Under MK No. 39, the Constitutional Court of Indonesia, among others, has declared the phrase ‘may’ under Article 10 paragraph (2) of Article 42 number 6 of Law Number 6 of 2023 concerning the Stipulation of Government Regulation in Lieu of Law Number 2 of 2022 concerning the Job Creation Law (Job Creation Law) to be unconstitutional and without binding force. Following MK No. 39, to date, the Government has not yet issued a response to this ruling. The effect of finding the word ‘may’ to be unconstitutional is that the unbundling of generation, transmission, distribution, and/or sale of electricity is, if this ruling is followed, potentially no longer possible in Indonesia.
This situation is reminiscent of the electricity regime under the revoked Law No. 15 of 1985 on Electricity (1985 Electricity Law), which only allowed bundled generation, transmission, distribution, and/or sale of electricity for the public interest. However, if needed, unbundled generation of electricity was permitted to support capacity demand under the 1985 Electricity Law.
How does that impact you?
The consequence of MK No. 39 could significantly impact the electricity sector, contingent upon any forthcoming regulation by the Government and/or the House of Representatives in response to MK No. 39. Historically, the Government (and the House of Representatives) has addressed rulings from MK either through the President issuing a Government Regulation in lieu of Law (such as in the case of the Job Creation Law) or the House of Representatives (and the Government) enacting a new Law (such as in the case of Law No. 30 of 2009 on Electricity or 2009 Electricity Law).
As indicated by MK No. 39, there is a restriction on unbundled electricity business activities, including generation.
Consequently:
- For any existing project, the legal implications of MK No. 39 to unbundled generation electricity activities is uncertain (including whether MK No.39 applies retroactively); and
- For any future project, due to the uncertainty surrounding the impact of MK No. 39 on investments in the IPP sector, we foresee that investors and financiers may likely adopt a cautious ‘wait and see’ approach.
Considering the broad legal implications of MK No. 39, we have been informally discussing this with relevant stakeholders and understand that the Government is intensively discussing the next course of action to respond to the decision from the Constitutional Court.
Description of the constitutional updates
MK No. 39 considers that the ‘unbundling' of generation, transmission, distribution and/or sale of electricity is unconstitutional by ruling the phrase ‘may’ in Article 10 paragraph (2) of Article 42 number 6 of the Job Creation Law to be contrary to the 1945 Constitution and therefore without binding force.
Article 10
(1) The supply of electricity for public interests as referred to in Article 9 letter a covers the (following) types of business:
a. Generation of electricity;
b. Transmission of electricity;
c. Distribution of electricity; and/or
d. Sale of electricity.
(2) The supply of electricity for public interests as referred to in paragraph (1) may be conducted in an integrated manner.
Pasal 10
(1) Usaha penyediaan tenaga listrik untuk kepentingan umum sebagaimana dimaksud dalam Pasal 9 huruf a meliputi jenis usaha:
a. Pembangkitan tenaga listrik;
b. Transmisi tenaga listrik;
c. Distribusi tenaga listrik; dan/atau
d. Penjualan tenaga listrik.
(2) Usaha penyediaan tenaga listrik untuk kepentingan umum sebagaimana dimaksud pada ayat (1) dapat dilakukan secara terintegrasi.
Precedents rulings
MK No. 39 affirms previous rulings that have ruled in favor of restrictions on ‘unbundled’ electricity activities, including:
- MK ruling No. 001-021-022/PUU-I/2003 (MK No. 001): This ruling considers that “Article 16 of Law 20/2002 imposes unbundling of electricity business by different business actors … unbundling in the context of the restructuring of the electricity business is not beneficial, not efficient, and becomes a heavy burden for the state,” thus viewing the unbundling principle as contrary to Article 33 of the 1945 Constitution. MK No. 001 annulled Law No. 20 of 2002 on Electricity.
- MK ruling No. 111/PUU-XIII/2015 (MK No. 111): This ruling considers that “Article 10 paragraph (2) of the Electricity Law … does not contain such principle as there is no affirmation that electricity supply business for public interest which includes the business of electricity generation, electricity transmission, electricity distribution and electricity sale must be done by a separate business entity,” which deems that if the unbundling principle is applied, it is therefore contrary to the 1945 Constitution. MK No. 111 ruled that Article 10(2) of the 2009 Electricity Law is conditionally unconstitutional if interpreted to justify unbundling practices that diminish state control.
The Constitutional Court's consistency and interpretation
In MK No. 39, MK maintains that if the unbundling principle diminishes state control, it is unconstitutional. Although not explicitly stated, MK appears to have deemed the phrase ‘may’ in the 2009 Electricity Law unconstitutional following the ruling of MK No. 111, which was then ‘reactivated’ by the Job Creation Law. The Constitutional Court considers that the Job Creation Law creates room for interpretation that enables the ‘unbundling’ practice. Consequently, the Constitutional Court has found that the phrase ‘may’ in Article 10 paragraph (2) of Article 42 number 6 of the Job Creation Law is unconstitutional.
This would mean that, given MK No. 39, Article 10 paragraph (2) of Article 42 number 6 of the Job Creation Law would now be read as follows:
“Electricity business for public interest as referred to in paragraph (1) is conducted in an integrated manner.”
Or, in Bahasa Indonesia:
“Usaha penyediaan tenaga listrik untuk kepentingan umum sebagaimana dimaksud pada ayat (1) dilakukan secara terintegrasi.”
Regardless, as MK No. 39 does not give a ruling on Article 10 paragraph (1) of Article 42 number 6 of the Job Creation Law, there remains room to argue that implementation of an ‘unbundled’ electricity activity is still possible given the wording ‘and/or’ therein with respect to the four activities of the electricity business.
Additionally, Article 10 paragraph (2) of Article 42 number 6 of the Job Creation Law states ‘in an integrated manner’, but does not further define the term ‘integrated’ nor specifically refer to ‘integrated IUPTLU’. Therefore, Article 10 paragraph (2), when read together with Article 10 paragraph (1), could also be interpreted such that the ruling in MK No. 39 does not necessarily mean restriction on issuance of non-integrated IUPTLU.
We understand that the Government and the relevant ministries are having discussions following MK No. 39. Therefore, it remains to be seen how the Government would interpret MK No. 39 and implement this ruling, specifically on the unbundling principle.
