Tenaga Nasional Berhad (TNB)

Tenaga Nasional Berhad is the largest electricity utility provider in Malaysia (TNB, 2013). TNB is also one of the leading utility companies in Asia. TNB was listed on the Main Board of Bursa Malaysia on the 12 July 1990 (EMIS, 2013). In the year 2013, total assets owns by TNB is worth almost RM87 billion. Besides that, TNB also hired more than 33,500 employees to serve Peninsular Malaysia, Sabah and Labuan with the estimated number of customer of 8.3 million (TNB, 2013a).

High-voltage Electric Power Transmission Network.

 Day-view of TNB's Power Plant in Manjung, Perak.

Night-view of TNB's Power Plant in Manjung, Perak.

As we know, TNB is largest electricity power provider in Malaysia and it is also known as one of the monopoly firm in Malaysia. EMIS (2013) also mentioned that TNB has the license to operate the company as a monopoly firm for 21 years initially. Basically a monopoly firm can be defined as the one and only seller or producer that sells good or services to buyers or consumers. Since TNB is the only electricity provider in Malaysia, TNB has full control over price. Thus, TNB has the power to increase the price without any valid or reasonable reason; and they would not worry that their customers will run away. This is because there is no close substitute for a monopoly firm and the company can practice “Take it or leave it” principle since consumer does not have other choices. Another characteristic of a monopoly firm is there is a non-price competition since there are no competitors. TNB is a natural monopoly.

Graph 1: A Natural Monopoly

When 4 units is produce, each cost 5 cent. When 2 units is produce, each cost 10 cents. And lastly when 1 unit is produces, each cost 15 cents. This means that the Long-run Average Cost (LRAC) curve is not u-shaped and it is downward sloping due to the increase in quantity produce will decrease the cost of each unit produce.

In addition, TNB is the price maker in the market and they can set the price of electricity without decreasing the demand of their services. Other than that, a monopoly firm has very high barriers of entry due to few barriers such as ownership barriers, legal barriers, economies of scale, product differentiation and brand loyalty. For this reason, a monopoly firm will make a positive economic profit in the long run since the high barriers of entry has blocked other firm to enter the market. At the same time, in the short run, a monopoly firm might earn either positive, zero or negative economic profit. There are many reasons TNB can maintain as a monopoly firm in Malaysia. Firstly, the barrier of entry is the high start-up cost. In order to start-up a power plant with high electric capacity, a very large amount of capital is required (Super, 2012).

Graph 2

According on the graph, profit maximization is achieved at the level of output where the Marginal Revenue (MR) = Marginal Cost (MC). The price must be set above the Average Total Cost (ATC) so that profit will be made. At point E, this is where the firm sets the highest possible price to maximize their profit.

There are some disadvantages for TNB for being a monopoly firms. For example, TNB is not productively efficient because the Price (P) is higher than the Long-run Average Curve (LRAC). Not to mention that TNB is not allocatively efficient since the Price (P) is higher than the Marginal Cost (MC). Since there are no competitors, the monopoly firm may produce low quality product since there is no substitute product for consumers (Dineshbakshi, 2012). Also, consumer may buy low quality products with a high price charged by the firm (Dineshbakshi, 2012).

On the other hand, there are also advantages of monopoly firm such as the firm can do extra investment and research for a cheaper and better method for production since their profit is high. Moreover, the high profits earned also encourage TNB to make expansion on their businesses and take risks to ensure that their business can still be improved. The last advantage of monopoly is the economies of scale as the higher the quantity produce, the lower the cost of production.

Next, TNB practices price discrimination for their pricing strategy. Price discrimination means that the selling price of a goods and services is different at different places. Second Degree Price Discrimination happens when a firms charges different price for different quantity if goods or services sold even for same type of goods or services. TNB practice the Second Degree Price Discrimination as the price of electricity bills that they charges is different according to the different usage of electricity. This can be shown by the table below (TNB, 2013b):

Tariff A - Domestic Tariff
Tariff Category	Unit	Rates
For the first 200 kWh (1 - 200 kWh) per month	sen/kWh	21.8
For the next 100 kWh(201 - 300 kWh) per month	sen/kWh	33.4
For the next 100 kWh(301 - 400 kWh) per month	sen/kWh	40.0
For the next 100 kWh(401 - 500 kWh) per month	sen/kWh	40.2
For the next 100 kWh(501 - 600 kWh) per month	sen/kWh	41.6
For the next 100 kWh(601 - 700 kWh) per month	sen/kWh	42.6
For the next 100 kWh(701 - 800 kWh) per month	sen/kWh	43.7
For the next 100 kWh(801 - 900 kWh) per month	sen/kWh	45.3
For the next kWh (901 kWh onwards) per month	sen/kWh	45.4
The minimum monthly charge is RM3.00

Table 1

As shown in the table, then the usage of electricity increased, the rates of charges also increased. This means that when the quantity increases, price also increases. To make sure that TNB can practice price discrimination, they must identify who are their customers so that they can charge different price for different types of customers.

Demand and Supply

            First of all, demand is the willingness and ability of the consumers to purchase different quantities of goods and services at a different price in a specific period. However, quantity demanded is the number of goods and services that has been bought by consumers.

            In the law of demand, if a price of a goods or services has increase, the quantity demanded will decrease; if a price of a goods and services has decrease, the quantity demanded will increase. This shows a negative relationship between price and quantity demanded. For example, if TNB increase the price charges for electricity, the quantity demanded will decrease because consumers are not willing to pay the same amount of usage with a higher price, so most probably consumer will decrease the usage of electricity to decrease their spending on electricity bills. Graph 3 and Graph 4 shows the negative relationship between price and quantity demanded.

Graph 3                                                                       Graph 4

In my opinion, the determinant of demand that can be applied to TNB is price of related goods. Complement goods is goods that must be use together and cannot be used separately such as television and electricity. If the price of television decreases, people will tend to buy more television and this will lead to the increase of electricity usage and finally the demand for electricity will increase.

On the other hand, in the law of supply, if a price of a goods or services has increase, the quantity demanded will increase; if a price of a goods and services has decrease, the quantity demanded will decrease. This shows a positive relationship between price and quantity supplied. For example, if the supplies of electricity has increases (new electricity provided in places such as rural areas), consumers will be more desire for the supply of electricity, and this will lead to the increase in price of electricity bills. Graph 5 and Graph 6 shows the negative relationship between price and quantity demanded.

Graph 5                                                           Graph 6

            In my opinion, determinant that can be applied to the supply of TNB is the change in technology and prices of factors of production. An improved or advanced in technology might decrease the cost of production such as using solar energy and wind energy to produce electricity.

            The elasticity of demand measure the rate of responses in quantity demanded that is affected by the change in price (Moffatt, no date). The elasticity of demand can be calculated using the following formula:

            Since TNB is a monopoly firm, the elasticity of demand for TNB is fairly inelastic demand. For example, this means that when the price increase by 10%, the demand will only decrease by 5%. Graph 7 shows the elasticity of demand for TNB.

Graph 7

            In conclusion, as a price maker in a market, if TNB can maintain a high profit in the future, it is believed that TNB will continue owning the electricity of Malaysia in the future.

References

Dineshbakshi (2012) Tenaga Nasional Berhad (TNB) as a monopoly company in Malaysia. Available from:  http://www.dineshbakshi.com/igcse-gcse-economics/private-firm-as-producer-and-employer/revision-notes/1306-monopoly [Assessed 4^th June 2013]

EMIS (2013) Tenaga Nasional Berhad | Malaysia | Company Profile. Available from: http://www.securities.com/Public/company-profile/MY/Tenaga_Nasional_Berhad_en_1663430.html  [Accessed 2^nd June 2013].

Moffatt, M. (no date) Price Elasticity of Demand. Available from: http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm [Accessed 8^th June 2013]

Super, E., (2012) Tenaga Nasional Berhad (TNB) as a monopoly company in Malaysia. Available from: http://theworldofeconomic.blogspot.com/2012/11/tenaga-nasional-berhad-tnb-as-monopoly.html (Super, 2012) [Assessed 1^st June 2013]

TNB (2013a) Corporate Profile | Tenaga Nasional Berhad. Available from: http://www.tnb.com.my/about-tnb/corporate-profile.html [Accessed 5^th June 2013]

TNB (2013b) Tariff Rate|Tenaga Nasional Berhad. Available from: http://www.tnb.com.my/tnb/residential/pricing-and-tariff/tariff-rates.html [Accessed 5th June 2013]