Electricity Industry in Indonesia after the Implementation of Electricity Law Number 20/2002: Proposed Agendas to Support Implementation of the Law

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1 Electricity Industry in Indonesia after the Implementation of Electricity Law Number 20/2002: Proposed Agendas to Support Implementation of the Law Hanan Nugroho*, Syamsidar Thamrin* and Gumilang Hardjakoesoema Indonesia has launched power sector policy initiatives that cover the sector recovery and establish competitive environment. With Electricity Law 20/2002, the State Electricity Company s monopoly is limited. On competitive areas, supply is unbundled into a number of different businesses. The current market is a vertical-hierarchical monopolistic (SBSS). Buyer has the access to buy power from MV/HV grids, but only through a holding company. The tariff is regulated. This is a problem used as a basis to transform the current market structure to Single-Buyer Multi-Seller (SBMS). To achieve the final goal of restructuring, much more efforts have to be paid with, major focus on generating, supervisory, regulatory mechanism, and on retails side. This paper discusses our analyses and recommendations regarding required preceding conditions to make competition possible, rationalize tariff, and other issues for restructuring the sectors and corporate. I. INTRODUCTION After three decades of sustained and rapid growth, the Indonesian electricity industry has been enduring a very difficult phase, as an impact of the country s economic crises. The collapse of Indonesia s currency (IDR) in 1997 has plummeted the regulated electricity selling prices from about 7 cents to fewer than 3 cents USD per kwh. Since then, the state electricity company (PLN) reported that its revenues stream was not able to cover the costs of providing electricity supply. For instance, PLN announced losses of USD 1.4 billion in Despite the prolonged economic and political crises triggered by the 1997 financial collapse, Indonesia is still experiencing high growth for electricity demand. Even under low economic growth scenarios, the demand is predicted to increase at 6-8 percents annually up to 2010, especially in JAMALI (Jawa-Madura-Bali), the country s major region and power system. The relatively high demand growth is associated with the country s low electrification ratio, which is about 53 % (2003), low electricity consumption per capita and positive economic growth after the crisis. The 53 % of households, that consist of about 135 million people, are customers of PLN. Most of the remaining households that do not enjoy electricity live in Indonesia s about 60,000 rural villages. Even though the government of Indonesia (GOI) has increased the electricity tariff many times to catch up the economic level after the 1997 crisis, in reality the tariff adjustment has been rather slow. Hence, it reduced or even eliminated the ability of PLN to invest in new capacity expansion. In the other side, the depreciation of the undervalued assets was not sufficient enough to recover the investment requirements. These financial constraints had caused PLN entered to another critical problem: the heavy imbalance between demand for electricity and its supply. * * Corresponding author. Energy Planner/Economist, National Development Planning Agency (BAPPENAS), 2 Taman Suropati, Jakarta 10310, Indonesia. Tel/fax. (62-21) nugrohohn@bappenas.go.id. Directorate of Energy, Telecommunication and Informatics, National Development Planning Agency (BAPPENAS), 2 Taman Suropati, Jakarta 10310, Indonesia. sthamrin@bappenas.go.id and gumilang@bappenas.go.id

2 Another development is that Indonesia, in response to the crisis that triggered political instability, is in the process of changing its political system from the centralized into a decentralized one. The policy of regional autonomy is still a central issue in Indonesian political system currently. To some extent, the regional sentiment has affected many aspects the planning process, with strong demand to shift from centralized planning to regional one. Yet in this situation GOI has determined to restructure the Indonesian electricity sector, from the previously monopoly, centralized, vertically integrated industry dominated by PLN to a more competitive one. In 1998, as a part of the economic recovery program, the GOI launched Power Sector Restructuring Policy white paper. The paper covered proposals for electricity sector recovery to ensure financial viability, restructuring the sector to establish a competitive market, strengthening the regulation, redefining government role, and increasing private participation. In the late 2002, the GOI enacted Law Number 20 on Electricity. With this new law, PLN s monopoly is gradually decreased, the supply of electricity has to be unbundled into a number of different businesses, which are subject to competition (except for transmission and distribution). Private sector participation is open for generation and for retail/wholesale supply to end-customers. The role of GOI, especially the financing for electricity development projects, is going to change. The electricity market structure is to be changed from the current Single Buyer Single Seller (SBSS) into a Multi Buyer Multi Seller MBMS) one in the future. While a number of drafts for Government Regulation on the implementation of Law No. 20 Year 2002 are being prepared, we observed that, due to the complexity of the problem and its ambiguous environment, it would need a more efforts to realize the ideal model desired by the law. Beside, it is undeniable that the contribution of electricity sector is highly expected in the near future for overall economic recovery. These become the concerns of this paper. The paper set outs some problems, then we propose recommendations to smoothen the implementation of the new electricity law. The paper is organized as follows. Section 2 describes the current condition of Indonesia s electricity industry, that include the industry framework, installed capacity, major problems and Law Number 20 Year Section 3 explains major issues and problems regarding Indonesia s electricity sector and PLN in particular. The section covers electricity tariff, operation and maintenance, investments and finance, IPPs and CPPs, rural electrification and preparation for competition. Section 4 consists of our findings and recommendation. II. CURRENT CONDITION 2.1. The industry framework Under the former Law Number 15 Year 1985 on Electricity, the electricity supply in Indonesia was conducted by the state through the state-owned electricity utility (PLN). As stipulated in the law, the authority to supply electricity had been delegated to PLN to act for and on behalf of the government. As along as it was not contrary to the state s interests, opportunity might also be given to private companies and cooperatives to take part in the power sector by operating power plants for sale to PLN, supply of electricity to the public, as well as for captive power generation. Otherwise it was PLN s sole responsibility to develop, own and operate the power system throughout Indonesia. The role of co-operatives and private generation serving general public had been rather insignificant until the early 90es when the government, through Presidential Decree No. 37 Year 1992, invited private investors to participate in the power sector by operating large-scale independent power producers (IPPs) for selling of electricity to PLN or other parties. Indonesia s current electricity supply framework has four ministries of GOI which are administratively and legally coupled with PLN (Fig. 1). The Ministry of Energy and Mineral Resources, acting as a policy maker and also having a regulatory function; Ministry of State Own Enterprises, representing the government as the owner of PLN, to supervise its

3 management and setting the performance target including the approval of PLN s annual budget; Ministry of Finance, focusing on subsidy and loan arrangements to PLN and setting the government equity; and National Development Planning Agency, having a development planning function. Figure 1. The current industry framework President of the Republic of Indonesia Coordinating Minister of Economy Ministry of State- Owned Enterprises National Development Board Ministry of Finance Ministry of Energy & Mineral Resources Dev. Planning Function Subsidy, Loan, Gov t Equity Shareholders Function Policy making, regulatory ELECTRICITY SUPPLY INDUSTRY PLN Generation PP Transmission & System Operation Distribution IPPs Self-Generation Cooperatives TARIFF C U S T O M E R S 2.2 Installed Capacity Currently, PLN owns and operates over 600 separate transmission and distribution systems throughout the country, an archipelago comprising of some 17, 000 islands. However, Indonesia s electricity system in general can be divided into two major one: the JAMALI and Outer Islands. The state of the power system is very diverse, ranging from a small scale isolated diesel plant in a remote island to a large-scale power system of JAMALI, which is equipped with extra high transmission 500 kv and 150 kv submarine cable and sufficient generating capacities to meet the demand (over 13,000 MW). In contrary, there are critical areas with regular black out in Outer Islands. The Outer Islands systems need extensive expansion to connect most of the areas and to create a more efficient system. Capacity of Captive Power is about MW (2002); of which MW is available in JAMALI.

4 Table 1 shows PLN s installed capacity in Table 1. PLN s Installed Capacity (2003) JAMALI OUTER- ISLANDS TOTAL GENERATION Installed Capacity (MW) 15,490 5,716 21,206 TRANSMISSION LINES EHV (kmc) HV (kmc) Substation: Unit/MVA DISTRIBUTION LINES MV LV Dist. Substation: Unit/MVA Source: 3,607 14, /46, , , , /7, , ,736 3,607 24,565 1,089/53, , , ,036/21,811 74,805/8,445 DG Electricity & Energy Utilization, Statistik Ketenagalistrikan (Electricity Statistic) ,841/30, Major problems In general, the major problems in Indonesia s electricity sector, including its PLN internal organization can be categorized into four main subjects: Tariff, Debt restructuring, Renegotiation of Independent Power Producers (IPPs) and, Sector and Corporate efficiency. The progress for solving these problems is quite well. Tariff has been increased gradually since the early 2002, and PLN debts were swapped to government equity. By 2003, from 26 IPP delay projects due to economic crises, 19 reached new agreements with PLN to proceed with implementation. To promote efficiency of the sector and corporate, the Electricity Market Supervisory Board (EMSB) has just been established, while the concepts of Enterprise Resource Planning (ERP) and Efficiency Drive Program (EDP) have been introduced. The remaining problems such as economic tariff setting and implementation of Electricity Tariff Automatic Mechanism (ETAM) as well as empowering the regulations need to be worked out carefully. Table 2 shows the pre, during and post-crisis conditions. Table 2. The Effects of Economic Crisis on PLN Financial Circumstances Pre-Crisis (< 1997) Post-Crisis ( ) Tariff (US$/kWH) Cost of generation (US$/kWH) Conversion of USD to IDR Income per capita (US$) 1, Cash flow of PLN Surplus Deficit Note: Low income per capita has decreased the power purchase of the people, subsequently their electricity consumption Electricity Law Number 20 Year 2002 In September 2002, Indonesia enacted Law No. 20 on Electricity replacing the former law No. 15/1985. The new law is to reform the electricity industry from previously monopolistic structure into a limited competitive market within a five-year time frame.

5 Accordingly, the law urges the electricity be independent from the government assistance in developing the sector. The essences of the new law are: (i) providing equal treatment to all market players, including PLN, (ii) facilitating implementation of competition on generation and high/medium voltage (HV/MV) retails, (iii) providing roles to regional government to develop off-grid electricity ventures to general public in order to increase the electrification ratio, (iv) facilitating varied investment schemes in power sector that enable efficient, transparent and competitive provision of electricity supply. In addition, the new law requires electricity ventures to meet safety requirement including environment, and improving customer service and protection. The law mandates the establishment of the EMSB. The schematic diagram towards a competitive system, although its transition stages are not clearly shown, could be depicted as in Figure 2. Figure 2. The future industry structure Integrated Business Unit Feature Different Business Unit Feature Generation Competition Generation Transmission Transmission System Operator Monopoly Operator Monopoly Market Operator Distribution Sales Distribution Sales Unit Monopoly Sales Agent Competition Source: Presentation of Minister of Energy and Mineral Resources: Explanation of Electricity Law No. 20 Year 2002, Jakarta, September 12, 2002 III. MAJOR ISSUES IN THE SECTOR 3.1. Tariff structure Electricity selling price in Indonesia is a government regulated one. The tariff is structured into several customer categories to enable cross subsidies among customers. The

6 tariff is applied uniformly across the country. With the stable increase of IDR toward the USD recently, the average tariff is now about USD 7 cents/kwh, or close to its economic level. Nevertheless, it seems that the tariff structure doesn t reflect costs of electricity for each customer group (Table 3). For example, tariff for industrial group is more expensive than that of residential group. The tariff structure will potentially discourage the electricity retail business (that refer to industrial / I3 category) to supply electricity to residential customers during the next competition era. 3.2 Operation & maintenance There are many aspects on O&M that need to be redefined, clarified and solved. Fuel Cost. There is no clear definition in determining the costs of fuel for a power plant. For instance, some fuels are set in IDR while others are in USD. Coal price is set in IDR as in the case of Suralaya Thermal Power Plant, the country s largest coal fired plant. About 70% of its coal consumption is supplied by the state coal mines, where 60% of it is set at fixed price in IDR while the rest is obtained from an open tender. As a result, there is a tendency to obtain a low quality coal with lower price for the sake of low fuel costs (increase fuel consumption but lower plant efficiency). On the other hand, the price of gas and geothermal steam are set in USD with no government subsidy as the case of oil fuels. As a result, their prices seem to be more expensive which causes their low consumption despite their more environmental-friendly label. Fuel Consumption. There is no operational indicator applied to determine the efficient operation of a power plant. Therefore some indication such as heat rate, T&D losses and system unbalance is not set based on internationally accepted standards yet. Inventory. PLN has been criticized for having a large pile of inventory. The need for a large pile of inventory is mainly due to the lack of standardization of the PLN s electrical system and components. Regional offices stock all type of various components and equipments from different brands. Yet, there is no mechanism of trading house to supply such a need, no real-time database system on the availability of all equipment and component and outsourcing mechanism. Maintenance Schedule. PLN has spared maintenance budget for each of its Regional Offices. However, there are indications that several PLN branch offices would rather sacrifice their maintenance schedule just for the sake of saving. It means that they will not spend the available budget for maintenance in order to maintain their year-end cash flow. From the point of view of technical life time of the equipment, it will be a big loss as the life time of the plant will be shorter and may need repairing cost which is usually costly Investment costs Indonesia is still experiencing high growth for electricity demand, regardless the last downturn of the national economy. The incapability to respond the demand will threat the economic recovery and development, and subsequently trigger another social unrest (MESDM, 2003). In anticipating such a condition, a comprehensive investment plan should have been designed to cover short, medium and long-term scenarios. However, currently the demand for electricity in some identified critical is not met yet due to delays of projects construction, such as Musi, Renum and Peusangan Hydroelectric Power Plants. Table 4 shows PLN assessment of its capital requirement. The prediction is not taking into account yet the possibility of Captive Power Producer (CPP) migration to PLN and major rehabilitations of many aging electricity plants owned by PLN, which are considerable.

7 Table 3: Electric Tariff 2003 (Based on Presidential Decree No. 104 Year 2003, December 31, 2003) Category Maximum Power Installed Cost (Rp/kVA/mo) Usage Cost (Rp/kWH) Social Category S-1/TR 220 VA - Rp. 14,800 monthly flat rate S-2/TR 250 VA 200 kva 10, VA 123 for 1 st 30 kwh 265 for the next 30 kwh 360 for >60 kwh 15,000 for VA 200 for 1st 20 kwh 295 for next 40 kwh 360 for >60 kwh 25,000 for 900-1,300 VA 250 for 1st 20 kwh 335 for next 40 kwh 405 for >60 kwh 27,000 for 1,300-2,200 VA 250 for 1 st 30 kwh 370 for the next 30 kwh 420 for >60 kwh 30,500 for 2,200VA-200 kva 380 for 1st 60 h operation/month 430 for >60 h operation/month S3 MV >200 kva 29,500 Peak-hour = K x F x 325 Off Peak-hour = F x 325 Residential Category R1 LV 250 VA 2.2 kva 11,00 for 450 VA 169 for 1 st 30 kwh 360 for the next 30 kwh 495 for >60 kwh 20,000 for VA 275 for 1 st 2 0 kwh 445 for the next 40 kwh 495 for >60 kwh 30,100 for 900-1,300 VA 385 for 1 st 2 0 kwh 445 for the next 40 kwh 495 for >60 kwh 30,200 for 1,300-2,200 VA 390 for 1 st 2 0 kwh 445 for the next 40 kwh 495 for >60 kwh R2 LV > kva 30, R3 LV >6.6 kva 34, Commercial Category B1 LV 250 VA 2.2 kva 23,500 for 450 VA 254 for 1 st 30 kwh 420 for >30 kwh 26,500 for VA 420 for 1 st 108 kwh 465 for >108 kwh 28,200 for 900-1,300 VA 470 for 1 st 146 kwh 473 for >146 kwh 29,200 for 1,300-2,200 VA 480 for 1 st 264 kwh 518 for >264 kwh B2 LV > kva 30, for 1st 100 h operation/month 545 for >100 h operation/month B3 MV >200 kva 28,400 Peak-hour = K x 452 Off Peak-hour = 452 Industrial Category I1 LV 450 VA 14 kva 26,000 for 450 VA 160 for 1 st 30 kwh 395 for >30 kwh 31,500 for VA 315 for 1 st 72 kwh 405 for >72 kwh 31,800 for 900-1,300 VA 450 for 1 st 104 kwh 460 for >104kWH 32,000 for 1,300-2,200 VA 455 for 1 st 196 kwh 460 for >196 kwh 32,200 for >2,200 VA 455 for 1st 80 h operation/month 460 for >80 h operation/month I2 LV > kva 32,500 Peak-hour = K x 440 Off Peak-hour = 440 I3 MV >200 kva 29,500 Peak-hour = K x 439 for 1st 350 h op/mo. Off Peak-hour = 439 for > 350 h op/mo. I4 HV >30,000 kva 27, Public Facility Category P1 LV 250 VA 200 kva 20,000 for 450 VA ,600 for VA ,600 for 900-1,300 VA ,600 for 1,300-2,200 VA ,800 for >2,200 VA 489 P2 MV >200 kva 16,000 Peak-hour = K x 379 Off Peak-hour = 379 P3 LV 635 Note: LV=Low Voltage; MV=Medium Voltage; HV=High Voltage K=1.2 for PLN Jakarta & Tangerang Regional, set by Ministry of Mines and Energy F= multiplication factor to distinguish between pure social (F=1) and commercial-social tariff (F=1.8)

8 Table 4. PLN Capital Need (in millions, USD) REQUIREMENTS FOR: JAMALI SYSTEM OUTER ISLANDS GENERATION TRANSMISSION SUBSTATION DISTRIBUTION RURAL ELECTRIFICATION Source: PLN, RPTL Despite the need for meeting electricity demand in the foreseeable future, there are no significant measures have been performed in improving the financial terms and conditions for new investments. Lack of that investments supporting policy has discouraged the interest of prospective investors who want to participate in the electricity sector development in Indonesia. In addition, the criteria for financial investment have not been set up yet. For instance, that large investment for a short and medium-term project can be offered to private sector while large investment for a long-term project should be handled by the GOI. Furthermore, there are no clear indications on the financial investment on the existing and ongoing power sector projects. For instance, some projects have no any accountability indicators, such as its ROI and/or ROE and its investment composition Captive power and independent power producers Captive power producers (CPPs), with capacity about 15 GW have been a major source of power supply in addition to PLN. The lack of regulation on tariff and fuel costs applied to this sector, definition on their core business including their working hours, peak power, surplus or deficit and their commitment on electric generation, are some problems that need to be clarified soon. As a result of fossil fuel prices increase recently; the CPPs may migrate to use power from PLN, which would put a lot of pressure to PLN capability to satisfy the increase demand. Even though renegotiation have been completed with the existing IPPs, but terms and conditions such as take-or-pay clause on the Purchase Power Agreement (PPA) of IPPs could cause problems to PLN to compete later because the price that PLN has to pay to IPPs is quite expensive. For that reason, there is a proposal to manage the existing IPPs through a new entity or mechanism called IPP Trader. Since the existing PPAs had been supported by the GOI, it is logic then that IPP Trader be part of GOI obligation. Furthermore, GOI needs develop new regulations for new IPPs and has to declare to the public the list of IPP projects candidate Finance There are many financial aspects that need to be redefined, improved and clarified. These include the low revenues and projected investment needed to finance the short, medium and long-term project developments. Low Revenues. PLN s low revenues is clearly due to the tariff set by GOI. To compensate for the deficit, PLN asks for subsidy from the GOI. Unfortunately, there is no clear mechanism on this subsidy, such that it is hard to detect where this subsidy fund goes. Electricity theft and receivables are also another cause of low income of PLN. There are many receivables, especially of some governmental customers, that have not been solved yet. All of these have caused the deficit in PLN cash flow. Instalment Cost. PLN will charge its customer a certain amount of fee, called instalment cost in order to customer to get connected to its electric grid and has electricity delivered to their premise. This cost varies but basically depends on the tariff applied to the customer. Again, as the tariff is not set properly and subsequently the instalment cost, PLN may loss some revenue opportunities from steady income.

9 Cash Flow. Similar to the investment plan, there is a critical need to maintain a certain level of cash flow in PLN balance sheet. This fund is necessary to support all the short- and medium-term activities. It is needed to sustain the operation of existing facility, to ensure the continuing supply of electricity to PLN customers. There is a need for additional costs to support the restructuring of PLN itself. The costs are to finance all the necessary studies related to electricity sector restructuring program, including market analysis, good corporate governance, subsidiaries and business strategy. There is also a need to finance all the human resources development programs, including early retirement program, settlement and mutation of staff, either voluntarily or mandatory due to the autonomy and decentralization agenda Subsidiaries of PLN To establish a more competitive power sector structure, PLN has established several subsidiaries. This unbundling effort includes the establishment of several generating and distribution companies, a transmission company in JAMALI and regional electric utility companies outside JAMALI. To reduce costs, PLN establishes strategic business units (SBU) as cost and profit as well as investment centers. In doing so, it is expected that PLN will be able to expand and diversify its line of business. However, the progress of this unbundling is still very slow. It is a worry that without any change in corporate culture and the commitment to stick to their core business, that is electricity, most of these subsidiaries may have become cost centers, rather than profit or investment centers Rural Electrification: electricity as an infrastructure There are about 60,000 villages or rural (remote and isolated) areas in Indonesia. To increase communal accessibility, the development of infrastructure is extended to connect those areas. In electricity sector, these activities include rural electrification program as a pioneering effort to electrify the rural households. To support the program, GOI provides electricity in the rural areas through government s subsidies, while setting the electricity selling price quite low. These efforts, set as high priority in the country s continuing REPELITA (Five Year Development Plan) prior to the 1997 crises, have achieved remarkable results, as indicated by the number of rural villages which have been electrified (about 80% to date). Being treated as infrastructure, thus to support economic and social development, most of this rural electrification program ends up with the enhancement of the consumptive level of the people. The main reason is either the tariff of electricity is quite lower than any other source of energy, such that people shift their energy source to electricity. Another reason is the installed capacity provided to the people is too low to support any productive activity. It is just barely enough to support the basic need of electricity, such as lighting and entertainment (information). Besides of that social function of electricity for rural electrification, the number of customers in this category is very large. In 2003 the total number of electric customers in rural areas is about 23.4 million, which almost all of these rural customers belong to residential category of the R 1 tariff. This number represents around 71.3 % of total residential customers all over the country, which is eligible for the significantly subsidized tariff category. While, the total number of PLN customers is around 32.1 millions, of which 29.9 millions (93.3%) are the residential customers (Table 5). Therefore, it is obvious that the fund provided by the GOI for rural electrification program is quite huge.

10 Table 5. Overview of Rural Electrification in Indonesia as of 2003 Description Total Number Percentage (%) Customers in Indonesia - Residential - Industrial - Business (Commercial) - Public Residential Customers in Indonesia - Outside Java-Bali System (JBS) - In JBS Rural Residential Customer in Indonesia - Outside JBS - In JBS 32,151,416 29,997,554 46,818 1,310, ,358 28,903,325 10,146,753 19,850,801 22,387,567 7,507,463 14,880, Number of Rural Villages Electrified 50,076 / 61, Source: PLN and DG Electricity & Energy Utilization, Statistik Ketenagalistrikan (Electricty Statistic) Preparation for competition Even though it is only about 3 years left from the dateline to introduce competition system, little development has been done. The EMSB has just been formed in 2004, but other requirements for competition seem far from ready. As most electricity market reform has concentrated on creating competition in generation as the first priority, however there will be no capacity left that available for competition in JAMALI system even up to With limited growth of PLN, the scenario without any consideration of Captive Power migration to PLN concludes that there will be no competition possible in generation side. Furthermore, to create healthy competition, there should be no generation company that has capacity that could cause the system down, but there is no preparation yet to un-bundle PT PLN to more than just two subsidiaries until now. Historically in the electricity sector, due to technological capability and foreign lending prerequisite reasons, Indonesia had spent more than 70% of its investment capital in foreign goods and services. As a result, it is also important to reveal that competition is expected to create more benefits to the local players and industries. Therefore, GOI should develop the policies to empower capacity of the industrial sector to compete with international players. IV. RECOMMENDED SOLUTIONS After examining the above various problems, we proposed some recommendations for further restructuring the Indonesian electricity sector, as follow: 4.1. Market Reform Preparation To be successful in a competitive market establishment, several supporting mechanisms are required. First, there shall be a competitive market mechanism and security of supply in the primary energy supply side. The price of primary energy must reflect cost of production plus other fees to cover its transportation and distribution. Second, there shall be sufficient supply of generation to enter market, along with the availability of open access and sufficient capacity on transmission line to avoid bottlenecking, and reliability of distribution system to ensure the deliverability of electricity to customers. Third, other supporting mechanisms, such as financial transaction capability which mandate a better metering and monitoring system, trained human resources to run the competitive market system must be

11 available. Fourth, a mechanism is mandatory to handle the future IPPs to fill in the necessary additional capacity, in particular on how it can participate in the competitive market, along with the IPP Trader. Fifth, it is necessary to have regulations that support the smoothness operation of the market, including on taxation, investment, procurement, publish project listing, publish supply and demand on the competitive market and so on. To achieve the electricity industry which is self-supporting, efficient, and highly competitive in electric electricity market expected to start in 2007, more detailed pictures/studies are still needed to make clear several issues regarding industry structure, implementation schedule, area to apply competition, and bulk purchase scheme. Preparation step and route map to the selected model/structure have to be analyzed carefully and prudently tested before the chosen model/structure could be applied. In the absence of excess generating capacity, creating competition to construct additional capacity could be more urgent than creating competition in generation. Generator rehabilitation program should be given first priority to improve PLN ability to compete. In the operation period of power plants, competition among various energy primer prices and access fees to the energy infrastructures would determine the choice of the primary energy. Therefore, the power plants should have the ability to choose among varies primary energy supply that would give the best price for their generation costs. Taking these into consideration, it would be important for GOI to establish infrastructure development scheme concerning primary energy. This restructuring program is aimed at increasing profit and service quality, along with increasing efficiency and competitive measure. The necessary activities will include: Financial restructuring of PLN and capacity building of organization working in the electricity sector, particularly the new one. Operational partnership to revitalize PLN. Preference and protection for PLN should be avoided by deleting the list of facilities provided by GOI, such as subsidy and new capital investments. Enhancement of trust-unit entity for accommodating the public share ownership of PLN. Enhancement of foreign investment in secondary market through open tender mechanism Tariff Adjustment to Reflect Costs By 2007, to promote the competition, rationalization and participation of private sector, along with the redefining of the government role, are essential. In electricity sector, due to the irrational tariff structure in the PPA between PLN and existing IPPs, GOI needs to enhance such an agreement. In doing so, the tariff structure can be divided into the one of commercial based on market mechanism and of social function borne by the GOI. On this subject, there are many comprehensive recommendations and solutions that can be proposed to improve the financial viability of PLN and attract new investors. We recommend: A mechanism of electricity pricing that reflects opportunity costs must be established, at least to serve as a mean to improve PLN huge deficits. This can be achieved by increasing numbers of subscriber categories that are acceptable to costs, from the current four tariff categories (large public facility, large commercial/residential consumer, medium/large hotel and medium/large industry). In the other side, the GOI should increase gradually the tariff for social and household categories using up to 900 VA. For low-income earners that are not acceptable to tariff increase, in the Social and Household category up to 450VA, its deficits should be subsidized by a new created Social Electric Development Fund (SEDF). The social requirement for the electric electricity industry under the SEDF should be maintained for the benefits of utilizing domestic energy, subsidizing low-income earners and electricity development in frontier areas. However, this subsidy must be minimized and targeted in achieving the tariff that is compliance with AFTA 2003.

12 The system of uniform tariff across the country should be reviewed. There should be tariff differentiation based on demography (population density), geography (location) and economy (regional income per capita). Other aspects that have to be put into consideration in determining this regional tariff system include the type of plant (subsequently type of fuel and its availability) and supporting infrastructure. Thus, the tariff will be rated independently by the Regional Electric Company, under supervision of regional utility commission. The electric tariff categories to reflect costs should be publicly announced and disclosed for higher transparency, and based on the principles of fairness and affordability. Here, the price structure of electricity, including the cost components of electricity (known as components A, B, C and D), should be clearly defined. To increase tariff collection rate, automatic coding system of tariff bill and metering instrument of electricity should be soon prevailed. Despite the fact that retailed tariff of PLN is rated in IDR, electricity equipment, goods and materials of the generation, transmission and distribution (GT&D), that largely rely on imported ones, are procured in USD. Furthermore, domestically produced petroleum and natural gas that is supplied by the state oil and gas companies and other gas suppliers for PLN are sold in USD. Therefore, electricity tariff mechanism of Indonesia is vulnerable to fluctuation of international currencies. Here lies a big question on how to solve double tariff system. In view of substantial changing tariff rate, it is necessary for power equipment; goods and materials including power fuel domestically produced, to switch from USD to IDR. In addition to the need of changing the currency rate system for the fuel cost, the utilization of fuel must be schemed and prioritized on compromised commodity. This strategy is applied to impose and reduce the consumption of petroleum-based fuels and high quality coal. To annihilate foreign exchange risks, the GOI and PLN should immediately consider following problems: (a) Foreign exchange risks should be equally shared among contract parties, subject to reviewing foreign exchange clause in the power fuel supply contract., (b) Domestically produced petroleum, natural gas should be sold in IDR in Indonesia by modified supply contract to minimize foreign exchange risks, (c) As substantial fluctuations of foreign exchange exceed commercial risk, special account of foreign exchange should be set forth and be controlled under the Ministry of Finance of Indonesia; (d) Quick fuel adjustment measures should be introduced to respond with foreign exchange fluctuation in view of the process of electricity competitive market Investment Plan With the current GDP growth at about 4-5% and the rate of growth of electricity consumption around 8-10%, in addition to the required investment for the additional power capacity, other facilities such as T&D system must be improved accordingly. Therefore, a schematic and prudent investment plan has to be initiated and schemed as early as possible. The required investment in power sector can be divided into two main activities as follows: Power Generation Facilities. In the short and medium terms, to solve the temporary to secure PLN s electricity supply, in JAMALI in particular, old and inefficient generation facilities of PLN and CPP burning coal and petroleum, should be rationalized. Therefore, prior to installing new generation facilities, it is imperative to technically and financially asses and value all the existing power generations belong to either PLN or CPP. This rationalization measure of diesel and MFO fired generation is mainly emphasized to the ones owned by CPP that has more generations than PLN and are independent in a smaller/medium size. In this scenario, the CPP should consider whether they should: Continue self generation by switching to other power fuel such as natural gas. Buy electricity from PLN. Go and operate efficient co-generation, in case they fail to get electricity from PLN.

13 Buy-out with PLN or with unbundled generation companies (Gencos). Do rehabilitation to extend the economic lifetime and better environmental impacts Finally, be scrapped. If so, how to solve issues of compensation and stranded cost? CPP currently owned-generation capacity is estimated at around 15,200 MW, which accounts for about thirty percentage of the total generation capacity of 24,000MW. It also has anticipated that although electricity supply and demand are still balance in JAMALI within four to five years ahead, CPP should switch to gas fired generation or scrap their generators. Consequently, the GOI should seek for financial support to conduct study for rationalizing PLN and CPP, their current sources of generations and operation, including abolition of diesel/mfo fired generations. In the longer-term, the new generation facilities should be able to meet the projected additional demand of electricity, which is estimated at a level of around 16.5 GW by In building these new generation facilities, it is imperative to consider: As the subsidy on the petroleum-based fuels is phased out gradually, the source of energy for power generation may shift to natural gas and coal. This development needs to be assessed carefully. These new generation facilities are operated under such a condition that attain and comply with the development of environmental standards. Financial terms and conditions for the investment in these new generation facilities have to be established based on internationally accepted standards and best practices. These new generation facilities should be installed based on decentralized scheme, as close as possible or in the proximity of the load demand centre and availability of fuel sources Others In addition to above, we propose other recommendations for successfulness electricity sector restructuring. These include: Although reducing costs of PLN and decreasing wholesale price for PLN are prime agendas, at the same time it is critical to adhere PLN s purchasing wholesale power agreement with IPPs. Abreast of rationalization of IPP, cost down of PLN and electric demand procurement for PLN, that are closely connected each other, should be implemented at the same time. PLN requires proceeding its own restructuring and re-organization of electricity sector reform throughout Indonesia in relation of IPP rationalization. And also, PLN should scrap non-competitive assets, and invest for rationalization of assets, which ensure to improve competitiveness and network reliability. It is necessary to separate functionally into five generation companies with an equally balanced asset among five companies, in reorganization of PLN. The electricity distributing and dispatching companies, unbundling from PLN should, as a single buyer, succeed to the contracted obligations of PLN in purchasing wholesale electricity from IPPs. To bolster purchasing commitments of IPP s wholesale electricity; the regional oligopoly of the electricity distribution sector should be maintained in a process of liberalization, It is necessary for rationalization of generation sector and for decreasing costs to respond smoothly by reviewing fuel subsidy for power fuel, particularly petroleum products, and also taxation policy of power fuel including tax reduction on natural gas. The recommendations above are mainly for restructuring the electricity sector in general. However, some internal reform measures have to be performed to revitalize the

14 organization of PLN. These internal measures must be conducted concurrently with all the measures above to comprehensively and integrally empower the electricity sector. V. SUMMARY AND CONCLUSION Indonesia is restructuring its power sector by launching power sector policy initiatives and the Electricity Law 20/2002. With the Law, the State Electricity Company s monopoly is limited and supply is unbundled into a number of different businesses. The current market is a vertical-hierarchical monopolistic (SBSS), with buyers have the access to buy power from MV/HV grids, but only through a holding company. Electricity tariff is strictly regulated. To achieve the final goal of restructuring, much more efforts have to be paid with, major focus on generating, supervisory, regulatory mechanism, and on retails side. We analyze and recommend some actions regarding preparation for competition, tariff rationalization, and other issues for restructuring the sectors and the State Electricity Company. REFRENCES Dikun, S. (2003). Infrastruktur Indonesia (Indonesian Infrastructure). Jakarta: Bappenas Diretorate General of Electricty & Energy Utilization / DGEEU (2004). Tarif Dasar Listrik Tahun 2003 (Electricity Tariff 2003). DGEEU. (2003). Rencana Umum Ketenagalistrikan Nasional (General Plan of National Electricity) DGEEU. (2004). Statistik Ketenagalistrikan (Statistic of Electricity) Ministry of Mines and Energy, Indonesia. (1998). Power Sector Restructuring Policy. Mangkusubroto, K. (1998). Keharusan Perbaikan Tarif Untuk Menjamin Kelangsungan Kecukupan Tenaga Listrik (The necessity to increase tariff to sustainable electricity services). Jakarta: PT. PLN (Persero). Moechtar, M. (2000). Restructuring for the better. The Jakarta Post, January 5-6, PT PLN. (2004). Rencana Penyediaan Tenaga Listrik : Jawa-Madura-Bali (Electricity Supply Plan : Jawa, Madura, Bali). PT PLN. (2004). Rencana Penyediaan Tenaga Listrik : Luar Jawa-Madura-Bali (Electricity Supply Plan : Outer Islands) Situmeang, H., et. al. (2003). Power restructuring in Indonesia. Manila: World Energy Council Meeting. World Energy Council. (2001). Electricity Market Design and Creation in Asia Pacific.