PLN still struggles to recover from crisis

PLN still struggles to recover from crisis

Johannes Simbolon
The Jakarta Post
Jakarta

This year, public utility PT PLN continued to struggle to cope
with the problems and difficulties that have been confronting the
company since the start of the economic crisis in the middle of
1997.

Last year, the company was busy seeking to renegotiate the
power purchase agreements (PPA) that it had signed with
independent power producers (IPP) prior to the crisis, so as to
alleviate the financial burdens caused by the crisis.

The sharp depreciation of the rupiah against the dollar caused
severe financial problems to the company, which sells its power
to the public in rupiah but pays most of its operating costs,
including the purchase of equipment, debt servicing and the
purchase of power from IPPs, in dollars.

The good news is that negotiations between the state company
and some IPPs bore fruit this year. The state company had signed
PPAs with a total of 27 IPPs prior to the crisis.

PLN clinched deals with Amoseas on the new price for power
from the latter's geothermal power plant in Drajat, West Java;
and with PT Energi Sengkang on the new price for its power from
the combined cycle power plant in Sengkang, South Sulawesi.
Amoseas is owned by American energy firm ChevronTexaco, while
Energi Sengkang is a consortium comprising El Paso of the United
States, Energy Equity of Australia and Trisharsa Sarana Jaya
Purnama, controlled by the daughter of former president Soeharto,
Siti Hardiyanti Rukmana.

PLN agreed with Amoseas to reduce PLN's power price to 4.2
U.S. cents per kilowatt hour (Kwh) from 6.8 cents on the original
contract, while the new price for power from Energy Sengkang has
been agreed at 4.28 cents, compared to 6.7 cents on the original
contract.

Tough negotiations are now in progress between PLN and PT
Paiton Energy Co., which is controlled by American firm Mission
Energy and Japanese firm Mitsui, on the new price for power from
the latter's power plant in Paiton, Problinggo, East Java. Yet,
both parties said they were optimistic about reaching a deal in
March next year.

PLN had offered a similar price that had been agreed upon with
Energi Sengkang and Amoseas, but Paiton insisted on a price of
4.9 cents for its power, which is actually much lower than the
price set on the original contract. Under the 30-year original
contract, Paiton, which was the first IPP to sign a PPA with PLN,
set the price for its power at 8.4 cents in the first five years,
8.2 cents for the sixth to twelfth year of operation and 5.4
cents for the last 18 years of operation.

PLN has also signed a deal with Sumitomo Corporation of Japan
on the resumption of the US$1.65 billion coal-fired project in
Tanjung Jati, Central Java, which, along with dozens of IPP
projects, was put on hold by the government in late 1997 as part
of efforts to cope with the economic crisis.

The project, which is popularly known as the Tanjung Jati B
project, will restart construction next year with a power
generation capacity of 1,320 Megawatts.

Under the new agreement with Sumitomo, PLN will pay between
2.26 and 3.25 cents per Kwh to Sumitomo for power supplied from
the power plant, compared to more than 6 cents on the original
contract.

PLN and the government have also reached an agreement this
year on the payment of insurance claims worth $260 million
demanded by Overseas Private Investment Corporation (OPIC), which
is the insurance arm of the United States government. The
insurance claim resulted from the loss experienced by PLN in the
international arbitration court that examined its dispute with
American energy firm CalEnergy.

CalEnergy filed arbitration proceedings against PLN and the
government put its geothermal power projects in Dieng, Central
Java and Patuha in West Java on hold in 1997.

PLN and the government have also agreed to pay $15 million in
insurance claims demanded by Multilateral Investment Guarantee
Agency (MIGA), an insurance arm of the World Bank, in
compensation for postponing the power project owned by American
firm Enron Corp in Pasuruan, East Java.

PLN have also agreed with several IPPs, including the owners
of the Tanjung Jati A power project, on the termination of their
contracts.

The power industry looked "quieter" this year as PLN and the
IPPs stopped using the media to blame each other for their
respective problems.

In previous years, PLN loved to blame the IPPs for its
financial problems, accusing them of acquiring their contracts
through corruption, collusion and nepotism, pointing out the fact
that almost all the IPPs were partners with Soeharto's family and
their cronies.

In response to this, the IPPs, which are mostly big
international corporations, threatened PLN with arbitration
litigation while applying pressure, through their respective
governments and multilateral lenders, on PLN and the Indonesian
government to honor the PPAs.

While optimism has been growing that PLN will be able to
settle its disputes with all the IPPs, a new problem has emerged:
power shortage.

PLN warned on many occasions this year that it would impose
rotating power cuts in some parts of the country due to a
shortfall of supplies.

Former PLN president Kuntoro Mangkusubroto said in a seminar
in Medan, North Sumatra in February this year that there are
about 29 "critical" areas across the country prone to rotating
blackouts. PLN had even instituted rotating power blackouts in
the provinces of South Sumatra and Lampung, he added.

So far, there have been no reports of power blackouts on the
Java-Bali grid this year, but director general of electricity at
the Ministry of Energy and Mineral Resources Luluk Sumiarso has
warned that the power supplies on the grid had been in a critical
state.

Power plants on both islands have a total power generation
capacity of 15,297 MW, while both islands need a total of 16,828
MW capacity to operate in a safe margin. The grid needs a reserve
capacity of at least 30 percent in order to operate safely. This
is to anticipate a sudden surge in demand, potential technical
failure in one power plant or maintenance works.

Power demand on both islands could exceed supply by 2003, when
the peak load is expected to hit 15,441 MW compared with the
installed capacity of 15,285 MW, Luluk said.

PLN needs around $28.45 billion in new investment over the
next 10 years to build new power plants and a power network to
stave off a power crisis in Java, Bali and other parts of the
country, Luluk added.

PLN has no money to make such an investment as it has remained
in the red since the economic crisis began. It posted losses of
Rp 0.6 trillion in 1997; Rp 9.2 trillion in 1998; Rp 11.4
trillion in 1999 and Rp 23.4 trillion in 2000. This year, its
losses are projected at Rp 8.5 trillion.

The government has tried to help lift it from its financial
difficulties by allowing it to raise power prices by an average
of 30 percent last year and 22 percent this year. However, the
company still has to rely on government subsidies to continue
operating. Next year, the government has allocated Rp 4.1
trillion in subsidies.

PLN tried to solve the power crisis in several areas, such as
South Sumatra and Lampung, by buying second-hand power plants
from Malaysia's Tenaga Nasional Berhad. But, the measure could
only provide a temporary solution rather than a long-term remedy.

For PLN and the government, the only solution is to seek
offshore loans or invite foreign investors into the country.
Unfortunately, this has not been easy.

Kuntoro said the lingering dispute between PLN and the IPPs
have eroded the bankability of PLN, making it difficult for the
state company to raise funds from the international market.

The disputes have also discouraged foreign investors in the
country, while the low power tariff set by the government has
become a disincentive.

Some analysts are optimistic that foreign investors will
regain confidence in the country and will finally be willing to
return to the country's power sector, citing PLN's success in
settling its disputes with the IPPs and the government's
commitment to allowing PLN to gradually raise power prices to a
economically profitable level. The government has allowed PLN to
raise power prices by an average of six percent for every quarter
next year.

Yet, some people say foreign investors or lenders are not
likely to regain their confidence in the country's power sector,
given the serious damage caused by the dispute between PLN and
the IPPs on the country's reputation.

During the seminar in Medan, Kuntoro voiced optimism that the
central government would be able to find solutions to the power
crisis in the short term. As such, he said, regional
administrations should be active in thinking up ways to ensure
power supplies in their respective jurisdiction.