PLN in dispute over coal delivery from Kideco

By Er Audy Zandri

State electricity company PT Perusahaan Listrik Negara (PLN) recently stated they are in dispute with PT Kideco Jaya Agung over its coal delivery to PT Paiton Energy's power plants 7 and 8 in East Java.

"There is a dwindling situation where Kideco asked for additional US$1.5 for the delivery of coal per ton to Paiton 7/8, from the previous tariff of US$10 per ton to US$11.5 per ton," Head of Coal Division of PLN Helmi Najamuddin said to Petromindo.com recently, adding that the increased rate would cost PLN additional US$1.725 million worth of investment per annum.

Helmi said that as an independent power producer, Paiton sold its electricity to PLN, which in turn pays the coal used to fuel the power plants directly to coal producers, Kideco and Adaro, in a pass-through mechanism.

Kideco has signed coal supply agreements to provide 1 million tons of coal per annum to Paiton 3 power plant in a long term contract between 2012-2016 with 15 percent additional tonnage option. The company has also signed similar agreement to provide 1 million tons of coal per annum to Paiton 7 and 8 power plants with 10 percent additional tonnage option in five yearly contract that is renewable annually. Both agreements were made on CIF basis, in which Kideco will also be responsible for the delivery of coal from its plant to Paiton's port in East Java, hiring Singapore based Orchard Maritime Services (OMS) to do the job.

"The cost of coal delivery to Payton 7 and 8 has gone up over the years, from around US$9 per ton. What bothers me is that, while their long term contract's delivery cost is agreed at US$10 per ton until 2016, they insisted for an increased rate and could not provide the cost structure for the additional US$1.5 for Paiton 7 and 8, which conveys the same distance as the delivery they make for Paiton 3," he said, adding that PLN has provided the US$10 per ton delivery cost structure.

Kideco Senior Marketing Manager in charge of domestic market Harry Trimulyadi clarified the matter to Petromindo.com, as follows

"PLN is one of our biggest customers, and we highly respect them as our client. But the case is really not that simple. For one thing, the agreed US$10 delivery rate for Paiton 3, which is fixed for five years between 2012 and 2016, was decided in 2009, which really was a good deal for PLN, because we asked OMS and they agreed with that rate at that time. But freight rate continues to increase and today's freight rate is significantly higher than those in 2009. Our delivery for Paiton 9, for example, is now paid at US$13 per ton, which conveys the same distance. If we compared the case with Adaro, which has some of their contractual agreements for freight rate decided at US$10 per ton, they conveys much shorter distance to Paiton than us. And it is not necessarily correct that we asked for additional US$1.5, as we were paid US$11.5 for Paiton 3 delivery in 2012," he said.

Harry said that PLN's US$10 per ton delivery cost structure, which is calculated based on if the delivery is done by its subsidiary PT Pelayaran Bahtera Adhiguna, is not necessarily suitable to be applied to different companies. "Because according to our calculation and research, US$11.5 is considered low to convey the distance between our site in East Kalimantan to Paiton, which in today's market, will not cut it," he said.

Both parties have also discussed the possibility of changing the contract into FOB basis, with PLN's subsidiary PBA to handle the coal delivery. Helmi said Paiton declined the idea, stating they prefer CIF.

And Harry confirmed, stated that the company did offer to change of contract from CIF to FOB. But according to Harry, PLN propose to have the contract in CIF with Bahtera Adhiguna handling the coal delivery, "which is unfair because we will be the one responsible if something is to happen with the delivery. In addition OMS also has contract with Paiton since the latter's establishment where they are in charge of coal delivery and being the port manager for Paiton's port in East Java," he said, adding that Paiton probably declined the idea because they are reluctant to change logistic provider. "As they are very satisfied with OMS' performance, as so far OMS has always been able to complete all delivery with excellent track records. In addition, their investment on the project has been massive, including their commitment to deploy dedicated self-propelled barges this July," he said.

While Helmi pointed out that Kideco has always declined to have a meeting with OMS, to spread down the cost structure, Harry believes that to have OMS attending the meeting would seem improper. "OMS' contract is with us, and in our opinion, it would be improper to invite them to a meeting with our buyer," he said, adding that such condition is only justifiable if OMS is Kideco's direct subsidiary or if OMS' contract is with PLN, which is neither.

"It is necessary to note that we are honoring the contract for Paiton 3, despite the agreed sub-standard freight rate. What we're asking from PLN now is to honor the contract for Paiton 7 and 8, which has provision for renewal each year, so we ask them to consider the freight rate at today's market. We will continue to pursue negotiations with PLN until all parties come up with an agreement, which if at the end of the day there's still no consensus, will resolve to inviting an independent third party expert to help solving the issues, as stated within the coal supply agreement," he concluded.

Editing by Adianto P. Simamora