District court dismisses Paiton arbitration claims

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)