PLN optimistic about contract compromise

PLN optimistic about contract compromise

SINGAPORE (Dow Jones): Endro Utomo Notodisuryo, director general of Electricity and Energy Development in Indonesia's Ministry of Mines and Energy, said he is confident state-owned utility Perusahaan Listrik Negara, or PLN, will reach a compromise with independent power producers to renegotiate past power purchase agreements.

"We want a solution to be achieved that will satisfy both parties," Endro told Dow Jones Newswires on the sidelines of an Asian power conference in Singapore Tuesday. "We expect that the other parties have the same attitude to try to find a just solution."

PLN is embroiled in talks to renegotiate power purchase agreements, or PPAs, with several independent power producers that were signed under the regime of former President Soeharto. PLN claims it was forced to sign "marked-up" power deals because of corruption, collusion and nepotism under the Soeharto regime.

In all, PLN signed 27 contracts to purchase power from multinational firms in the past decade, most of which were partnered with members of Soeharto's family.

Endro said the new Indonesian government is trying to renegotiate the IPP contracts using international standards of conduct.

"We're not barbarians. We understand the sanctity of a contract," he said. "Now it's very important for me and for the Indonesian government to show the international community that although the IPP contracts have become a burden to us, we will solve (disputes) using a team approach and international standards."

The government took over all IPP negotiations in December in an effort to salvage investor confidence in Indonesia.

The government team that handles PLN's disputes with independent power producers is made up of five ministers: Finance Minister Bambang Sudibyo; Minister of Mines and Energy Susilo Bambang Yudhoyono; Coordinating Minister of Economy, Finance & Industry Kwik Kian Gie; Minister of Investment & State Enterprise Laksamana Sukardi; and Trade and Industry Minister Yusuf Kalla.

One of the most publicized contract disputes is PLN's ongoing acrimonious negotiations with PT Paiton Energy on an agreement PLN signed in 1994.

Paiton Energy is 40 percent owned by Edison Mission of the U.S., with Japan's Mitsui & Co. Ltd. holding 32.5 percent; and General Electric, 12.5 percent. Indonesian firm PT Batu Hitam Perkasa - partly owned by Hashim Djojohadikusumo - has a 15 percent stake in Paiton.

Paiton Energy developed a 1,230-megawatt coal-fired power plant in Probolinggo, East Java. Under the terms of its current contract with PLN, Paiton sells power to PLN at a price between 5.5 cents and 8.5 cents a kilowatt-hour. The average price of power set by other independent power producers in Indonesia is about 6.4 cents/KWh, and PLN sells its power at a rate of about 3 cents/KWh.

Paiton offered to lower its selling price to 3.3 cents/KWh in October 1999, but still couldn't reach a deal with PLN. Local media reported last week that Paiton had offered to lower its power price even further, but government officials wouldn't say by how much.

Endro also declined to comment on the details of PLN's negotiations with Paiton, saying only that PLN would be using "international benchmark prices for power from coal-fired plants" for its negotiations. "If the price is far beyond that, then the contract risk isn't balanced," he said.

He noted that if no solution is reached with Paiton, PLN stands to lose a cumulative US$10 billion by 2002 under the terms of the current contract.

Endro said "national collusion" in the past caused many of the financial woes facing PLN today.

Indonesia's power sector must be "market driven versus investor driven, as it was in the past," he said. "Most of the IPPs under contract were unsolicited. We have to let the market determine power purchase deals."

He said the appointment in January of former Indonesian Minister of Mines and Energy Kuntoro Mangskusubroto as PLN president director sends a strong message to international investors that Indonesia is serious about economic reform.

Kuntoro is seen by the international community as a strong and effective negotiator who is dedicated to reform.

But Endro cautioned that reforms in the power sector would take a long time.

"In the long term, we are going to achieve full competition. But before that, we want to create transparency...and (government) partnerships with the private sector," Endro said.

"We want the private sector to be free to build electric power plants," he said. "But under reform, if you can't compete, you are going to die."