Ririn Radiawati Kusuma, Jakarta – The government has agreed to demands by the House of Representatives to scrap plans to raise electricity rates again next year.
The reversal came early on Friday after a marathon debate with lawmakers on the House's Commission VII, which oversees energy issues, ran past midnight. Earlier that night, the government had agreed to limit the rate increase to 5.4 percent, instead of the planned 15 percent hike. However, lawmakers opposed to another rate hike refused to yield, and eventually the government gave in.
The decision is a blow to power utility Perusahaan Listrik Negara, which sorely needed the hike because its subsidy in the 2011 state budget will be reduced by 25 percent to Rp 41 trillion ($4.6 billion).
The now-aborted rate increase would have generated Rp 12.7 trillion in revenue, but lawmakers and the government suggested that PLN could make up some of the shortfall through cutting Rp 8.1 trillion in operating costs.
The government in March said it was keen to eliminate by 2014 fuel and electricity subsidies, which together totaled Rp 111.9 trillion this year.
The International Monetary Fund last week warned that the energy subsidies, unless phased out completely, posed a threat to the nation's ability to sustain high economic growth, especially given an expected decline in national oil production revenue in coming years.
However, the House has resisted efforts to do away with the subsidies and raise electricity rates, with lawmakers frequently calling on PLN to instead improve its efficiency.
With a few exceptions, the utility has endured losses for years because the government forces it to sell electricity below generating costs, making up much of the deficit with annual subsidies. PLN's losses have limited development of the country's power grid and frequent blackouts have been the result.
Hatta Rajasa, the coordinating minister for the economy, on Friday declined to comment on the abandoned rate hike, saying only that raising electricity rates was always the government's last option.
"The government will try to boost efficiency by using coal and gas instead, and cut the electricity power loss," he said.
The House in June approved a government request to raise electricity rates for industrial users by 6-15 percent, and up to 18 percent for affluent residential customers. However, many industries had complained the rate hikes were effectively 40 percent – a fact acknowledged by the government – and some companies reported even steeper rises in their power bills.
Ahmad Erani Yustika, an economist with Indef, said the decision not to impose a rate hike next year intended to relieve industrial burdens and help boost exports.
"The industrial sector has been shocked with the electricity rate hike of 15 percent in 2010. The government wants to calm the market down," he said.
Ahmad said the government should borrow more to finance infrastructure, noting that its deficit-to-GDP ratio was well within acceptable limits. "They have to be brave," he said.
Independent energy analyst Fabby Tumiwa said the decision to let rates stand would hamper development of the country's power generating capacity, noting that PLN needed more money to invest in power plants.
[Additional reporting by Dion Bisara.]