted from: www.tnb.com.my


tnb market structure 3rd draft (1)

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