Bill Guerin – Against the backdrop of the sudden closure of the US Embassy, violent clashes accompanying the re-election of Jakarta's widely disliked governor, Sutiyoso, and the brazen refusal of parliament Speaker Akbar Tanjung to step down, the Indonesian capital and surrounding areas were blacked out for long periods on September 12-13.
After the power failure, PT Perusahaan Listrik Negara (PLN, Indonesia's state-owned electric utility) president Eddie Widiono said it was up to the public whether to file a class-action suit "but please also consider our efforts to always improve our service", adding that the events were "only" a technical problem. Other PLN officials claimed kite strings or large tree leaves could have caused the outages.
Widiono could hardly have been more insensitive or provocative. Thousands of electric-train passengers stranded, no clean water supply, and fires all over metropolitan Jakarta caused by candles fueled palpable misery and inconvenience to the city's residents.
Consumers have little chance of compensation. The state power monopoly PLN is protected from class actions by a clause in the new Electricity Law, passed this month after 18 months of deliberations, which only allows for compensation after three consecutive days of disruption to power supplies. Two years ago, after a seven-day blackout in Bogor, PLN paid out a derisory Rp500 (5 US cents) per user.
An estimated 4.5 million customers felt the pain this time and losses are estimated at tens of billions of rupiah. The monolith employs more than 50,000 workers to service almost 29 million subscribers.
The anger and frustration from small consumers and businesses follow countless complaints of fluctuating voltage that damages electronic goods, a string of localized power-outage incidents day after day without notice, and continually increasing tariff hikes.
PLN says it lost Rp4.5 billion (US$500,000) due to the first day's blackout alone, but Goodyear, the giant tire maker, claims more than Rp1.25 billion worth of lost of production. Satelindo, one of the country's biggest GSM (global system for mobile communication) network operators, said 638 of its 1,400 relay stations couldn't function.
Business-wise, this unreliable power supply means higher costs for investors and constraints on manufacturers meeting delivery schedules. Business uncertainty will rise sharply as companies try to reduce the possible impact of more unplanned blackouts. For some businesses the costs could be significant. Businesses cannot work around unplanned blackouts. Businesses will have to factor greater lead times for delivery, diversify their supply networks, and/or stockpile inventory. Such measures represent significant costs.
Although PLN has been a limited-liability company since 1994, the government makes it follow policies that are not compatible with commercial interests. The government provides much of PLN's financing through loans from international agencies and, of course, acts as both policy-maker and regulator for the power sector.
Expanding supply to the rural areas in the provinces has been subjugated to government policy objectives, as has the theory that electricity would be provided at an affordable price for households.
The new bill, however, means PLN will gradually lose its monopoly in power generation, transmission and distribution to mid-size and large users. In theory new investors will be allowed to enter the sector, though this is somewhat academic given the backdrop of countrywide risk factors, such as legal risk, a weak banking sector and weak capital markets, and several sector-specific factors that make investment in the sector decidedly unattractive.
Under the bill, all producers, including PLN, will have to sell to distribution companies through a bidding system. The lowest bidder will be allowed to enter the power grid, which will be operated by a special agency to be established by the government. Full liberalization will be implemented in stages over a seven-year transition period.
Implementation of the law will be made gradually through a Power Market Supervisory Agency (PMSA) that will be set up within a year of the legislation being implemented.
The PMSA will determine which provinces are ripe for market competition and which will remain under monopoly control and will be tasked with ensuring fair market competition for mid-size and large consumers and determining power prices for small users. Five years after the new law takes effect, the government must have selected one area for the implementation of free-market competition.
While the power generation and power marketing sectors will be opened for competition, the government will continue to control the power transmission and distribution network. However, in the spirit of free competition, all licensed companies will be free to develop power plants and sell their power to the public by themselves or through agents.
Local governments will have the right to issue licenses to private companies to set up power plants or sell power to the public in their respective jurisdictions.
Financially, PLN is in dire straits. Power generation costs in rupiah terms have risen steeply, not simply because of the proven gross inefficiency and associated corrupt practices of PLN, but mainly as a result of the meltdown of the rupiah in 1997. Most of PLN's borrowing is in dollars, while its revenues are in rupiah. An estimated 80 percent of power cost components is based on foreign exchange.
PLN currently sells electricity at 3.5 cents per kilowatt-hour, which is only 50 percent of the production cost. Electricity tariffs were increased by an average 6 percent at the turn of the year and a staggered increase in tariff is on the cards from which PLN expects to achieve a 16 percent increase in revenue. A further 24 percent increase in electricity prices is planned for next year and until 2005, when the rates are expected to reach the economic level of 7 cents per kilowatt-hour.
Overburdened by mountains of debt, PLN simply does not have enough resources even to expand its transmission and distribution networks, let alone build new power stations.
Indonesia currently produces about 22,732 megawatts of power annually but will need about 58,800MW by 2010. This is estimated to require new investments of up to $37.26 billion.
The world's largest financial institutions have poured millions of dollars into independent power producers (IPPs) to help develop the power sector and, in the early 1990s, PLN signed power purchase agreements for 27 power-plant projects, backed by foreign funds, to cope with an expected surge in demand. These contracts, as a result of the partial liberalization of the utilities industry, were all with consortiums of international energy companies and former president Suharto's family members and friends.
Some of these are on-stream and the government in 1997 and 1998 suspended others as retrenchment measures to cope with the monetary crisis. The government put on hold many of the projects in late 1997 as part of the retrenchment program to cope with the economic crisis.
The postponement was first lauded as proof that the reform movement had, after all, begun to bite, but later triggered a string of disputes with the IPPs and arbitration proceedings, resulting in financial losses for the government.
Since then, PLN has been trying to renegotiate the power purchase contracts with those IPPs that are still generating in a bid to lower the price of their power, while fighting off legal action by others. The utility estimates that it would have needed to pay out a massive $133 billion over 30 years to these IPPs under the original contracts.
Ten IPP contracts have been successfully amended, resulting in decreases in power prices to be paid by PLN from a range of between 6 and 8 cents per kilowatt-hour to a range of between 3 and 4.9 cents. Ten other IPP contracts are at the final stage of renegotiations, six others were finally canceled due to their unfeasibility and only one ended up in litigation.
The fact that these IPPs are willing to renegotiate price terms in their contracts suggests that they accept the government's view that, though the contracts inspired by the Suharto regime are holding the country to ransom and are distinctly unfeasible commercially, new agreements were a much better option than costly litigation and public exposure of their original sins, as it were.
On the other hand, electricity supplies in Java and Bali and several other provinces would have been in critical condition now had it not been for these independent power producers. However, all is not as it seems with the new deals.
In July PLN trumpeted a new agreement on a power purchase deal with PT Paiton Energy at a price of 4.93 cents per kilowatt-hour for a period of 40 years. But a little-publicized clause means PLN will also pay $4 million per month to Paiton for a period of 30 years as part of the deal and a "take or pay" clause agreed to has a capacity factor of some 6.62 cents per kilowatt-hour.
Though this is a considerable reduction on the original 1994 price agreed at 8.46 cents per kilowatt-hour, it is way above the rates set by similar power generating plants in other Southeast Asian countries. Malaysia's Bunting geothermal power plant produces at about 3.19 cents per kilowatt-hour and the Na Duong steam-powered power plant in Vietnam manages to churn out power at a cost of 4.2 cents per kilowatt-hour. The cost is also much higher than the rate set by PLN's own Suralaya steam-powered power plant in West Java (about 3.7 cents per kilowatt-hour).
If the Paiton deal sets the standard for other IPP deals, then clearly the taxpayer and the public, those so shabbily treated by PLN, will end up footing the bill anyway. Notwithstanding this interpretation, Siemens-backed Java Power is said to be near to agreement with PLN on a price of 4.68 cents per kilowatt-hour and monthly payment of $900,000 for 30 years.
These deals were reached in the hope of forestalling a major power shortage in the vital Java-Bali grid. PLN has warned that Java and Bali, which account for almost 80 percent of electricity consumption, could see power supply disruptions next year if no additional capacity comes on stream.
The peak load in the Java-Bali grid is now about 16,000MW, while the PLN installed capacity is only 18,800MW. With an estimated increase in annual demand of between 10 and 15 percent, at least 1,800MW in additional capacity is needed by 2004 to maintain a minimum power reserve margin of 30 percent. A reserve level lower than this minimum will ensure more periods of darkness for parts of Java during peak demand periods.
As PLN has few financial resources, even for maintenance and expansion of transmission and distribution networks, any new generation capacity can only be come from IPPs anyway.
Regular major power blackouts may lead to social unrest or worse and a disruption of the economy. More than three decades of successful development under Suharto means that electricity is even more vital now to the community. Not just the industrial sector, but home industries and small factories, even in the most rural areas, depend on power. Blackouts and rising costs will hit them hard.
Electricity, like hydrocarbon fuel, is a vital commercial energy source. Even if the politicians ever get round to focusing on the economy instead of themselves there can be no growth without an adequate power supply, and the price of electricity impacts on the efficiency of the whole economy.
The issue boils down to money – income, expenditure and growth capital. Some $65 billion has been spent so far on bailing out the banking industry, but the power sector was being forced to carry the can for past sins of the government and corrupters, as well as gross inefficiencies.
Though this year's moves to resolve disputes with those who in effect own and run PLN's monopoly power supply network augurs well, the salvation of PLN needs to become a national priority sooner rather than later.
Widiono needs to get charged up for his country and get the widely disliked national utility plugged into the needs of Indonesians.