Generally, ring fencing is separation of accounts, business activities and governance of an entity, without being completely taken out of the company. It occurs when one part of the entity (the ring-fenced entity) is providing exclusive/single-purpose services and another part is providing services in a competitive market.
In Australia, ring-fencing arrangement is implemented in its distribution sector. In the Ring Fencing Guideline issued by the Australian Energy Regulator (AER) in October 2017, ring fencing is defined as the identification and separation of regulated monopoly business activities, costs and revenues from those associated with providing services in a contestable market1. Meanwhile, for MESI, the Electricity Supply (Amendment) Act 2015 defines ring fencing of the Single Buyer as identifying and isolating the activities, assets, costs, revenues and service obligations of Single Buyer from the licensee, TNB, through accounting, financial or legal separation2.
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Ring-fencing is required to improve transparency and prevent biased decisions that may cause conflict of interest and unfair advantage to any market players. For Malaysia, since Single Buyer is still part of TNB, ring-fencing essentially eliminates potential conflicts of interest and perceived favouritism that can lead to lessening of competition particularly in the power sector. It is also envisioned for ring-fencing of Single Buyer to translate into greater transparency and enables stronger supervision by the regulator.
Ring-fencing is often implemented through both structural separation and implementation of rules and guidelines. There are four types of structural separation, namely ownership, financial, legal and physical separation. In general, the lesser the extent of structural separation, the more rules and guidelines are required. It is important to realise that greater structural separation may result in diminished economies of scale or scope that are inherent in vertically integrated business3. Presently, ring-fencing of Single Buyer is through financial and physical separation only and fortified by the Guidelines on Ring-Fencing Practices and Procedures for Single Buyer (Peninsular Malaysia)4 as well as other initiatives.
Single Buyer’s operational expenses and generation specific costs are kept separate as per IBR implementation. Under the IBR regime, Single Buyer is one of the five business entities that makes up the electricity base tariff in Peninsular Malaysia. Single Buyer Generation (SBG) and the Single Buyer Operations (SBO) tariff constitutes to about 70 percent of the base tariff. Any operational costs that are shared between Single Buyer and any other divisions or units within TNB must be allocated based on a pre-approved cost allocation methodology by the Regulator.
Physical separation for Single Buyer is achieved by relocating Single Buyer’s office out of TNB premises. Single Buyer’s office is now located at Bangsar South since 2013.
Single Buyer does not disclose any information to any party that may result in conflict of interests, lessening of competition or competitive advantage of another party except to the extent required in the performance of its functions under the Guidelines to Single Buyer Market. Requests of information from other market participants (including any other divisions and units of TNB) must be made in writing to the Head of Single Buyer who will evaluate the written request of information for any potential conflict of interest or effect of reducing competition or competitive advantage to any market participant. Only information which will not give rise to any conflict of interest or have an effect of reducing competition or provide competitive advantage to any generators or other market participants may be released. Meanwhile, information that is beneficial to all market players are published on Single Buyer website for equal accessibility.
Single Buyer’s operations are ring-fenced by adopting the arm’s length operation approach with other parts of TNB. This includes but not limited to:
Interactions with other departments in TNB is now governed by Service Level Agreements (SLAs). To date, Single Buyer has signed SLAs with TNB Distribution for metering, TNB ICT, TNB Finance and TNB Human Resource.
In line with the Guidelines for Single Buyer Market and Guidelines on Ring-Fencing Practices and Procedures for Single Buyer (Peninsular Malaysia), Single Buyer has established its own corporate identity and branding that includes logo, corporate colours, uniforms, letterheads, business cards and website, which is distinguishable from that of any other market participants (including TNB). The Single Buyer logo as shown by Figure 3 was launched on 28th February 2017. Single Buyer has also changed its email from “@tnb.com.my” to “@singlebuyer.com.my” and launched its website in 2017. All these initiatives are carried out to increase transparency and also to ensure non-discriminatory behaviour and operation of Single Buyer.
