Liberalizing power industry

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.