-  At a briefing on Tuesday, MyPower Corp Bhd said that it would recommend to the Cabinet to stay on course with implementing the fuel cost pass-through (FCPT) mechanism.

-  Under the FCPT mechanism, the electricity tariff is to be reviewed based on the international gas price every six months.

-  The potential electricity tariff hike is to narrow the gap between the true cost of generating power and the current subsidised tariffs.

-  Note that the actual cost of power without subsidies is about 42 sen per kWh compared to 38.53 sen per kWh currently.

-  Between January to June, price of LNG had gone up by 10%-25% but the price of coal was 10%-15% lower.

-  However, overall subsidy for the power sector is estimated to cost the government RM12bil to RM14bil in 2014 (instead of RM8bil to RM12bil previously).

-  Without further information on the quantum of the rate hike, MyPower Corp proposes that the government utilises the savings from the revised power purchase agreements (PPAs) with independent power producers (IPPs).

-  The proceeds from the savings totalling RM500mil will help cushion the potential impact of higher electricity tariff on consumers.

-  As a recap, the electricity tariff was last revised in January 2014. The average electricity tariff in Peninsular Malaysia has increased by 15% from the previous average rate of 33.54 sen/kWh to 38.53 sen/kWh.

-  For Sabah and Labuan, the average tariff surged by 17% from an average rate of 29.52 sen per kWh to 34.52 sen per kWh. Rates in Sarawak will not be affected.

-  Under the current electricity tariff structure, domestic gas price is RM15.20 per mmbtu.

-  We note that adjustment in the electricity tariff will raise the cost component of Housing, Water, Electricity, Gas and Other Fuels for 2014.

-  In terms of contribution to inflation, the Housing, Water, Electricity, Gas and Other Fuels component contributes 22.59% to the Consumer Price Index (CPI).

-  As at YTD May 2014, the CPI component of Housing, Water, Electricity, Gas and Other Fuels had advanced by 3.4% YoY (vs. +1.4% YoY during the corresponding period last year).

-  Nevertheless, we do not expect another round of electricity tariff increase during 2H14 to have a significant impact on full-year headline inflation for 2014.

-  The electricity and gas components account for 2.88% and 0.46% of total CPI respectively.

-  Our full-year CPI projection is 3.3% for 2014 (2013: +2.1%). Should petrol pump prices remain the same for the rest of the year, Malaysia’s inflation could potentially come in at 2.8% in 2014.

Source: AmeSecurities