Liberalizing power industry

The State Electricity Company (PLN) will gradually lose its monopoly in power generation, transmission and distribution to mid-size and large users as new investors will be allowed to enter the public utility industry under the new electricity law approved by the House of Representatives on Wednesday.

However, small users and people living in remote areas need not worry that they will completely fall prey to free market forces as the electricity law will set up a safety-net mechanism to protect the interests of small power users and the government will still fully control the power industry in areas considered not yet viable for open market competition.

The 71-article law also stipulates provisions for consumer protection in that power users will be compensated for any damage inflicted by power losses or blackouts caused by suppliers.

The rationale of the market liberalization, slated to be phased in within six years of its ratification by the president, is that the greater the degree of competition and the more flexibility enterprises and investors have in the way they organize their operations, the greater the benefits will be for the consumers.

Implementation of the law will be made gradually by a Power Market Supervisory Agency which will be set up within a year of the legislation being implemented.

It is this agency that will determine which provinces are ready for market competition and which will remain under government control. It is also this agency that will be in charge of ensuring fair market competition for mid-size and large consumers and determining power prices for small users.

Consumers nevertheless should not expect lower power prices immediately after the market liberalization. The government has instead mandated a 24 percent increase in electricity prices for next year because the PLN selling price, currently at US$.0.035 per kWh, is only half as high as its $0.070 per kWh production cost.

The electricity price increase is compelling to allow for sustainable production and to encourage conservation. Power generation costs in rupiah terms have risen steeply, not largely because of the gross inefficiency of PLN, but mainly as a result of the more than 70 percent depreciation of the local unit against the American dollar because 80 percent of its cost components are based on foreign exchange.

Electricity, like hydrocarbon fuel, is a vital commercial energy source. The economy can never expand without an adequate power supply, and the price of electricity heavily influences the efficiency of the whole economy.

It is considered imperative to open the power industry to private-sector investors because PLN, overburdened by mountains of debt caused partly by the meltdown of the rupiah, simply does not have enough resources even just to expand its transmission and distribution networks, let alone construct new generation stations.

PLN itself and analysts have warned that Java and Bali, which account for around 80 percent of national electricity use, may see power supply disruptions within three to four years if no additional generation capacity is built.

In fact, electricity supplies in Java and Bali and several other provinces would have been in critical condition now had it not been for the additional supply from the independent power producers who began to emerge in the mid-1990s as a result of the partial liberalization of the utilities industry.

However, not a single investor will be interested in the electricity industry if this sector remains monopolized by PLN as it is now and the power price remains controlled by the government at a level way below its actual production cost.

The biggest challenge now is to ensure that the market watchdog, the Power Market Supervisory Agency, whose members will be appointed by the president with the prior approval of the House of Representatives, will be perceived by the market as highly competent and credible.