ID :
186071
Thu, 06/02/2011 - 13:31
Auther :

COUNTRIES FORCED TO PASS THROUGH PART OF INCREASES IN WORLD FUEL PRICES


By Wan Nor Azura Mior Abd Aziz

KUALA LUMPUR, June 2 (Bernama) -- Many countries that provide fuel subsidies
are now forced to pass through part of the increases in world fuel prices, which
have escalated by about 26 per cent since the beginning of the year.

RAM Holdings Bhd group chief economist, Dr Yeah Kim Leng, told Bernama
Thursday the fuel cost pass-through (FCPT) mechanism, which was used in Malaysia
before 1980, was common in many countries such as Singapore, Thailand,
Philippines, Japan, US and Europe to counter the volatility in fuel prices.

Malaysia and China introduced this mechanism for the power sector early this
week, by implementing new electricity tariff rates which will help them mitigate
the effects of higher gas prices.

Under this mechanism, the government will review fuel cost every six months
and any changes (upward or downward) due to the fuctuations in fuel prices (gas,
coal and oil) will be passed through in the end-user tariff.

As part of Malaysia's ongoing subsidy rationalisation exercise, the
government on Monday raised the average electricity tariff by 2.23 sen kilowatt
per hour (kWh), or 7.12 per cent, to 33.54 sen kWh, from 31.31 sen kWh,
effective June 1.

Of the 7.12 per cent increase, 5.12 per cent (1.6 sen/kWh) is to compensate
for the 24 per cent upward revision of the natural gas price to the power sector
from RM10.70 per million metric British thermal units (mmbtu) to RM13.70 per
mmbtu while the remaining 2 per cent (0.63 sen/kWh) is a base tariff revision to
cover the increase in the cost of supply of electricity since the last base
tariff review in June 2006.

The move, however, would not affect about 75 per cent of the population who
mainly consume less than 300 kWh per month.

China on Monday raised the price for electricity used for industrial,
commercial and agricultural purposes across the country’s 15 provinces and
municipalities by 16.7 yuan (about US$2.57) per 1,000 kWh, while electricity
prices for residential use were unchanged.

Yeah said the rising subsidies had raised concerns over unproductive use of
resources, inefficient energy use and unsustainable government spending,
especially for countries facing deficit budgets.

The higher cost of power for the country's largest trading partner would
push up the prices of agricultural and industrial products in China, he said.

"As for the impact on the Malaysian economy, we do not expect the price
pressure to be large, especially for products in highly-competitive
international markets where cheaper substitutes are available," he said.

Thus, he said, imports from China would eventually cost more, making them
less competitive.

He said it would take time before the local industries and consumers would
be affected by the price increase as there would be an adjustment period for
both the domestic and export prices.

Currently, imports from China made up about 12 per cent of Malaysia's total
imports, Yeah said.

Yeah said Tenaga Nasional Bhd's (TNB) outlook and earnings had improved
considerably as a result of the tariff revision.

"It has eased market concerns over its ability to cope with rising coal and
gas prices," he said.

He said the introduction of the FCTP mechanism would also put TNB in a
better position to face unpredictable as well as sharp swings in world fuel
prices.

CIMB Research said the Performance Management and Delivery Unit's hint at
tariff increase after the power purchase agreements with independent power
producers were fully resolved was positive for TNB, Malaysia's electric utility
company.

"This is a big plus for TNB as it will allow it to enjoy a timely (every
six months) and transparent (FCPT) review of its tariff rates as well as ease
market worries that it would have to carry the burden of future rise in fuel
costs," it said in a research note.

The research house has also upgraged its rating for TNB from 'neutral' to
'trading buy" with a new higher target price of RM8.05 (US$2.66), from RM6.82
(US$2.27).

"We view the FCPT as a big plus since it will lift worries over inconsistent
tariff reviews in the past and this will place Tenaga on a firmer financial
footing," it said. .

Meanwhile, Affin Investment Bank economist, Alan Tan Chew Leong, said the
Chinese authorities were taking preemptive measures, by increasing the
electricity tariffs, to prevent power producers from cutting production to
minimise their losses.

"China raised electricity tariffs amid rising costs brought on by prices of
natural gas, coal and crude oil, similar to the challenges faced by Malaysia,"
he said.


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