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)