Tenaga Nasional Berhad (TNB) as a monopoly company in Malaysia

Tenaga Nasional Berhad is the only company in Malaysia which supplies electricity to households. The company remains as the only electricity supplier direct to consumer, because to start such a monopoly business as TNB will require a company to invest a huge amount of capital. A huge capital is needed mainly for the start-up of power plants with high electric capacity of megawatts.

Manjung Coal Power Plant

Why is it that TNB the only company that supplies electricity to household? Even if other companies where to start an electricity supplying company same as TNB, assuming they have more than enough capital. So why can’t they start the company? It would be because of legal barrier to entry of patents or/and licenses own by TNB. In this case it would be license that TNB have gotten from the government to operate the business. Thus, having just one company to supply electricity to consumers will help maintain a healthy market.

As an example, we now assume there are two companies supplying electricity in Malaysia TNB and Hew Electricity Berhad; having two companies to choose from for consumers, it is definite that consumers will most likely make a decision based on which company can offer a cheaper price. Furthermore, not just price will be the issue but number of power plants will also increase in the country, which will lead to the increase of transmission towers, what’s worse is how will they direct the cables to each household who chooses different suppliers. In order to resolve these issues, the government have given the license to only TNB to operate this business. This helps limit the entry into the industry by using license, and these is why monopoly industry have extreme barriers.

Nonetheless, a government directive is also part of barriers to entry a certain industry, but for monopoly the government have set it is as a consequence of imposition of regulation that makes entry of new firms unattractive or almost impossible.

In addition, TNB has ownership on the scarce raw materials and this plays a part in making an effective barrier to entry with no other firms having access to the scarce inputs to produce their output. So, if a certain production requires a particular input, and the single firm which owns the entire supply of the input, the firm will have complete control in the industry. In this case TNB have access to coal, which is the cheapest raw material used to generate electricity here in Malaysia. 

Moreover, a single firm should be in this industry to keep the production cost from increasing, if there were more than one firm in this industry it will contribute to a higher price in coal. Than the coal supplier will sell the coal at a higher price, because coal is a scarce resource by selling it at a higher price will contribute to the increase of production cost.

Monopoly Profit Maximization

Based on the graph where production at the Marginal Revenue (MR) = Marginal Cost (MC) output. In order for the company to obtain maximum profit, the price must be set at the point coloured blue, where it touches the demand curve and must be above the Average Total Cost (ATC). If TNB remains a monopoly in this industry it will be able to make supernormal profits indefinitely.

Recently in the 4^th quarter TNB had made a RM 1bil profit, they had a better turnover compared to the previous year in the same quarter where they had made a loss of RM338.6mil. TNB’s revenue rose from RM9.15bil to RM9.33bil this year.

In relation, TNB was able to secure the coal at a cheaper price. However, TNB had also secured a bid on a new combined cycle gas turbine plant in Seberang Prai. The new power plant will increase TNB’s capacity to supply electricity to consumers; this will also lead to higher profits for TNB in the future. The profits increase due to the efficiency of the plant, it is able to produce an output of 60 per cent, being able to utilise the raw materials prices can be kept low.

Since TNB is a pure monopoly this makes the firm a price maker, so if prices were to be maintained or increase in the future, even with the new plant up to produce electricity by 2016 at a cheaper rate, TNB will still be making a higher supernormal profit during that period, which will boost the company’s income.

Resources:

                   http://www.coalguru.com/other_asia/tnb_posts_myr_1_billion_profit_in_the_q4/4912

http://biz.thestar.com.my/news/story.asp?file=/2012/7/17/business/11674208&sec=business

http://www.btimes.com.my/Current_News/BTIMES/articles/20121009214348/Article/index_html