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
Table of Contents...............................................................................................................2 ELECTRICITY INDUSTRY STRUCTURE....................................................................5 TYPE OF MARKET STRUCTURE.................................................................................5 Electric Generation and Infrastructures.........................................................................5 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........................................................................................5 Why Natural Monopoly occurs?...................................................................................6 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).........................................................................................................6 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)..............................................................................................................................6 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)....................................................6 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.......................6 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

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would be a need to use expensive sources of electricity that are from inefficient power plants...................................................................................................................7 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)..7 MALAYSIA AND ELECTRICITY..................................................................................7 TNB BACKGROUND......................................................................................................8 TNB AS A MONOPOLY................................................................................................10 In the annual report of TNB it is mentioned that: In 1995 TNBs 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...........................................................................................................10 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:...................................10 Resource: (Ahyap, 2008).............................................................................................11 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)..............................................................................................................11 CHARACTERISTICS OF MONOPOLY AND TNB ...................................................11 In a monopoly situation there is a single seller which has market power. ................11 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...........................................11 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

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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. ......................................................................................................................................12 Representing the Industry: In a monopoly, the firm represents the industry itself. So we can say that here TNB represents the electricity industry.....................................12 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).............................................................................12 TNB SWOT Analysis......................................................................................................12 PRODUCT DIFFERENTIATION..................................................................................14 PRICING STRATEGIES................................................................................................14 MARKET SHARE...........................................................................................................16 BARRIER TO ENTER THE MARKET.........................................................................16 CRITICAL EVALUATION OF MICROECONOMICS THEORY..............................18 CONCLUSION................................................................................................................23 REFERENCES................................................................................................................24 Demand Response. (2011). Retrieved March 29, 2011, from http://en.wikipedia.org/wiki/Demand_response.........................................................24 Johnson P., 2000, Dept. of Political Science, Auburn University..............................24 Welcome to efficient lighting and electric. (2011). Retrieved March 29, 2011, from http://www.electricalcontractorslosangeles.net/.........................................................25 Ahyap. (2008). Retrieved March 29, 2011, from http://www.ahyap.com/blog/tenaganasional.php.................................................................................................................25 TNB annual report- 2010.............................................................................................25

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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 regulations 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

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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.

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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,

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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 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) Per capita Primary Energy Supply (toe): 2.53 Final Energy Demand (toe): 1.50 Electricity Demand (kWh): 3,174

Energy Statistics
Primary Energy Supply (ktoe): 67,878 Final Energy Demand (ktoe): 40,318 Electricity Demand (ktoe): 7,331 (GWh): 84,517

F 2007 Revenue B Y reak down

2% 3% 1% 2% 3%

FY2007 Total
Peninsular Malaysia SESB Goods & Services Deferred Incom e

RM million

2.20

89%

EGAT LPL

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

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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 Divisiondeveloping, operating and maintaining TNBs 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 didnt 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).

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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 TNBs 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

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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 1-200 200-400 kWh 1-500 Tariff (cent) 21.80 34.50 Tariff cent 30.00

Home Use Monthly Usage > 400kWh

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.

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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, TNBs strength cannot be ignored in Malaysia. This factor has great significance in being the forefront

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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 TNBs strength. Strong growth prospects can be named another TNBs 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 doesnt 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

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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:

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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

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 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

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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 wont allow the entry of any other competitors this will not be any concern for TNB that they work on as a barrier.

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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

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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 responsibilitys activities.

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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

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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

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.

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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

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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 monopolys pricing structures, but they are not able to produce a totally fair pricing to society.

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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 Power. Thailand, (2011). Malaysia, Indonesia March and 29, the Philippines. 2011, from Intergovernmental Group of Experts on Competition Law and Policy, Geneva. 3. Electric Retrieved http://www.evoc.com/solutions/Electric-Power/default.aspx 4. DiLorenzo, Thomas J. (1996), The Myth of the Natural Monopoly Demand Response. (2011). Retrieved March 29, 2011, from http://en.wikipedia.org/wiki/Demand_response Johnson P., 2000, Dept. of Political Science, Auburn University

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Welcome to efficient lighting and electric. (2011). Retrieved March 29, 2011, from http://www.electricalcontractorslosangeles.net/ Ahyap. (2008). Retrieved March 29, 2011, from http://www.ahyap.com/blog/tenaganasional.php TNB annual report- 2010 5. www.bursamalaysia.com 6. Paul G. Farnham, (2010), Economics for Managers. Pearson Education, Inc. 2nd Edition.

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 1. Tariff A - Domestic Tariff For Monthly Consumption Between 0-400 kWh/month For the first 200 kWh (1 - 200 kWh) per month For the next 200 kWh (201 -400 kWh) per month The minimum monthly charge is RM3.00 For Monthly Consumption More Than 400 kWh/month sen/kWh sen/kWh 21.8 33.4 UNIT RATES

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TARIFF CATEGORY For the first 500kWh (1-500kWh) per month For the next 100 kWh (501-600kWh) per month For the next 100 kWh (601-700kWh) per month For the next 100 kWh (701-800kWh) per month For the next 100 kWh (801-900kWh) per month For the next kWh (901 kWh onwards) per month The minimum monthly charge is RM3.00

UNIT sen/kWh sen/kWh sen/kWh sen/kWh sen/kWh sen/kWh

RATES 28.6 37.8 38.7 39.7 41.7 44.6

Adopted from: www.tnb.com.my

Industrial Users
TARIFF CATEGORY 1. Tariff D - Low Voltage Industrial Tariff For Overall Monthly Consumption Between 0-200 kWh/month For all kWh The minimum monthly charge is RM7.20 For Overall Monthly Consumption More Than 200 kWh/month For all kWh (From 1kWh onwards) The minimum monthly charge is RM7.20 Tariff Ds Special Industrial Tariff (for consumers who qualify only) For all kWh sen/kWh 32.7 sen/kWh 34.8 sen/kWh 32.5 UNIT RATES

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The minimum monthly charge is RM7.20 2. Tariff E1 - Medium Voltage General Industrial Tariff For each kilowatt of maximum demand per month For all kWh 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 For all kWh 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 For all kWh during the peak period For all kWh during the off-peak period 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 For all kWh during the peak period For all kWh during the off-peak period 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 For all kWh during the peak period For all kWh during the off-peak period 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 For all kWh during the peak period For all kWh during the off-peak period The minimum monthly charge is RM600.00 RM/kW sen/kWh sen/kWh 22.20 24.3 13.4 RM/kW sen/kWh sen/kWh 28.10 26.6 16.0 RM/kW sen/kWh sen/kWh 25.20 25.8 14.7 RM/kW sen/kWh sen/kWh 29.30 28.1 17.3 RM/kW sen/kWh 18.10 25.8 RM/kW sen/kWh 23.40 26.6

Adopted from: www.tnb.com.my

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