Monday, September 14, 2009

A Phony Market Oriented Law: Some Critiques on the New Electricity Law

I have grown tired with the absurdity of some of the laws that have been passed recently by the Indonesian House of Representatives ("DPR"), particularly the laws on film and electricity (thanks to Mova for the link on Electricity Law). I won't make a review on the new Film Law as Rob Baiton has made an excellent summary and review on such law in his post here. So, I'll go with the new Electricity Law instead.

The Current Nature of Indonesian Electricity Business

Now, before we go forward with the review, we need to understand the nature of electricity business in Indonesia. First of all, in Indonesia, and probably in the majority parts of the world, electricity has been considered as a public utility, which means that it is also a political commodity. I'll discuss further below on the implication of electricity status as a political commodity.

As you might be aware, there is only one electricity provider in Indonesia, PT PLN (Persero) ("PLN"), an Indonesian state owned company, that has been deemed by the Government to provide public service obligation in the electricity sector. As a public service company, PLN has the first priority to establish electricity business in Indonesia and may receive Government supports in order to run its business, including to receive subsidies to replace any costs of PLN for performing such public task.

Under the old Electricity Law (Law No. 15/1985) and its implementing regulations, the electricity business is actually opened to private enterprises, and to certain extent these companies can also directly sell and distribute their electricity to end consumers. However in practice, most private enterprises sell their electricity to PLN and then PLN shall sell and distribute such electricity power to the people. Arguably, this is not efficient for business purposes, but as will be discussed further, I tend to believe that this is the best option in Indonesia, at least until we have a better solution.

Issues on Electricity Price

Historically, the electricity price is always determined by the Government, which makes sense when we considering the nature of electricity as a political commodity. Since politicians need to maintain their votes, most of them would try to make the electricity price as low as possible by all necessary means, even if such means are not economically viable. What is the easiest option for the Government then? Subsidizing the electricity price. It causes a considerable amount of pressures to our Stated Budget, but hey, who cares as long as the people is happy, right?

Who is the main victim of this policy? PLN. For years PLN has been operating in loss, not because they are not efficient but because they cannot sell their electricity in accordance with the market price or at least a price that can cover their basic costs. Though I understand that now some type of industries must purchase electricity from PLN on a market based price, the majority of ordinary citizen like us pay the subsidized price of electricity.

The other victims of this policy are of course private enterprises. As long as there is a subsidy, market price wouldn't work, and thus there are not many incentives for private enterprises to enter into this business. Even worse, there is also a price control for selling electricity to the end consumers. So, the least thing that they could do is to sell electricity to PLN and hoping for a better price which is of course still higher than the subsidized price.

Review on the New Electricity Law: The Government Misunderstanding of The Market



At a first glance, it seems that the new Electricity Law is a market oriented law. The law unbundles the electricity industry by separating electricity business into electricity generation, transmission, distribution, and sale businesses, and opens the opportunities for regional companies and private enterprises to enter directly into the electricity business in certain territories of Indonesia (provided that PLN doesn't have the capacity to establish and run an electricity business in such territories). So, under the new Electricity Law, private enterprises can now sell their electricity to end consumers. Seems a very market oriented law to me, but is it true? Now, before people go to the Constitutional Court and wasting their time asking the Court to deem this Law as unconstitutional due to its market oriented policy, I suggest that those people should look further into this new Law and compare it with the old one, so that they can realize that this Law is indeed one of the greatest blunders of all time.


Yes, all of the concepts provided in the new Electricity Law has been already regulated in the old Electricity Law and its implementing regulations. If there is an actual change, that must be the fact that the new Eletricity Law combines the concepts in the old Electricity Law and its implementing regulations into one Law, and yeah now the new Electricity Law opens the possibility of local governments to join the mess. Good job, DPR, good job.


Further, apart from the introduction of regional government in determining the price of electricity, there is no change to provisions on electricity price control. Articles 33, 34 and 35 of the new Electricity Law clearly state that any electricity generating business license holders cannot sell their electricity to the consumers without having secured approvals from the Government or local government. The law does state that the price of electricity should be based on healthy market practice, but what the use of having this provision if in the end the price should be approved first by the Government or local governments?


In my opinion, the above articles render this new Electricity Law to become useless if not bring unnecessary problem. The reason why we open a business to the market force is to let business players compete and create competitive prices that benefit the consumers. But that wouldn't happen if the prices are still being controlled! As long as the politicians care about their votes in the next election, who would willingly let the electricity price goes to the market? They all know already that the current price of electricity is lower than the actual market price.


In other words, there would be no incentives for business players to enter into electricity business and start directly selling their electricity to consumers if they cannot enforce market price. The only way that this policy will work is if the Government/local governments subsidize the price of electricity generated by private enterprises in order to cover their costs. However, this will create additional paper work and in overall would not be efficient.


I bet that the private enterprises would rather stick to the old ways, i.e. they sell their electricity on a market price basis to PLN (theoretically it's not a truly market price, but it is still the best option) and then PLN will sell such electricity to the people in subsidized price. Everyone would be happy and the Government will not have to be bothered by dealing with entities other than PLN with respect of subsidy.


Some Thoughts on Indonesian Electricity Business
I think this is the time for the Government to be consistent in issuing its policies. The Government can't expect that private enterprises would be amused by this mumbo jumbo government-market synchronized regulation. It doesn't create harmony, it creates discord! If we want to stick with market oriented policy, we would need to let it work based on market principles, the price should not be fixed anymore and the most efficient company will emerge as the winner from the competition.


But come on, can we do that? I'm not sure that we can quickly change our policy after having so many years running the electricity business as we have it today. That would be suicidal. In my mind, rather than creating a fake opening of business opportunities, the Government should focus on helping PLN to become a more efficient company, which means that PLN can reduce the costs of its electricity generating, cutting its actual price and therefore would enable the Government to reduce the subsidy in the long run. How can the Government help? Well, some have been done such as the Fast Track program where the Government acts as a guarantor for PLN's financial obligations for establishing coal fired power plants. The Government can also provide tax incentives to PLN or build new infrastructures to be injected to PLN's equity as a payment in kind. Of course this will cause the Government to bear additional costs in the short run (since they will also need to pay the subsidy), but in the long run, if PLN can improve its efficiency, all of us, including the Government, would receive the benefit. I would love to see the implementation of market principles in the electricity sector, but now is not the right time.

2 comments:

Anonymous,  Friday, February 11, 2011 10:59:00 PM  

belated comment, but anyway,
FYI, the constutiional court annuled the market-price concept regulated stipulated on the previous electricity law (20/2002). So, I guess DPR and gov't just learned their lesson(taught by Jimly et al). It is pretty difficult to apply market price if it against the constituution, you see

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