Power industry enters a new era

Power industry enters a new era

Eddy Satriya
Jakarta

Economic changes coupled with advances in new technology, the
need to conduct good-governance practices, and intensifying
pressure to reduce the central government's role have
significantly brought new developments to the provision of public
utilities and infrastructure in many developing countries.

Waves of deregulation, liberalization and privatization
started in the 1980s have had an effect on decision makers in
setting up their industries.

The energy sector in Indonesia has also progressed
significantly in its reform through the issuance of new
regulations. Oil and Gas Law No. 22/2001, Electricity Law No.
20/2002, and Geothermal Law No. 27/2003 were all promulgated
after the economic crisis in 1997. The main themes of the new
laws are improving the quality of services, abolishing monopoly,
defining the new role of the government, and improving public-
private partnerships in infrastructure provision. As a result,
the energy sector is now ready to open up the domestic market and
to redefine the government's role in the industry.

Therefore, it was like a clap of thunder overhead on Dec. 15,
2004, when the news regarding the dissolution of Electricity Law
No 20/2002 reached all decision makers, investors and players in
infrastructure who assembled in the National Development Planing
Board's (Bappenas) hall on Jl. Taman Suropati, Central Jakarta.

The reason for the annulment is that some of the main articles
-- article no. 16, 17, and 38 -- of the Electricity Law are
against article 33 of the 1945 Constitution. Having the
Electricity Law canceled means that the law is no longer
effective and all of the contracts and commitments being prepared
must be stopped. Thus, at the moment there is no law or basic
regulation effectively in place for the electricity industry.
Yet, some say that the annulment means that the old Electricity
Law No. 15/1985 is the prevailing law. However, that is not
automatically the case since the old law had already expired and
the decree made by the Constitutional Court canceled Law No.
20/2002 but said nothing about Law No. 15/1985. In short, the
annulment has caused a backlash and the virtual eclipse of the
power industry. The industry may be led into an even darker
tunnel, unless the government and related stakeholders make a
quick move to fill the gap.

As a matter of fact, the enactment of Electricity Law No
20/2002 has already marked a new era in the country's power
sector. A series of restructuring and reform steps have been
taken accordingly. For example, the formulation of the so-termed
Blueprint for Indonesia's Power Sector -- also known as
Guidelines for the Development of the National Power Industry --
and the establishment of the Electricity Market Supervisory Board
through Government Regulation No 53/2003 are among reform steps
taken in the sector. In addition, good will for reform has been
signaled by the resignation of the former director general of
electricity and energy utilization as a member of the board of
commissioners of state-owned electricity company PLN.

On the other hand, unfortunately, PLN has not fully recovered
yet from the economic crisis. The fact that only half of the
population is connected to the grid shows PLN's difficulty in
expanding its services. Blackouts and brownouts in some areas
outside of Java and Bali islands also indicate a lower grade of
electricity services. The company's limited budget for new
investment and the rehabilitation of power generators, and the
price increases of crude and diesel oil has hampered PLN's
activities significantly since about one third of its power
generation is oil-fueled.

Other alternative for funding new investments in the system --
ranging from generation, transmission, and the distribution of
the power to end-users -- are through foreign debt or loans.
However, financing new projects through foreign loans has not
been that easy for PLN. Most investors now seek government
guarantees due to the poor track record of PLN., as many of its
previous projects suffered long delays in the implementation
stage.

The other way to improve the power supply service is through
increasing the selling price to users. As the sole operator in
the country, PLN -- through a government decision -- has
successfully increased electricity charges over the last four
years. Statistics show that price increases in the electricity
tariff are much higher than those of other basic utilities, such
as water supply and public transportation. In addition, power
losses and inefficiency in management have worsened the overall
performance of the power sector. All of these difficulties and
the "wait-and-see" attitude of investors in the power sector have
caused the deterioration of overall services.

Thus, we arrive at the question: How does this logic actually
work? On one side, Electricity Law No. 20/2002 encourages the
modernization of the sector through, among other things,
redefining the government's role, gradually liberalizing the
power sector that has been controlled by one party for decades,
and by inviting private participation in the sector. The new
Electricity Law has also freed PLN from constructing facilities
and providing services in rural and remote areas. Article 7 of
the law says that this task has now been transferred to both the
central and regional administrations.

On the other hand, the cancellation of the law may throw the
industry into uncertainty, which could lead to the deterioration
of power supply services and worsen the investment climate at a
national level. In other words, the cancellation of Electricity
Law No. 20/2002 does not send out a positive signal ahead of the
Infrastructure Summit.

The Constitutional Court has made its decision. Yet, we are
aware that not all liberalization programs carried out across the
world end as success stories. This is not a matter of "the Lexus
and the Olive Tree" as underlined by Thomas L. Friedman. But,
this is purely a question of which one is now the real enemy to
the welfare of the Indonesian people from transition to
transition: Monopoly or liberalization?
Only time will tell.

The writer is a senior infrastructure economist, working for
Bappenas. He can be reached at esatriya@bappenas.go.id.