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).