Electricity rates will not rise: Marsudi

Electricity rates will not rise: Marsudi

JAKARTA (JP): State Electricity Company (PLN) has no intention
of raising its base tariffs soon because its present tariffs are
still economically viable, PLN's president Djiteng Marsudi said.

Marsudi said the existing tariff structure was based on an
automatic adjustment formula which allows for quarterly tariff
adjustments according to the inflation rate, fuel costs and the
rupiah exchange rate.

Marsudi was commenting on Friday on a World Bank suggestion
that PLN increase its tariffs to maintain strong liquidity.

"But I can understand the World Bank's recommendation in view
of its interest in ensuring Indonesia is able to repay its
foreign debts, including those to the World Bank," he said.

Marsudi said PLN would be able to repay its debts to the
World Bank even if the current tariff level was maintained.

The 1997 World Bank report, titled Indonesia sustaining high
growth with equity, strongly suggests a tariff increase to ensure
that the power company is not snared in another liquidity crisis
as it was in 1995 and 1996.

"It (tariff rise) is also a precondition to a successful
privatization of PLN's generating capacity," the report, issued
here Wednesday, says.

Following are excerpts from the World Bank's analysis of PLN's
prospect and challenges:

A tariff increase would help prepare PLN for its new role
(starting next year) as purchaser from large independent power
producers (IPPs). Even a substantial increase in tarries should
not undermine Indonesia's external competitiveness because
Indonesia currently has a lower average electricity tariff than
its East Asian neighbors; one KWh of electricity costs 6.9 US
cents today, the lowest price since 1988/89.

The automatic adjustment formula (ETAM) also would benefit
from substantial revision. There is some scope for improving
implementation of ETAM under the current Presidential Decree.

However, a revised decree is needed to remove existing
ambiguities and ensure that the new ETAM will be able to deal
satisfactorily with the rapid increase in PLN's power purchase
costs as the large private plants come on stream, beginning in
1998/99.

Tariff Structure

The current tariff structure involves 24 separate categories
and embodies many cross-subsidies. Currently, large customers pay
to cross-subsidies small users, and commercial customers
generally subsidize all other categories. The large number of
categories makes the tariff system non-transparent and introduces
potential differences in costs for similar firms. While social
arguments exist for subsidizing minimum consumer service, there
is no reason why large power consumers, rather than the nation at
large, should pay for this social goal.

The cross subsidy puts the larger users at a cost disadvantage
vis-a-vis other countries, and encourages them to turn to self-
generation. To level the playing field, it would be desirable to
reduce the number of categories, reduce the subsidy (except for
"life-line" levels of consumption) and consider covering the cost
of social objectives directly from the national budget.

PLN's uniform tariff schedule gives customers identical
electricity prices regardless of their location in the country.
However, unit costs are about twice as high outside the Java-Bali
grid.

This implies a cross-subsidy from Java-Bali consumers to the
rest of the consumers. Part of the subsidy has been implicitly
absorbed by Government acceptance of a low rate of return equity.
But, the subsidy raises costs on Java-Bali relative to
competitors and encourages large consumers to install their own
plant, as noted above. It also makes it difficult to achieve a
rate of return attractive to private investors.

If the government seeks to retain the uniformity of the tariff
structure for social reasons, then it would be desirable to
spread its costs across the nation, rather than just to
electricity users on Java-Bali. The subsidy could be made
explicit and the Government could directly reimburse PLN.
Clarification of this issue also would help make PLN a more
attractive candidate for privatization. In addition, it would
encourage off-Java expansion, which now is hindered by cost that
exceed the average tariff.

Generating capacity has grown rapidly for some time under the
Government's expansion program. By contrast, transmission and
distribution capacity has typically lagged (see below). The
resulting problems with service interruption and high commercial
tariffs have encouraged self-generation, which has reached some
70 percent of PLN's capacity.

For PLN, the net result has been historically high ratios of
capacity to peak load in the Java-Bali grid, which reached 162
percent in 1993/94. Recently the excess of capacity to peak load
has fallen to 35 percent, but because peak load has increase much
faster than sales, the average load factor has fallen about 7
percent. In the near-term PLN's recent ambitious investment
program is coming on line, but PLN plans no new base load
generation capacity, apart from completing existing investments,
before 2003.

Purchase

PLN has signed twenty-two power purchase agreements, of which
six major plants have reached financial closure; twenty-four more
are in various stages of negotiation. The additional capacity
represented by all these projects is roughly equal to PLN's
current capacity. Almost all of these projects originated from
unsolicited proposals, with full or partial "take or pay" power
purchase agreements (PPAs).

In general, the PPAs provide for tariffs that are above PLN's
average tariff, although there have been some recent exceptions.
(The exceptions tend to reflect the few instances of competitive
bidding as well as the worldwide decline in prices of power
generation equipment). The private power agreements under
negotiation would easily provide sufficient generation capacity
to meet projected demands through 2006.

The ratio of capacity to peak load will rise to at least 40
percent by the end of the 1990s and the lower load factor will
remain, given the commissioning of PLN's own ambitious expansion
program and the large private generating plants (beginning in
1998/99). Continued lags in transmission and distribution
capacity, plus PLN's difficulties in negotiating gas contracts,
may limit the power that could be sold from these plants. Given
the take-or-pay nature of the contracts, PLN will be forced to
take power from the private plants, even though their cost
exceeds PLN's

The capacity situation is likely to raise PLN's cost
substantially. Hence the government should go slow in adding to
capacity. An appropriate choice of contracts would place more of
the risk of excess capacity on the new plants.

Existing capacity of the 500KV line will not be sufficient to
enable operation of the new plants currently under construction
in East Java. Slippages in the 150 KV and 20 KV networks and
substation in urban areas constrain sales growth and are a major
factor in the frequency of outages and "brown-outs", although
recently the networks performance has improved significantly.

Expansion of the transmission and distribution network is thus
critical system improvement. The top priority should be
construction of the southern 500 KV line and other key sections
to allow sales from the large East Java plants. Some scope exists
for private participation in transmission and distribution, for
example through Build-Maintain-Transfer concessions, allocated by
a transparent, competitive bidding process.

Privatization

The government is restructuring PLN in preparation for its
privatization, but much remain to be done on the pricing and
regulatory front before a successful privatization can be carried
out. Two on-Java generating subsidiaries (PT PJB I and II, also
known as Gencos) were established in 1995 by "unbundling", and
they are the initial targets for privatization.

PLN has recruited an international auditor to provide comfort
to investors, and has retained a domestic consortium as financial
advisor. A track record for the Gencos is being established.
However, a number of issues need to be settled to permit sales to
be sold at prices that reasonably reflect the value of the Genco
assets.

The financial strength of the parent company is also
important, and depends on tariff increases and adjustments,
because sales by the Gencos would be to the parent company. There
is also a danger of trying to achieve Genco profitability by
sacrificing that of the parent company.

The projected upturn in excess generation capacity in 1998
also has potentially serious implications for the planned
privatization. In particular, it may become necessary to
"backdown" the Gencos' baseload plant in order to accommodate the
take-or-pay contracts.

The government is now implementing its plan for power sector
restructuring, in particular for a "single buyer market" for
Java. Under the governments plan, PLN would buy power from a mix
of partially-divested generation companies and IPPs. The power
would be sold to PLN's distribution units for sale to final
consumers.

The single buyer market is intended as a transition phase to a
fully competitive, multi-buyer, multi-seller market.
Implementation of the single buyer market has already begun with
divestiture of assets into two generating subsidiaries (the
Gencos mentioned above), the preparation of PPAs for these
Gencos, and the gradual transfer of single buyer functions,
including system planning, to PLN's Java-Bali Electricity
Transmission Unit (JABETU). (13/vin)