Public may get stuck with bill for private power

Kurtubi, Member U.S. Association for Energy Economics (USAEE), American Economic Association (AEA), Jakarta

There are at least two independent power producer (IPP) cases the settlement of which will be of great disadvantage to the public. First, the "settlement" agreed upon by state-owned power company Perusahaan Listrik Negara (PLN) and Paiton I to the effect that the rate paid to Paiton will be US$4.93 cents/kwh.

It was later learned, however, that PLN will have to pay more than this rate, which has yet to include PLN's payment to Paiton I to the amount of $4 million/month for 30 years. Besides, the agreement also contains a take-or-pay clause with a capacity factor of 85 percent for a period of 40 years, instead of 30 years, something which it is next to impossible to realize. In the end, according to Dr. Nengah Sudja, an electricity expert, PLN will have to pay to Paiton I some $6.62 cents/kwh.

This real rate of $6.62 cents/kwh is way above the rates set by similar power generating plants in other countries, such as a coal steam-powered power plant in Malaysia ($3.19 cents/kwh) and the Na Duong steam-powered power plant in Vietnam ($4.2 cents/kwh). It is also far higher than the rate set by the PLN- owned Suralaya steam-powered power plant in West Java (about $3.7 cents/kwh). Obviously, if this deal between PLN and Paiton I becomes a reference in settling other IPP cases, these settlements will disadvantage the public as it is the public who will finally have to pay dearly for the presence of private power over a period of 40 years!

The second case involves the urgings of several parties "representing" the interests of the Karaha Bodas Company (KBC), an IPP, for Pertamina to immediately pay a fine of $261 million (plus interest) as already ruled by an international arbitrator. KBC has made repeated efforts through various courts, such as the courts in New York, Texas, Delaware, Singapore and Hong Kong, to chase Pertamina assets and have them confiscated.

In Delaware, however, the court rejected the claim. Actually the government has allowed KBC to proceed with its Karaha Bodas geothermal power plant project, but KBC continues to chase Pertamina assets, especially those managed by a trustee agency in New York (in the case of LNG export receipts, the funds are kept in a bank in the United States). By virtue of Law No. 8/1971 and Law No. 9/1968, Pertamina's assets are separate from those owned by the government. Therefore, KBC's insistence that the funds managed by the trustee in New York be confiscated is misplaced.

If Pertamina finally gives in to the pressures from the various parties supporting the claim made by KBC, either from government circles or from certain non-governmental organizations, and pays $261 million (plus interest), just like the payment of $265 million it made in the case of PLP Dieng Patuha, the burden that the public will have to bear as a result of mismanagement by certain government officials will have come full circle.

In fact, a close look at the history of the KBC project -- from KBC's first arrival in Indonesia, its claim that it had paid out over $100 million, an amount considered excessive, the postponed start-up of the project and further postponement in line with the IMF's advice and, finally, the abandoning of 9 wells highly hazardous to the locals living around the site -- shows that the international arbitrator should not have penalized Pertamina with an obligation to pay a fine of $261 million to KBC.

To the Indonesian people, this ruling is very unfair so that it is only natural that Pertamina should fight hard to avoid any execution. It is eventually the Indonesian people in general who will have to pay this fine through higher electricity charges. Therefore, these efforts by Pertamina to protect itself do not have anything to do with the entry of new investors as in this regard Pertamina is simply exercising its rights. Besides, investment depends largely on macroeconomic and security factors.

Just like other power generating projects developed by IPPs, almost invariably connected with government officials' family members or cronies, this KBC project also reeks of corruption, collusion and nepotism. Unlike normal practice in mineral resources' projects the world over, KBC has entered the geothermal areas in Mount Karaha and Telaga Bodas in West Java through a process that is far from transparent.

There are suspicions that the project is related to the family of a government official controlling 10 percent of the shares as the local partner. U.S. law, as set forth in the 1988 Foreign Corrupt Practices Act, prohibits a U.S. company from engaging in corruption or bribing officials or close relatives of the officials to facilitate the establishment of its projects outside the U.S. Once a U.S. company is proven guilty of bribery, this is a crime violating U.S. law and also, certainly, those of the host country.

Nearly all private power projects involving foreign investors entail problems which in the end will be burdensome to the Indonesian public. These IPPs come here touting huge projects to generate power at very high prices. In the case of Paiton I and KBC, for example, in their Power Purchase Agreements (PPAs) of 1994, which contains a take-or-pay clause, it is stipulated that PLN must pay to Paiton I and KBC a price of US$8.46 cents/kwh, a level of charges that is highly embarrassing. Today, although the government has "successfully" renegotiated this matter, the amount that PLN is obliged to pay -- $6.62 cents/kwh -- is still very, very expensive compared with the charges set by similar IPPS in the case of Malaysia's Bunting geothermal power plant and Vietnam's Na Duong.

Ideally, a power company from a developed country should come to Indonesia with its sophisticated and superior technology and management so that the electricity it produces will be lower in price that the power produced by PLN, a company holding a state monopoly on power generation and often condemned as an inefficient company by international financial institutions.

The Asian Development Bank (ADB) has even openly, and without the slightest discomfort, dictated to the Indonesian government that it immediately ratify the power affairs bill as a precondition for the disbursement of a $180 million loan to Indonesia. For a loan of only $180 million, the comparative advantage of state-owned power company PLN in producing electricity at low cost for its consumers throughout Indonesia must be sacrificed and obliterated by unbundling PLN into a number of smaller limited liability companies as required by the law on power affairs.

The two cases discussed above show that efforts to liberalize the national electricity sector need more detailed evaluation so as to ensure that electricity generation will not be made a slave to the goal of maximizing profits at the expense of the public at large.