INDONESIAN CONSTITUTIONAL COURT UPHOLDS KEY PRINCIPLES OF THE 2009 ELECTRICITY LAW

INDONESIAN CONSTITUTIONAL COURT UPHOLDS KEY PRINCIPLES OF THE 2009
ELECTRICITY LAW

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

2. State control of electricity supply business activities

3. Practical implications for 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.

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Link to Original Article:
http://sites.herbertsmithfreehills.vuturevx.com/107/13125/december-2016/indo
nesian-constitutional-court-upholds-key-principles-of-the-2009-electricity-l
aw.asp?sid=e705e0de-9acc-4eed-9da1-3210f66e26ea

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com