Power grid developer told to lower price or lose job

Power grid developer told to lower price or lose job

JAKARTA (JP): The developer of the controversial Kediri power
transmission project has been given one month to reduce the value
of its contract or lose the job, a senior government official
said here on Tuesday.

Director general for electricity Endro Utomo Notodisuryo said
that the contract value of the Kediri project should be lowered
to that of a similar project in Depok.

"If in one month, the renegotiation fails to reach a price
equal to that of the Depok project, then the (Kediri) project
will be immediately retendered," Endro announced on the sidelines
of a seminar on electricity subsidies.

The decision to renegotiate the Kediri project came after
state electricity company PLN became suspicious that the contract
value had been marked up.

A consortium of local companies PT PP and PT Indokomas won the
tender to build a power grid in Kediri, East Java, to link the
Paiton II power plant in East Java to a 200-kilometer overland
electricity network to Klaten in Central Java.

The Rp 342.28 billion (about US$36.41 million) contract was
signed in 1998 under former PLN president Djiteng Marsudi,

According to PLN, the contract for the construction of a
similar transmission project in Depok, West Java, last year cost
only Rp 136.7 billion.

Endro said that renegotiations with the Kediri consortium had
begun on Monday this week.

The government, he explained, could no longer afford to
postpone the Kediri project, which was already one year overdue.

"We're in a dilemma here. Due to the one-year delay in
developing the project, PLN has suffered losses in business
opportunities worth Rp 438 billion, which is more than the
contract's value," he said.

PLN has been unable to utilize the electricity generated from
independent power producer Paiton II due to the lack of
infrastructure, especially transmission facilities.

Under a take or pay clause in PLN's power purchase contract
with Paiton, the state company must also pay for Paiton's unused
power. The value of the unused electricity supply has reached
$310 million.

The Kediri project is one of 17 power transmission projects
currently under development in anticipate of a surge in power
demand.

PLN has been under financial distress since the outbreak of
the country's worst ever economic crisis in late 1997. The plunge
of the value of the Indonesian currency due to the crisis was a
major blow to the company because the prices of the power it buys
from independent power producers (IPPs), mostly in U.S. dollars,
has far exceeded the level of it retail prices.

Endro said that the Ministry of Finance's decision to cancel a
Rp 3.9 trillion subsidy extended to PLN last year further
worsened the company's financial condition.

He said that according to the State Finance Comptroller, PLN
should not be give the subsidy because its cash flow was
positive. Whereas the subsidy, he went on, was allocated to cover
only PLN's negative cash flow.

"We're therefore trying to tie this year's subsidy of Rp 4.1
trillion to cover the gap in electricity prices instead," he
added.

Endro said the government was hoping to phase out electricity
subsidy spending by the year 2005 or 2007.

"This would allow investors a better forecast on their rate of
return," he explained.

Separately, the Indonesian Geothermal Association (INAGA)
estimated that investors were unlikely to invest in new
geothermal fired power plants within the next two to three years.

INAGA chairman Puguh Sugiharto said foreign and local
investors were awaiting the completion of a geothermal law, which
the government hopes to issue later this year.

He added that the uncertainty resulting from the renegotiation
of IPPs contracts had also discouraged new investment here.

PLN has been renegotiating the contracts of 27 IPPs since the
company became unable to purchase their power at the U.S. dollar
rates stated in the contracts.

The government expects to finalize the renegotiation process
in the first quarter of this year.

"Investor interest will pick up in three years, when it is
expected that there will be a shortage of power due to increased
demand," Puguh said on the sidelines of an INAGA meeting. (bkm)