Competitive market benefits power consumers<\/p>\n
David O'Brien, Jakarta<\/p>\n
An article in this newspaper on Aug. 23, 2004 reported the
\ndoubts that consumer protection activists have for reform of the
\nIndonesian power sector. There are some issues worthy of
\ndiscussion to balance the argument from the dogmatism of \"status
\nquo good, change and competition bad\".<\/p>\n
It seems there is a lack of appreciation that the system
\nremains close to crisis and the status quo will not stop the
\nlights going out. It is when the lights are out and the factories
\nare shut that consumers really start to hurt.<\/p>\n
Electricity demand continues to grow at double the rate of GDP
\ngrowth. There has been little new capacity added since the crisis
\nand reserve margins are thinning in the face of this growth and
\nreliability issues associated with ageing plant.<\/p>\n
There is a pressing need for a solution to ensure that
\nIndonesia's emergence from crisis is not forestalled due to lack
\nof electricity supply.<\/p>\n
The financial health of PLN will not allow it to exist as is.
\nTariffs have been frozen this year at a rate that equates to
\nnearly US$0.07 at an exchange rate of Rp 8,500 to a dollar. At a
\ncurrent rate of 9,200 this has already declined to below $0.065.
\nThis is all occurring in an environment of rising global interest
\nrates adding to cash flow pressures.<\/p>\n
This $0.07 level is widely promoted as the \"natural price
\nlevel\" for Indonesia, being the pre crisis price. It needs to be
\nappreciated that pre crisis PLN enjoyed subsidized fuel prices
\nfor fuel (80 percent of costs) that allowed for a profit to be
\ngenerated, albeit never at a reasonable rate of return.<\/p>\n
The system currently remains highly dependent upon oil due to
\nhistorical subsidies and its associated distorting effect upon
\nfuel choice decisions. Little development of gas for domestic use
\noccurred when oil was priced artificially low. As a result the
\nsystem is reliant to a large extent on oil at its current record
\nprices. The second most popular fuel is coal. Coal is now also
\nenjoying a record run, being well up from its historical average
\nprice of around $25\/tonne to $60\/tonne. It will take several
\nyears of new gas development to allow for a more balanced
\nportfolio of generation.<\/p>\n
In this environment there is not the capacity for self funded
\nexpansion by PLN as it continues to plug gaps as best it can and
\nfight for survival. The current capital requirements for the
\nelectricity network over the next decade are estimated at up to
\nRp 180 trillion . With the state budget already burdened with
\ndebt repayments and ongoing retail fuel subsidies there is
\nlimited capacity to meet these needs.<\/p>\n
The article stated that \"as private companies control
\ndifferent parts of the business, it (free market competition)
\nwill make the supply chain longer and in turn push prices higher
\nfor consumers\". The article went on to attribute a 40 percent
\nprice rise for consumers as a result. Though surprised at such an
\nassertion I was not at the forum last weekend to see the
\nfinancial projections that support it. Previous projections that
\nI have been associated with anticipate an increase of less than
\nhalf this level to strengthen the industry and allow greater
\ndevelopment to benefit consumers.<\/p>\n
The proposed law foresees little change to the supply chain.
\nTransmission and distribution are to remain in state owned hands
\nas monopoly assets and generation and retail will be subject to
\ncompetition. All of this only applies in areas that meet the set
\nof seven criteria set forth for there to be competition. These
\ncriteria exist to ensure that any competition initiated will
\nbenefit consumers.<\/p>\n
One of the criteria to be met before adoption of competition
\nis that these business units have a greater level of commercial
\nand legal autonomy. This will allow greater clarity of transfer
\npricing at arms length and comparisons of operating costs of
\ndifferent business units. With the entire supply chain presently
\nunder the single ownership of PLN, there is limited disclosure of
\nsupply chain effectiveness.<\/p>\n
The Java\/Bali\/Madura (JBM) system and that of Batam are the
\nonly regions that are forecast to meet the criteria for
\ncompetition in the foreseeable future. It is planned that Batam,
\ngiven its size, will serve as a testing ground prior to adoption
\nin JBM.<\/p>\n
It should be noted that JBM accounts for 80 percent of demand
\nfor the whole of Indonesia and is the area which will support the
\nbalance of the country through providing community service
\nobligation funds. These funds will make the delivery of
\nelectricity at reasonable prices to the less economic regions
\npossible. In this manner consumers in less developed regions can
\nbe served with affordable electricity.<\/p>\n
The JBM system already has autonomous business units split
\nalong the lines described above. In fact there are five
\ndistribution\/retail companies, a transmission company and two
\ngeneration companies.<\/p>\n
The law foresees competition initially at the generation
\nlevel. This is the largest component of the cost base for the
\nfinal consumer. I am yet to see an increase in competition lead
\nto increased prices and reduced services levels. Look at the
\nresults in the telecommunications sector in Indonesia with only
\nlimited competition introduced.<\/p>\n
Nengah Sudja describes how in a free market, where demand
\nexceeds supply, prices will rise to a higher level before
\nreaching equilibrium. The form of market for Indonesia is yet to
\nbe defined. It is still unclear from the law if a totally
\nuncapped pool market is proposed or there will be some form of
\nsingle buyer or something in between.<\/p>\n
The fact is that in a growing market a free pool is not
\ndesirable and there will be some form of cap or a single buyer
\nsetting a cap price. Both are acceptable forms of market so long
\nas investors are aware of the rules and can price this
\nappropriately in assessing their investment.<\/p>\n
It is most unlikely that consumers will be immediately subject
\nto market forces. Most countries use a system of bilateral
\ncontracts that protect consumers that are not seen as benefiting
\nfrom competition initially. The competition is likely to occur at
\nthe level of large commercial\/industrial users. This leads to
\nconsumer benefits again as more competitive prices, innovation
\nand improved reliability of supply will support greater growth of
\nthe economy.<\/p>\n
It is also proposed in the Law that an independent regulatory
\nbody be established to oversee the controlling entity and balance
\nthe needs of investors and consumers. Such a body is now proposed
\nto be implemented in the electricity industry by the end of this
\nyear.<\/p>\n
The development of a strong and healthy electricity industry
\nserves to raise living standards for the entire nation. There
\nwill be Universal Service Obligations to be imposed upon
\ninfrastructure providers so as less profitable areas are
\ndeveloped. Greater clarity of costs and tariffs is a key to
\nensuring that this activity takes place in the most economically
\nefficient manner to benefit all. The step by step approach to
\ncompetition being undertaken seems to be designed with the
\nconsumer very much in mind.<\/p>\n
The writer is a Technical Advisor at CSA Strategic Advisory.
\nCSA helps businesses through a combination of \"soft\" behavioral
\nand \"hard\" financial advice.<\/p>",
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