The Electricity Law and its impact on competition
The Electricity Law and its impact on competition
Lalu A. Damanhuri, Jakarta
Electricity has long been a state-regulated sector in Indonesia. The main idea behind regulation was that it was necessary because the market for electricity services was a natural monopoly. Regulation was imposed to protect consumers from monopolistic abuses.
With the promulgation of Electricity Law No. 20/2002, a comprehensive legal framework is in place for the development of electricity sector. The policy initiative and the legislation together have paved the way for private sector participation in the development of electricity in Indonesia.
Private sector participation is arguably the most important element of the electricity sector reforms. For Indonesia, faced with an increasing burden of capital requirements for expanding publicly owned electricity systems, private participation is an alternative source for securing the much-needed investments in the sector.
Market experts are quite sure that competition will improve efficiency in the generation segment and lead to lower prices. Indonesia can benefit from adopting a single-buyer model combined with competition among the generators for supplying power to large users. Even at this modest level of reforms, Indonesia may not have enough industrial customers to enhance competition among producers. Retail competition, at best, may remain an exclusive long-term objective.
The present level of private-sector participation in the power industry is bound to grow in the future as the momentum of government's policy for involving more and more private companies as independent power producers (IPP) grows. As the private sector grows, a regulatory body will be essential to provide a level playing field for public as well as private sector participants. Such an authority is also needed to protect the interests of the consumers against the possibility of abuse of market power and to ensure the adequate supply, affordability and reliability of electricity services.
Despite the deregulation, PLN (the state electricity company) still dominates all electricity markets in Indonesia. A number of lawsuits against PLN by new competitors (IPP) for anti- competitive actions are still under court proceedings.
The way deregulation was implemented in Indonesia failed to create an environment in which competition would thrive. Most important was the failure to understand that the incumbent monopolist in the all aspects of electricity could leverage its market power to deter new entrants into the electricity business as well as to hinder competition.
Currently, PLN with two of its generating subsidiaries, constitutes the largest business player in the Java-Madura-Bali (Jamali) system. Several IPPs are already operating and have started to distribute power to the Jamali electric energy system. The power sales and purchase contracts between PLN and the generating companies -- private and PLN subsidiaries -- are based on a Power Purchase Agreement (PPA).
There is not yet a single transmission contract and power sales contract with a distributing company, except for contracts between big consumers and PLN, because transmission and distribution are undertaken by operational units that still form an integrated part of PLN.
One might say that the current structure is that of a "Single Buyer" model, where the Central PLN acts as a single buyer. Before this year, the burden of purchasing electricity was delegated to the Central PLN, in this case P3B (the Center for Regulator of Loads, Control and Supervision) while the operational units that purvey the power receive income from the supply of transmission services.
More than two years after the promulgation of the law, many of its provisions have been disputed in court, the law's implementation has been very slow and clouded with significant uncertainty. There have only been a few new IPPs in the generation field. The market structure in the electricity sector will depend crucially on the resolution of PLN's legal challenges to the electricity law. These challenges have derailed the implementation process of the law and have increased significantly the uncertainty in the electricity sector.
Benefits and costs of reform vary from time to time, the more efficient a sector is at its starting point, the closer the potential gains will be to increased transaction costs. However, the task of designing well-functioning reforms for Indonesia still remains a work in progress. Problems have occurred in this reforming process, and many questions remain unanswered.
The intent of the electricity law was to promote competition and the public interest. It will be a significant failure of Indonesia's political, legal and regulatory systems if the interests of an entrenched monopolist rather than the public interest, dictate the future of the Indonesian electricity sector. Unfortunately, the lack of progress in the implementation of the law has been a victory in itself for PLN and a defeat for the citizens of the country. If the present trend continues, the intent of the electricity law -- to open all electricity markets to competition -- will not become a reality.
The writer is a senior specialist from the Committee On Policy for Acceleration of Infrastructure Development (KKPPI).