21 December, 2016
In recent years, several keystone Indonesian laws (particularly those involving state-run sectors) have been the subject of constitutional review by the Indonesian constitutional court, occasionally resulting in unexpected industry-disruptive decisions.
On 14 December 2016, the Indonesian Constitutional Court rendered its decision in relation to the constitutional review of certain provisions of Law No. 30 of 2009 on Electricity (“the 2009 Electricity Law”). This constitutional review was brought by two employees of PT PLN (the Indonesian state-owned electricity distribution company) who are also the chairman and general secretary of the PT PLN Labour Union. Broadly speaking, the petitioners in this case appear to have been motivated by an attempt to require closer government control and supervision over (and, accordingly, to enhance the scope of PT PLN’s role in) the Indonesian electricity sector. This case is consistent with the series of similar challenges motivated by nationalistic forces opposed to private sector involvement with state-owned business which have previously been brought in relation to the Indonesian oil and gas, mining and water resources sectors.
This latest constitutional review is also similar to the 2003 constitutional review of the previous Indonesian electricity law, in which the Constitutional Court declared that electricity is an important state product and therefore must be managed by the Indonesian Government through a state owned company funded by the Indonesian Government or through partnerships with the private sector for the mutual benefit of the Indonesian people. The results of the 2003 decision led to the issuance of the 2009 Electricity Law.
Ultimately, and unlike in some of the more controversial similar challenges in other state-run sectors, the claims brought by the petitioners were largely rejected by the Constitutional Court. Nonetheless, the Constitutional Court declared that two provisions of the 2009 Electricity Law (namely, Article 10(2) and Article 11(1)) are potentially contrary to the Indonesian Constitution and not legally binding to the extent that the implementation and interpretation of these provisions results in the Indonesian Government failing to maintain control and supervision over the Indonesian electricity sector.
1. Un-integrated electricity business activities
Article 10(1) of the 2009 Electricity Law states that the electricity supply business activities for the public interest in Indonesia are: (i) power generation, (ii) power transmission, (iii) power distribution and/or (iv) power sales. Article 10(2) of the 2009 Electricity Law then further states that these different types of business activities are able to be conducted in an integrated manner.
The petitioners in this case argued that because Article 10(2) of the 2009 Electricity Law does not expressly require the relevant electricity business activities to be conducted in an integrated manner, it can then be inferred that the 2009 Electricity Law allows such business activities to be conducted in an un-integrated manner. The petitioners argued that if such un-integrated electricity business activities are permitted by the 2009 Electricity Law, then this would: (i) breach a 2003 decision of the Constitutional Court (in relation to the previous electricity law) which prohibited un-integrated electricity supply business activities; and (ii) likely result in the Indonesian Government becoming heavily dependent on the private sector and would breach the requirement of the Indonesian Constitution for the Indonesian Government to maintain control and supervision over the Indonesian electricity sector.
In its decision, the Constitutional Court partially accepted the petitioners’ application in relation to Article 10(2) of the 2009 Electricity Law. The Constitutional Court accepted that it can be inferred that the 2009 Electricity Law allows the relevant electricity business activities to be conducted in an un-integrated manner.
However, the Constitutional Court determined that, as there is no mandatory requirement for electricity business activities to be conducted in an un-integrated manner (unlike the mandatory provisions of the previous electricity law which were declared to be legally ineffective by the 2003 Constitutional Court decision), the 2009 Electricity Law is not necessarily contrary to the Indonesian Constitution. The Constitutional Court concluded that Article 10(2) of the 2009 Electricity Law will only contravene the Indonesian Constitution and be legally unenforceable to the extent that un-integrated electricity business activities are implemented in the business of electrical power supply for public purposes such as to result in the Indonesian Government reducing its control and supervision over the Indonesian electricity sector.
2. State control of electricity supply business activities
Article 11(1) of the 2009 Electricity Law states that the supply of electrical power for public purposes can be conducted by state-owned companies, regional government-owned companies, private companies, co-operatives and autonomous communities. The petitioners in this case argued that Article 11(1) of the 2009 Electricity Law (which allow parties other than state-owned companies to participate in electricity supply business activities) would result in the Indonesian Government losing control of the country’s electricity supply and is therefore contrary to the Indonesian Constitution.
In its decision, the Constitutional Court determined that the participation of parties other than state-owned companies in electricity supply business activities is not contrary to the Indonesian Constitution, provided that the Indonesian Government retains supervision and control over such business activities. However, the Constitutional Court did accept that Article 11(1) of the 2009 Electricity Law does not expressly state that parties other than state-owned companies who participate in electricity supply business activities are subject to the control and supervision of the Indonesian Government. As a result, the Constitutional Court concluded that Article 11(1) of the 2009 Electricity Law will only contravene the Indonesian Constitution and be legally unenforceable to the extent that the implementation and interpretation of Article 11(1) results in parties other than state-owned companies who participate in electricity supply business activities not being under the control and supervision of the Indonesian Government. The Constitutional Court further clarified that a party will be deemed to be under the control and supervision of the Indonesian Government if they are subject to the Indonesian Government’s overriding authority to set policy and administrative requirements, issue regulations, grant licenses and supervise the Indonesian electricity industry.
3. Practical implications for the Indonesian electricity sector
The immediate response from the Ministry of Energy and Mineral Resources (“MEMR”) has been that the decision of the Constitutional Court will not impede the Indonesian Government’s 35,000 MW electricity development program and that the Indonesian electricity sector remains open to private (and foreign) investment.
We agree that the Constitutional Court decision, while raising some uncertainty in relation to the supervision and control that the Indonesian Government may seek to impose in the future over the Indonesian electricity sector, does not prohibit the involvement of private or foreign investors (including independent power producers) from conducting electricity business activities in Indonesia. Of course (and consistent with the existing regulatory framework), these private investors will remain subject to the Indonesian Government’s overriding authority to set policy and administrative requirements, issue regulations, grant licenses and supervise the Indonesian electricity industry.
In fact, in our view, the Constitutional Court decision brings some additional certainty to the Indonesian electricity sector. In particular, we note that the Constitutional Court unconditionally dismissed challenges to various other provisions of the 2009 Electricity Law, including in relation to the ability of private parties to conduct electricity supporting services (in this case, the operation and maintenance of the electricity installations) and the ability of the electricity sale price to be determined based on the healthy business principle (which is still be subject to the approval from the Indonesian Government) and tariff disparities in regional areas. By upholding these key provisions of the 2009 Electricity Law, the Constitutional Court has reinforced important elements of the existing Indonesian electricity regulatory regime.
In order to address the concerns raised by the Constitutional Court, we understand that MEMR intends to issue or amend the implementing regulations under the 2009 Electricity Law to further clarify the Indonesian Government’s policy of maintaining government control and supervision over the Indonesian electricity sector. We expect these implementing regulations will be issued during the course of 2017.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
david.dawborn@hbtlaw.com
