PLN can legally renegotiate purchase contracts

PLN can legally renegotiate purchase contracts

JAKARTA (JP): State electricity company PT Perusahaan Listrik
Negara (PLN) is legally allowed to renegotiate its U.S. dollar-
based power purchasing contracts due to the current currency
crisis, a legal expert has said.

"The current situation is beyond PLN's control," said Erman
Rajagukguk at a business gathering yesterday.

He said renegotiations were needed to prevent one-sided
contracts that favor the companies selling power to PLN. "The aim
of the contracts is to provide a win-win situation for both
parties," he added.

He said a force majeure clause in international contracts
sanctions such renegotiations. Force majeure refers to a
situation in which a party cannot fulfill a contract because of
unexpected occurrences beyond its control.

He admitted that a traditional definition for a force majeure
situation did not explicitly include troubles caused by foreign
exchange crises. The clause tends to only include risks from
fires, floods, riots, strikes, labor strife, transportation
disruptions and interruptions in the supply of raw materials, he
added.

Erman pointed out, however, that the currency crisis could be
included in a modern interpretation of force majeure, which is
defined as: "An occurrence beyond the control of the party
affected, provided that such party could not reasonably have
foreseen such an occurrence at the time of entering into the
contract or could not reasonably have avoided or overcome its
consequences."

PLN sells its electricity in rupiah, but purchases some of its
power from private producers in U.S. dollar rates.

"There's no way it can survive with the original contracts,"
said the American law school graduate.

He said he has been studying many U.S. dollar trade contracts
over the last two months due to the country's financial crisis.

PLN's president Djiteng Marsudi has said the state electricity
company would continue buying power from private producers at a
pre-crisis rate of Rp 2,450 per dollar despite agreements to pay
according to current exchange rates.

Djiteng said the move has infuriated independent power
producers (IPPs) who accuse PLN of breaking their power purchase
agreements (PPAs).

"PLN doesn't have enough money to pay for its power at the
actual currency rate in line with the PPAs," he said, adding that
he has asked for price renegotiations, but that the IPPs have
refused.

PLN's purchase agreements with IPPs stipulate that the company
buy its power in U.S. dollars. It has signed purchase agreements
with 26 IPPs, of which only two are currently in operation.

PLN also buys power in dollars from tycoon Sudwikatmono's
Cikarang Listrindo plant, which was originally designated to
serve industries in the Cikarang area but was allowed to sell to
PLN from 1996.

Under its purchase agreements, PLN must buy power from the
IPPs at between 5.74 cents and 8.4 cents per kilowatt-hour (kwh).
Currently, PLN's average selling price is Rp 170 (1.7 cents) per
kwh.

Djiteng said PLN was ready to accept the consequences of its
move, including the possibility that the IPPs would sue it in the
international court.

Erman said Indonesian companies should not worry about the
possibility of being forced into international arbitration
institutions for failing to fulfill original contracts because a
good contract should be based on fairness.

"And it will not be easy for the international community to
just deride us," he said, adding that Indonesia is not alone in
facing the impacts of the currency crisis.

"We have more bargaining power to renegotiate the U.S. dollar-
based contracts," he concluded.

The currency crisis, which started in early July, has pushed
the rupiah exchange rate to as high as Rp 17,000 to the U.S.
greenback from the pre-crisis level of Rp 2,450. (08)