This article first appeared in The Edge Malaysia Weekly on January 10, 2022 - January 16, 2022

Investors generally shy away from companies operating in the space of regulated assets where the growth of the business and returns depend on the government and the political environment.

Tenaga Nasional Bhd is certainly one of those companies.

The dominant electricity provider was supposed to get a review of the base electricity rate starting from last week. But the government decided to maintain the base tariff at 39.45 sen per Kw/hour (Kwh), a level set in 2018.

Under the arrangement, Tenaga was to negotiate with the Energy Commission to review the base rate every two years. But it did not happen in 2018, which was the year Malaysia held a general election. In 2020, the pandemic made it difficult for any adjustments to the base tariff.

And now, with the next general election around the corner, the government is not likely to revise the base electricity tariff anytime soon.

According to Tenaga’s announcement, the government has decided to continue with the current parameters of the Incentive Base Regulation (IBR) until further notice.

This means there is no certainty as to when the base tariff rate for electricity will be reviewed next. This does not help Tenaga and is possibly one reason why the stock remains undervalued.

Under the IBR, the electricity tariff for households is based on two components, which are the base tariff and Imbalance Cost Pass Through (ICPT). The base tariff will reflect the capital expenditure and operating cost of providing electricity, and takes into account a return on the fixed assets of Tenaga.

The ICPT is based on the fuel cost and is looked at every six months. If the price of oil and coal increases, it would be reflected in the ICPT. In the current period, the government has decided to maintain the ICPT, with a rebate of 2 sen per Kwh.

Tenaga has said that the developments would not impact its operations and financial position. But how long can the rebates on electricity tariffs go on without affecting the company?
 

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