On 8 September 2009 the Indonesian Parliament suddenly moved to approve a new Electricity Bill, which will become the new Electricity Law upon signature by the President. This is a brief note of headline points from the Bill. We will be circulating further guidance as we digest the detail of the law but would be very happy deal with any specific queries you have. Contact details are at the end of the piece.

Background

The new law will replace the previous Electricity Law, Law No.15 of 1985. A previous attempt to overhaul the sector foundered when a 2002 law on the subject (Law No. 20 of 2002) was annulled through a challenge to the Constitutional Court on vague grounds to do with insufficient recognition of public interest.

The draft bill had been in existence since 2006. There had been little (if any) recent comment about the bill and so its approval came somewhat unexpectedly. The end of the current Government term next month and likely replacement of the Energy Minister may have concentrated minds.

Its enactment can also be seen as a further reflection of the effect of SBY’s resounding re-election as President in July as well as his increased Parliamentary base. Notably, the World Bank and IFC annual 2010 “Doing Business Report” recently placed Indonesia as the top reformer in East Asia and Pacific region between the 2009 and 2010 report. The trend looks set to continue.

The basics of new law

Reaction should be positive. The crucial principle – the ability of parties other than Indonesia's State Electricity Company, PLN, including private parties, to operate in all levels of the electricity industry – is present. Private parties can participate pursuant to a system of business permits. The dismantling of PLN's long standing monopoly in the power sector is an important step and will, no doubt, meet resistance from nationalist groups.

As always in Indonesia, the new law will take some time to bed down and start to take effect on the ground. Implementing regulations will be important. The new law also proposes to bring the regional and local governments into the regulatory structure for the power sector. This is a new approach and will take some practical guidelines to make it work.

The previous system cast PLN as monopoly purchaser, distributor and seller of power. Privately backed power generation projects were, subject to limited exceptions, only possible via a complicated tender process with PLN. Furthermore, the exclusive off-taker had to be PLN bringing a range of major issues, not least credit and covenant risk, into play. The Government, despite its ‘crash programmes’ for new generating capacity, had been unable in practice to address this to any real extent.

PLN’s stranglehold appears to have an expiry date, although the Bill still provides for PLN to hold "first priority" for electricity supply to the public. An entirely different approach to projects in this sector may become possible now. Envisage, for example, an independent power project supported by local government in an industrial (or industrialising area) with local industrial users or trading entities as off-takers, with surplus supply available to local population at improved prices (local Governments will now have a role in price setting in their areas).

The issue of access to the grid is likely to loom for some time. However, again it is hoped that the principle of open access and access charges can take root and provide flexibility in this area over time. The situation may be loosely compared to the move away from Pertamina's comparable previous monopoly in downstream oil and gas activities in Indonesia. It has taken several years from the introduction of the liberalised new Oil and Gas Law in 2001 to see traction for private participation and there are still areas where Pertamina’s incumbency is a difficulty in practice but very real change is now happening.

The Bill also introduces for the first time a clear legal basis for cross-border international electricity trading. Such electricity supply must not harm Indonesia's national interest and economic development.

Conclusion

The key message overall is one of increased flexibility: flexibility to consider different structures with different parties to achieve something commercially viable and bankable that may not necessarily be constrained by the ‘PLN factor’. The need for improvement in the electricity industry and supply to Indonesia's growing economy is well recognized and must be a priority for the Government. Economic and social development, not to mention the state budget, are all damaged by the costs and inefficiencies in the current situation. The hope is that potential participants ready to engage with the new system and explore the new opportunities will find Governments at all levels eager to make this new regime work, albeit there will be issues to work through in the detail and to give practical meaning to the new reformed legislative principles.