District court dismisses Paiton arbitration claims

JAKARTA (JP): The Central Jakarta district court ruled on Thursday that it had jurisdiction to examine the legality of the power purchase agreement (PPA) between state electricity company PT PLN and independent power producer PT Paiton Energy.

The court turned down Paiton's proposition that the court did not have the right to examine the case, and that international arbitration should settle the matter. Paiton had argued that in power purchase agreements signed by both parties in 1994, they had agreed to resolve all disputes through international arbitration in Stockholm.

"It is a landmark decision," PLN president Adhi Satriya said in a statement.

Paiton's lawyer, Frans Hendra Winarta, said he would take all appropriate and necessary legal actions under Indonesian and international law to appeal the decision and to protect the interests of Paiton's employees, shareholders, investors and lenders.

"Paiton Energy is deeply disappointed by the decision," Frans said in a statement.

"We believe the court is in error because the PPA specifically stipulates that the disputes between the parties must be resolved through an international arbitration court, as is the practice in international business transaction," Frans added.

PLN's lawyer, Adnan Buyung Nasution, argued that the contract was void ab initio (void from the beginning), invalid and based on the corrupt, collusive and nepotistic practices associated with the administration of former president Soeharto.

Buyung said that despite the PPA stipulation that all disputes would be resolved through an arbitration court, the PPA contained the requirement that Paiton was subject to Indonesian laws.

Following months of unproductive negotiations on changes at the PPA, PLN used this clause as the basis for filing in October this year a lawsuit at the Central Jakarta court against Paiton

PLN asked the court to nullify the contract, which it said set exorbitant prices for Paiton's power.

Paiton Energy is owned by Japan's Mitsui (32.5 percent), Edison Mission of the United States (40 percent), General Electric, also of the U.S. (12.5 percent) and local firm PT Batu Hitam Perkasa (15 percent), which is controlled by tycoon Hashim Djojohadikusumo.

The company has developed a 1,230 Megawatt (MW) coal-fired power plant, called Paiton Swasta I, in Probolinggo, East Java.

Under the contract, Paiton sells its power to PLN at the price of between 5.5 U.S. cents and 8.5 cents per kilowatt hour (Kwh), higher than the average price of 6.4 cents per Kwh set by other independent power producers and much higher than PLN's selling price of Rp 240 (about 3 cents).

Paiton began the arbitration litigation process soon after PLN filed its suit in the Central Jakarta court, but it soon dropped the proceedings after the court ordered it early this month to desist from pursuing the litigation.

The court threatened Paiton with US$600 million in penalties if it did not comply with the ruling.

Frans said the court's ruling would discourage foreign investors from investing in the country.

But Adhi said foreign investors should welcome the court's ruling as a major step in the right direction to ensuring foreign investments and financing were based on sound economic rationale and due diligence.

Adhi called on the other independent power producers not to be perturbed by the court's ruling, and emphasized that PLN would prefer to negotiate matters rather than pursue litigation or arbitration measures. He said PLN would not indiscriminately take litigation measures against other projects.

Adhi said PLN was still open to negotiating with Paiton to resolve the dispute out of court.

Paiton's president Ronald Landry said from the beginning that Paiton preferred to resolve the issue through negotiation.

"Unfortunately, it has become clear to us by PLN's pursuit of this undeserving suit that PLN is not sincerely interested in negotiation," Landry said.

Paiton said he believed that the reason PLN refused to negotiate was because it had failed to construct an adequate transmission system to accept the full power output of Paiton's facilities.

The company called on the Indonesian government to intervene in the dispute. (jsk)