Govt to totally liberalize power sector in 5 years

Govt to totally liberalize power sector in 5 years

JAKARTA (JP): The government plans to liberalize the power
sector over the next five years to allow independent power
producers (IPPs) to directly sell power to the public in
competition with state electricity company PLN.

Minister of Mines and Energy Kuntoro Mangkusubroto said
yesterday the government would soon start on all the necessary
requirements, including restructuring PLN and changing the
existing electricity law, to pave the way for a free power market
in Java and Bali by 2003.

Outer regions will gradually adopt the free market mechanism
in later years, he said.

"The government believes that competition is the best means to
secure efficiency and the lowest possible price for electricity,"
Kuntoro said at a gathering to mark the long-term restructuring
of the power sector.

The ceremony drew hundreds of local and foreign power company
executives.

Under the existing 1985 electricity law, IPPs are obliged to
sell their power to PLN at negotiated prices. PLN then sells the
power together with electricity generated by its own plants to
the public. PLN is thus the single seller and the single buyer of
power.

Under the free market mechanism, IPPs and PLN would both send
power to a state power distribution and transmission company
which would offer the pooled power for sale to power retailers
and corporate users through an open bidding system.

The distribution and transmission company would be entitled to
charge a fee for its services.

The system would thus feature multiple sellers and multiple
buyers with prices determined by market forces.

"The power market would evolve around a 'power purchase pool'
into which (power) generators would bid and from which retailers
and large end-users could purchase.

"There would be free entry into both the generation and
retailing segments. Only transmission and distribution, as
natural monopolies, would continue to be regulated," he said.

The system is applied in countries like Singapore, Britain,
Chile, Argentina and the U.S. state of California.

Kuntoro said that after the free market scheme was fully
implemented in Java and Bali, the government would no longer
provide subsidies to consumers on both islands, except for the
very poor.

Consumers in other regions will still receive government
subsidies until the free market system is fully implemented
nationwide.

Under the plan, the government will take over PLN's current
transmission and dispatch division for the Java-Bali grid and
turn the division into the Java-Bali Transmission Company (JBTC),
separate from PLN.

PLN's power generation division will be transformed into two
separate companies: the Java-Bali Electricity Company (JBEC),
which will control all power plants built on both islands, and
the Regional Electricity Company (REC), which will control all
power plants in other regions.

JBEC will be an independent, profit-oriented company ready for
privatization, while REC will be directly owned and subsidized by
the government.

Kuntoro said JBEC would be formed next year, while JBTC and
REC would be created the following year.

PLN currently has two power generation subsidiaries: PT
Pembangkitan Listrik Jawa Bali (PJB I), which controls power
plants in West and Central Java, and PT Pembangkitan Jawa Bali II
(PJB II), covering power plants in East Java and other regions.

The multiple buyer/multiple seller market system is in sharp
contrast with the system outlined in the power purchase
agreements signed by the country's 27 IPPs.

Under the agreements, PLN is required to buy power from IPPs
at an average fixed price of 7 U.S. cents per kilowatt hour (kwh)
and as much as 80 percent of their power generation capacity.

Under the free market system, power prices and sales volumes
would be determined by a supply-demand mechanism.

The current agreements stipulate that IPPs have to transfer
their assets to PLN after 30 years of operation. The free market
system, however, would allow IPPs to own their properties
forever.

Kuntoro, acknowledging the differences between the current
power purchasing agreements and the incoming free market system,
said all 27 IPPs would be directed to operate under the new
system.

The government has postponed the development of several IPP
power plant projects to cope with the monetary crisis.

PLN has also tried to renegotiate its contracts with IPPs to
alleviate its financial problems amid the crisis.

Kuntoro said President B.J. Habibie would soon issue a decree
to set up a task force headed by Coordinating Minister for
Development Supervision and Administrative Reforms Hartarto to
help end the dispute between PLN and the IPPs. (jsk)