Three groups of applicants through three separated submissions petitioned the Constitutional Court (“CC”) to invalidate Law number 20 Year 2002 on Electricity (the “Law”) for the reason of breaching their constitutional rights. The applicants requested the CC to invalidate the law as it deemed to violate articles 28 and 33 of the Constitution.

The applicants are of the opinion that the Law has breached their constitutional right as after the enforcement of the Law, electricity-- a vital commodity sector pivotal to the lives of the people—will no longer be controlled by the state.

Prior to examining the substance, the CC decided the legal standing of the applicant and determined whether they suffer legal injuries caused by a breach of their constitutional right. The CC then declared that the existence of legal injuries may not always be tangible but can also be potential. The CC considered that enforcement of the Law may potentially breach the people’s constitutional rights in the future. With such judgment the CC declared the applicant to sustain their legal standing.

Some of the applicant also submitted a claim for formal judicial review, i.e. a review on the procedure on the enactment of the Law. The Applicant claimed that the enactment of the law is not consistent with Law Number 4 Year 1999 Concerning the Structure and Position of the People’s Consultative Assembly, House of Representative and Regional House of Representative as (i) the Law was enacted in a plenary session which were not attended by more than one-half of DPR’s member as required by DPR’s session procedure and (ii) the Law was enacted unanimously, this is deemed to be inconsistent with DPR’s session’s procedure as there’s still disagreement among the house members concerning the Law.

During the trial proceeding, the DPR denied the allegation that the Law was enacted in breach of DPR’s procedure. Since the applicants were not able to provide arguments and evidences to confront DPR’s reply, the CC decided to reject the claim that the Law was enacted in a manner which violated DPR’s procedure.

The CC then moved to examine material judicial review submitted by the applicants. The CC reiterated article 33 of the Constitution which authorized the State to control vital production sectors pivotal to the lives of the people. According to the CC, “controlled by the state” means that (i) the State itself manages and operates the vital production sector and at the same time prohibits participation from the private sector and (ii) for sectors who is already operated by private persons but is then deemed to be vital and pivotal to the lives of the people, the State may expropriate the production elements and take over the operation of the production sector. “Control by the state” is meant to ensure three elements, namely (i) adequate availability, (ii) impartial distribution and (iii) reasonable price. The CC reminds that such economical system has become the ideology of the state, as embodied under Article 33(4) of the Constitution.

In adjudicating the material judicial review, the CC had taken into account expert opinions. The State Minister for State Enterprises defines “State Control” as a role by the state as regulator, facilitator and operator which dynamically will reduce state’s role only as regulator and facilitator of vital production sectors. Meanwhile, Constitutional expert Prof. Harun al Rasyid defined “State Control” as “owned by the state”.

In the CC’s interpretation, “controlled by the state” cannot be interpreted simply as state’s private participation in the vital production sector as “control by the state” through sole private participation will not be adequate to ensure development of public prosperity and ascertainment of social justice. The phrase “controlled by the state” cannot be reduced to only the state’s function to regulate vital sectors, as the function “to regulate” is inherent within the state itself. “Controlled by the state” must include the state’s role in (i) determining policies, (ii) performing managerial functions, (iii) supervision, (iv) exploitation and (v) issuing regulation. The CC confirmed that the concept of private participation (shares participation) cannot stand as an alternative toward the concept of state regulation. It is allowed, according to the CC, that the private participation to be performed in any way as long as it does not prevent the state to exercise its authority to control the vital sectors. CC considered that Article 33 of the Constitution does not restrict privatization as long as the privatization does not impair the authority of the state to exercise its right to control. Article 33 of the Constitution is also consistent with the idea of fair competition among business persons so far as such competition does not hamper the state to exercise its right to regulates, manages, exploits and supervises vital production sectors pivotal to the lives of the people.

The CC then moved to examine whether the Law is beneficial to the State. In examining the Law, the CC reiterated government representative’s opinions that after enactment of the Law, electricity market will be administered by Bapetal which employ market rules to business people. The CC also reiterated government’s reply in that in weighing whether the Law is beneficial or not, the CC must examine the elements of (i) efficiency, which will be conducted through unbundling system (ii) tax contribution, PLN (state electricity company) has suffered losses for many years and (iii) benefits to the people, access through the PLN has proven to be difficult.

The CC also included expert opinions in dissent of the Government’s reply. The experts considered that (i) electricity is a public utility production that cannot be transferred to private sectors (ii) the role of the government in determining tariff will be illogical as the cost recovery elements from the investors are not open to public (iii) liberalized electricity sector will only affect Java-Madura and Bali, as the market has been established for 90 years. Private sectors’ mind-set is to maximize profit, it is thus impossible to expect private sector to carry out cross-subsidy to other regions.

Primary focus of the CC’s adjudication is the concept of “unbundling” of the electricity production, as laid down under Article 8 of the Law. The unbundling system divides electricity production into separated sectors: (i) attainment of energy, (ii) transmission,  (iii) distribution, (iv) wholesale, (v) sale agents, (vi) market manager and (vii) electricity system manager. The Law acknowledges that transmission and distribution sectors will not be subject to market competition.

The CC shares similar opinion with the applicants that the “unbundling” system will reduce the state authority to manage, regulate, exploit and supervise electricity sector, and is therefore inconsistent with the Constitution. As the unbundling system becomes the heart of the Law and the Law will become meaningless without the Article, the CC decides to invalidate the Law in its entirety. The CC also held that its decision will have a prospective effect, and that all contracts signed based on the Law remained enforced until its validity expires.

The CC’s decision has been criticized by many parties, as well as gaining recognition and applause from the other. Apart from its economical and political tendencies, the decision is quite clear in elaborating and defining the “Controlled by the state” phrase laid down under article 33 of the constitution. Article 33 has been seen as a constitutional guardian of Indonesia’s economic system. Some also sees it as a stumbling block as it hampers the spread of neo liberalism ideology in Indonesia. The CC however, failed to explain and prove how the “unbundling” system would in any way prevent the “controlled by the state”. Considerations made by the CC in attempting to prove that the unbundling system impairs the “controlled by the state” requirement of the constitution are based mainly on presumptions. The Jakarta Post’ editorial (Dec, 17^th ) picture the CC’s decision as a “failure in seeing the other side of the coin”.

From January 2002 to December 2003, the government raised electricity tariffs by 6% every quarter to reduce subsidies and help fund the state budget deficit. The price increases were also intended to help PLN pay for higher fuel costs. Energy and Natural Resources Minister Purnomo Yusgiantoro said the government would need $30 billion to fund infrastructure development in the electricity sector until 2010 and the government is only capable in funding 40% of the amount. The government has planned to obtain the other 60% from multilateral and private agencies. The money will be used to finance power plants, as well as electricity transmission and distribution projects.

The government is currently preparing a new draft law with ‘softer approach to liberalization’. (mma)