22 December, 2016
On 14 December 2016, the Constitutional Court of the Republic of Indonesia (Court) issued its decision No. 111/PUU-XIII/2015 (2016 Decision) which has again considered the constitutionality of certain provisions of Law No. 30 of 2009 on Electricity (Electricity Law) that deals with Indonesia's electricity regulatory framework, and in particular, the constitutionality of private sector involvement in the provision of electricity to the Indonesian public. The constitutionality of the Electricity Law has been dealt with in a number of cases brought before the Court over recent years.
Summary
The 2016 Decision has declared, among other things, that the provisions of the Electricity Law which relate to the recognition that:
- the electricity business can be carried out separately through its different functional levels of generation, transmission and distribution; and
- private sector entities can engage in the business of supplying power to the Indonesian public,
- are "conditionally unconstitutional".
A declaration of these provisions being "conditionally unconstitutional" understandably may give rise to concerns in the private sector, however on a closer examination of the Court judgment, it becomes clear that the Court's position is that provided those provisions of the Electricity Law are implemented in a way where the State retains control over the relevant activities, then those activities do not breach the Indonesian Constitution and remain fully valid and effective. In this respect, the recent news headlines could as accurately have read "Constitutional Court declares private sector participation in power business as conditionally constitutional".
The basis for the Court's requirement for State control of the power sector derives from provisions in the 1945 Indonesian Constitution which require that sectors which are important for the country and affect the lives of the people shall be controlled by the State.
A traditional Independent Power Producer (IPP) project has substantial elements of State control in it:
- the project is awarded by PLN under regulatory frameworks put in place by Government;
- the IPP can only operate if it receives an electricity generation license granted by the relevant level of Government; and
- the tariff at which the IPP is permitted to sell is either approved by the Government, or determined pursuant to tariff regimes (e.g. feed in tariffs) set by Government regulations.
Accordingly in our view, the 2016 Decision does little to change the ability of private developers to engage in the power business in Indonesia. If the Government were to ever attempt to fully liberalise the Indonesian power market (e.g. allow private companies to set their own prices to PLN or consumers without approval from Government), then there would be a strong case to be made to say that the element of State control has been eroded, and such liberalization reforms would become unconstitutional. However there are no signs from Government that they wish to again proceed down this path of market liberalization.
The 2016 Decision
In the 2016 Decision, the Court declared that:
- Article 10 Paragraph (2) of the Electricity Law, which states:
- "Electricity supply business for public interest as referred in paragraph (1) may be conducted in an integrated manner."
- is conditionally unconstitutional and shall have no binding power if it is construed to allow electricity supply businesses to be run on a unbundled basis where there is no State control over the relevant unbundled services; and
- Article 11 Paragraph (1) of the Electricity Law, which states:
"Electricity supply business for public interest as referred in Article 10 Paragraph (1) shall be conducted by state-owned entities, region-owned entities, private entities, cooperatives, and self-reliant communities engaged in the field of electricity supply"
is conditionally unconstitutional and shall have no binding power if it is construed to mean that the principle of "controlled by the State" is not a requirement applying to the participation of these stated entities (i.e. including private entities) in the electricity supply business.
What does "conditionally unconstitutional" mean?
When the Court was first established in 2003, its intended remit was clear – if there were provisions of any Laws which conflicted with the 1945 Indonesian Constitution, those provision should be annulled. If the provisions did not conflict with the Indonesian Constitution, those provisions could remain in effect. There was never any intent on the part of the Indonesian Parliament for the Court to effectively re-write any laws, or create new law. This simple mandate was followed by the Court and its sitting judges from the inception of the Court in 2003 until 2008, when the Court formally introduced the conditionally constitutional doctrine as part of the Court's ruling, effectively creating a new legal norm by stating that a statute's provision will remain valid and in compliance with the 1945 Indonesian Constitution to the extent that it is read in accordance with the Court's official interpretation.
The Indonesian House of Representatives (DPR) tried to block the Court’s "innovation" in 2011 by amending the laws creating the Court, to make it clear in the Court's founding law itself that the Court's only remit was to declare a law (or part thereof) in conflict with the Constitution (and therefore annul those provisions) or not, and expressly prohibited the Court from in effect adopting this "conditionally constitutional" doctrine.
Ironically, within 3 months after these changes were made by the DPR in 2011, the Court reviewed the constitutionality of these amendments and declared them unconstitutional, thereby restoring the Court's freedom to continue to apply this "conditionally constitutional" doctrine in its future decisions.
It is not clear whether the use of the doctrine is constitutionally valid. However as no rights of appeal exist for the Court's decisions, it is a doctrine that is here to stay unless and until the Court determines otherwise. It is important to note though that the Court does not have any enforcement power under its founding law and in practice, some of the decisions where the doctrine has being used did not yield the intended effect, simply because the affected branches of the Government (legislative, executive, and judicial) ignored the rulings or created other rulings or regulations which were not in line with the Court's set of conditions. Consequently, to actually give the Court’s "conditionally constitutional" judgment some teeth, interested parties would need to make a new application to the Court to declare that the relevant provision unconstitutional because it did not meet the conditions previously set by the Court.
What is the impact on the relevant Electricity Law provisions of being declared "conditionally unconstitutional"?
As mentioned above, the Court's decision was in essence that the relevant provisions of the Electricity Law were unconstitutional if they were being implemented in a manner that did not reflect the State having control over the power business.
Accordingly, because the finding was based on conditionality, there is no immediate impact on the legality of these provisions of the Electricity Law. The Court is merely flagging that if the implementation of these provisions is done on a basis where the State does not have control over the activities, then the conditionality embedded in the Court's finding would be triggered, and interested parties would be free to again make a new application to the Court to seek a decision that the provisions are in fact unconstitutional.
A similar example occurred in the case of Law No. 7 of 2004 on Water. In 2005, the law was deemed conditionally constitutional if implemented a certain way, and then following a fresh case brought in 2015, the Court declared the law to be fully unconstitutional, arguing, among other reasons, that the Government failed to implement the reasoning stipulated by the Court in its 2005 decision (i.e. the Government failed to honour the "conditionality" elements of the 2005 decision).
So in summary, there are no changes to the legal effect of the Electricity Law, however the Court has clearly sent a signal that if the State does not exercise control over these electricity supply business activities, it is open for affected parties to again come back to the Court and seek a declaration that the relevant provisions are (unconditionally) unconstitutional.
What does "controlled by the State" mean?
The Court's recent decision affirms that private sector participation in the power supply business is constitutional as long as it is controlled by the State. So this begs the question: what does "controlled by the State" mean?
The key provisions of the Electricity Law allowing private sector involvement in the power business have already previously been reviewed by the Court in 2009 in great detail, and the Court declared at that time that those provisions were constitutional. The Court in 2009 determined that the Government does control private sector participation in the power business because of the following factors:
- the Electricity Law itself contains a clear provision stating that the Government controls electricity supply activities in Indonesia;
- the Government acts as a regulator of electricity industry;
- the Government may engage in the business of electricity supply through state-owned entities and region-owned entities, and these entities have priority rights under the Electricity Law to supply electricity throughout Indonesia;
- the Government must assign a state-owned entity to provide electricity supply if no other entity is capable to provide the required service within an area;
- electricity tariffs and electricity network lease fees (for power wheeling) are regulated.
As such, the Court decided in 2009 that the petitioners in that case failed to show any evidence that the above relevant provisions of the Electricity Law contravenes the 1945 Indonesian Constitution, and therefore those provisions were declared constitutional and remained valid.
Whilst the Court did not, in the 2016 Decision, go into as much detail regarding "controlled by the State" as it did in 2009, the Court did expressly note that it disagreed with the notion that "controlled by State" automatically meant that private entities must be excluded from the electricity supply business, citing its 2009 decision where the Court had noted that the main purpose of the provisions allowing private sector investment is to ensure that Indonesian citizens would be able to have access to electricity.
Even more controversially perhaps, the Court also, in its 2016 Decision, cites an earlier 2004 decision on the now-revoked 2002 Electricity Law (see our earlier Client Alert on this 2004 decision here), where it had gone further to state that the "controlled by State" principle does not necessarily mean that privatization of State-owned companies engaged in the power business should be wholly rejected. The Court noted that privatization is permitted as long as it does not eliminate the State control.
Have the "State control" mechanisms in the electricity sector changed since the Court's reasoning in 2009?
By and large, the regulatory features relied upon by the Court in 2009 to come to a conclusion that the State remained in control of private sector participation in the power business remain features in today's regulatory regime. Accordingly, we are of the view that if a further challenge to the Electricity Law is made seeking to argue that the "conditionality" elements of the 2016 Decision are not being met – i.e. there is insufficient State control over private sector participation, the Court would rely on the same reasoning it did in 2009 and determine that in fact there was sufficient State control over private sector investment in the power business.
Whilst there have been regulatory changes since 2009, the vast majority of these continue to respect the requirement for State control. For example, the recent wheeling regulations (allowing a power generator in one region to deliver its power to a different location by wheeling it through a transmission network owned by a third party) still require Government approval of the wheeling charges.
The only recent reform which may start to give rise to questions over sufficiency of State control are the provisions of Minister of Energy and Mineral Resources Regulation No 3/2015 (MEMR Reg 3/2015), which provide for PLN to enter into power purchase agreements with generators (whether State-owned or private owned) at tariffs which do not need to be approved by the Government (provided those tariffs fall below a specified ceiling tariffs set by Government in that regulation). Accordingly, there may be an argument to say that by the Government allowing PLN and the generator to agree on a tariff without seeking approval, the State has effectively ceded some control to PLN. However there are also strong arguments for asserting that MEMR Reg 3/2015 does not breach the State control requirements, namely:
By setting a maximum price ceiling, the Government is discharging its duties of ensuring that the public are protected from high power prices, and has thereby exercise the necessary control over the tariff setting.
The Court in its 2009 decision relied on the fact that State-owned companies (such as PLN) are themselves engaged in the power supply business, and this fact alone was an indicator of State control. Accordingly the Court has implicitly treated a State-owned company (such as PLN) as a proxy for "the State". Applying the same reasoning, giving PLN the ability to reach agreement on tariffs below the ceilings set in MEMR Reg 3/2015 is the same as "the State" reaching agreement on that tariff. Therefore the requirements of State control are met.
In any event, the provisions of MEMR Reg 3/2015 have not often been used by PLN, with the majority of the IPP projects still obtaining specific Minister of Energy and Mineral Resource approval for the tariffs agreed with PLN.
Conclusion
The 2016 Decision in effect does little to change the regulatory framework permitting private sector participation in the Indonesian power sector. The 1945 Indonesian Constitution requirement for State control over Indonesia's power sector remains as strong today as it did when the Court considered the issues in detail in 2009.
In our view, the only area for concern arises where the Government seeks to embark on major market liberalizations – such as moving to a competitive generation-side power pool market as found in jurisdictions such as Australia, Singapore and the Philippines. Any attempt by the Government to allow market forces to determine prices for power without Government control will likely lead to a quick finding by the Court that its "conditionality" element has not been fulfilled, thereby resulting in the provisions being declared unconstitutional. However these sorts of market liberalization are not on the Government's agenda.
