BLACKOUTS DARKEN DOMINICAN PROSPECTS

UNCLAS SECTION 01 OF 04 SANTO DOMINGO 005391 SIPDIS SENSITIVE DEPARTMENT FOR WHA/CAR, WHA/EPSC, EB/ESC/IEC AND EB/IFD/OMA; DEPT PASS DOE E.O. 12958: N/A TAGS: DR ECON EFIN ENRG PGOV SUBJECT: BLACKOUTS DARKEN DOMINICAN PROSPECTS ¶1. (SBU) IN THE FACE OF ELECTRICITY BLACKOUTS AND GROWING PUBLIC DISSATISFACTION, ON OCTOBER 1 THE GODR TOOK CONTROL OF TWO OF THE COUNTRY'S THREE ELECTRICITY DISTRIBUTION COMPANIES. THE DEAL SIGNED SEPTEMBER 10 CALLS FOR THE GODR TO REPURCHASE SPANISH FIRM UNION FENOSA'S FIFTY PERCENT SHARE OF EDENORTE AND EDESUR ("THE EDES") FOR AN INITIAL PAYMENT OF ROUGHLY $15 MILLION, FOLLOWED BY PAYMENT OF ABOUT $360 MILLION FINANCED OVER TWELVE YEARS. THIS COULD BRING TO A CLOSE A TENSE RELATIONSHIP BETWEEN THE GODR AND UNION FENOSA THAT REACHED A PEAK IN AUGUST. THE DEAL RAISES QUESTIONS ABOUT THE GODR'S ABILITY TO RESTORE FINANCIAL VIABILITY TO THE SECTOR OR TO MANAGE THE ACCRUING DEBT, ISSUES THAT COULD DELAY THE SECOND DISBURSEMENT OF THE GODR'S NEW STANDBY AGREEMENT WITH THE IMF AND COULD DELAY APPROVAL OF A WORLD BANK ENERGY SECTOR LOAN. END SUMMARY. -------------- BACKGROUND -------------- ¶2. (U) THE DOMINICAN REPUBLIC HAS A LONG HISTORY OF ENERGY SECTOR-RELATED PROBLEMS, DATING BACK TO THE TRUJILLO ERA. TO ADDRESS POWER SHORTAGES IN THE 1990S, THE BALAGUER GOVERNMENT INVITED INDEPENDENT POWER PRODUCERS (IPPS) TO INVEST IN THE COUNTRY, SELLING THEIR POWER UNDER LONG-TERM CONTRACTS TO THE STATE-OWNED UTILITY (CDE),WHICH ALSO HAD GENERATION FACILITIES. ¶3. (SBU) DURING THE 1990S, THE FERNANDEZ ADMINISTRATION LAUNCHED A PRIVATIZATION EFFORT, SELLING 50 PERCENT OF THE GENERATING COMPANIES (EXCEPT FOR HYDRO) AND 50 PERCENT OF THE DISTRIBUTION COMPANIES TO FOREIGN INVESTORS, SPANISH UNION FENOSA AND VIRGINIA-BASED AES. THE INVESTORS ACQUIRED MANAGEMENT CONTROL OF THE DISTRIBUTION COMPANIES WITH THEIR SHARES. UNION FENOSA REPORTEDLY ONLY RELUCTANTLY AGREED TO PARTNER WITH THE GODR IN EDENORTE IN RETURN FOR GETTING THE POTENTIALLY MORE PROFITABLE CONCESSION OF EDESUR. IN THE PRIVATIZATION, THE STATE-OWNED CDE (RE-NAMED CDEEE) MAINTAINED CONTROL OF TRANSMISSION AND ITS CONTRACTUAL COMMITMENTS TO THE INDEPENDENT PRODUCERS. THROUGHOUT THIS PERIOD, THE GODR MAINTAINED A GENERAL ELECTRICITY SUBSIDY. IN THE FACE OF MILLIONS OF DOLLARS IN ARREARS THAT THE GODR OWED THE IPPS, LAST YEAR THE GODR DETERMINED THAT IT COULD NO LONGER AFFORD THE GENERAL SUBSIDY THAT HAD GROWN TO SEVERAL MILLION USD PER MONTH. ¶4. (U) IN SEPTEMBER 2002, PRESIDENT MEJIA ANNOUNCED THAT THE GODR HAD REACHED AGREEMENT WITH THE IPPS (EXCEPT FOR NORTH CAROLINA-BASED COGENTRIX) TO RENEGOTIATE THEIR CONTRACTS AND SELL POWER DIRECTLY TO THE DISTRIBUTORS IN THE SAME MANNER AS THE PARTIALLY-GOVERNMENT-OWNED GENERATING COMPANIES. IN TURN, THE GODR WOULD COMPENSATE THE IPPS FOR GIVING UP THEIR CONTRACTS WITH CDE THROUGH NEGOTIATED PAYMENT OF "STRANDED COSTS," INTENDED TO COVER THE LOSS OF GUARANTEED PAYMENT FOR THE ORIGINAL CONTRACT TERMS. MEJIA ALSO ANNOUNCED PLANS TO ELIMINATE THE GENERAL SUBSIDY THAT HAD GROWN TO THE EQUIVALENT OF ABOUT US $15 MILLION PER MONTH (AT THE CURRENT RATE OF 19 PESOS TO THE DOLLAR; IT IS NOW 33 TO THE DOLLAR). MEJIA WANTED TO USE INSTEAD A TARGETED SUBSIDY FOR POOR NEIGHBORHOODS. THE GODR PLANNED FOR AN ANTI-FRAUD UNIT TO ENFORCE COLLECTIONS. GOVERNMENT INSTITUTIONS WERE TO BE REQUIRED TO PAY FOR ENERGY CONSUMPTION, AND THE ELECTRICITY TARIFFS WERE TO BE ADJUSTED MONTHLY UNDER AN AGREED FORMULA. AS PART OF THE AGREEMENT, THE TARIFF THAT GENERATORS CHARGED THE DISTRIBUTORS WAS PEGGED TO THE DOLLAR EXCHANGE RATE, AND THE DISTRIBUTION COMPANIES BILLED CUSTOMERS AT AN EXCHANGE RATE TWO MONTHS OLD. ¶5. (U) SINCE THEN, THE GODR HAS FINALIZED CONTRACTS WITH ONLY SOME OF THE IPPS. MOREOVER, THE GOVERNMENT CONTINUES TO SUBSIDIZE ALL CONSUMERS FOR THE FIRST 300 MW OF MONTHLY ELECTRICITY USAGE, THEREBY ABSORBING SOME OF THE TARIFF INCREASES RESULTING FROM FUEL PRICE HIKES AND/OR EXCHANGE RATE DEPRECIATION. THE GOVERNMENT ESTABLISHED A "STABILIZATION FUND" FOR THAT PURPOSE, BUT EFFORTS TO RAISE REVENUE FOR THE FUND -- SUCH AS THE RECENTLY IMPOSED FIVE-PERCENT TAX ON EXPORTS -- HAVE NOT BEEN AS SUCCESSFUL AS HOPED. -------------- THE CRISIS -------------- ¶6. (SBU) IN JULY OF THIS YEAR, THE SECTOR COULD NO LONGER SUSTAIN THE RISING FUEL COSTS, CONSUMER NON-PAYMENT, AND THE RAPIDLY DEPRECIATING PESO. ALL THREE DISTRIBUTION COMPANIES FACED SOLVENCY PROBLEMS AND HAD ACCUMULATED ARREARS IN PAYMENTS TO GENERATING COMPANIES. EDENORTE AND EDESUR'S DEBTS TO GENERATING COMPANIES HAD REPORTEDLY REACHED OVER $100 MILLION, AND THEIR ACCUMULATED LOSSES WERE MORE THAN TWICE THAT AMOUNT. PROBLEMS WITH EDENORTE WERE PARTICULARLY ACUTE, AND AS BLACKOUTS SPARKED PROTESTS IN THE NORTHERN PART OF THE COUNTRY, THE GOVERNMENT THREATENED TO INTERVENE. UNION FENOSA INDICATED THAT IT WOULD BE WILLING FOR THE GODR TO TAKE OVER EDENORTE, BUT DID NOT WANT TO GIVE UP EDESUR, WHICH COMPANY REPRESENTATIVES SAID WAS STILL PROFITABLE. THE GODR, ON THE OTHER HAND, DID NOT WANT TO SEPARATE THE TWO. MOREOVER, THE INTER-AMERICAN DEVELOPMENT BANK (IDB),HELD A REPORTED $180 MILLION-PLUS IN OUTSTANDING LOANS TO THE TWO DISTRIBUTION COMPANIES AND HAD CONTRACTUAL RIGHTS ON DETERMINING HOW TO ADDRESS THE INSOLVENCY. THE SUPERINTENDENT OF ELECTRICITY SENT THE IDB A LETTER IN AUGUST ASKING THE BANK TO INTERVENE. THE IDB LOANS WERE GUARANTEED BY THE SPANISH PARENT OF UNION FENOSA. WHEN THE IDB CHOSE NOT TO INTERVENE, MEJIA NEGOTIATED A DEAL DIRECTLY WITH UNION FENOSA TO REPURCHASE THE COMPANIES. THE GODR ANNOUNCED THE AGREEMENT ON SEPTEMBER 9, ONLY TWO DAYS BEFORE MEJIA LEFT ON A STATE VISIT TO SPAIN. -------------- THE DEAL -------------- ¶7. (SBU) ALTHOUGH THE DEAL REPORTEDLY INVOLVES 14 SEPARATE CONTRACTS, THE BASIC TERMS OF THE REPURCHASE HAVE BEEN WIDELY PUBLICIZED, AND THE GODR MADE THE INITIAL "BUY-SELL" CONTRACT AVAILABLE ON-LINE (HTTP://CDE.GOV.DO/CONT(UNDERLINE)COMPRA(UNDE RLINE)EDES.HTM). ACCORDING TO THAT PORTION OF THE CONTRACT THE GODR AGREED TO PAY $15 MILLION AT CLOSING AND PAYMENTS TOTALING $680 MILLION OVER THE NEXT 144 MONTHS. THE PAYMENT SCHEDULE INCLUDES INTEREST AND UNSPECIFIED CREDITS. THE ESTIMATED $362 MILLION NET PRESENT VALUE OF THE AGREEMENT IS SAID TO BE NEARLY TWICE THE AMOUNT OF UNION FENOSA'S INITIAL INVESTMENT. FURTHER DETAILS ARE NOT AVAILABLE. THE AGREEMENT APPARENTLY DOES NOT ADDRESS ARREARS OWED TO THE GENERATORS, WHICH EXCEED $100 MILLION. GODR OFFICIALS CLAIM THAT THE GOVERNMENT DOES NOT INCUR ADDITIONAL DEBT, SINCE THE GODR WAS RESPONSIBLE FOR HALF OF THE EDE'S LIABILITIES ANYWAY, AND THE COMPANIES WERE ALREADY ACCUMULATING LOSSES EACH MONTH. -------------- REACTION -------------- ¶8. (SBU) AS PROVIDERS SHUT DOWN THEIR OPERATIONS BECAUSE OF ARREARS DUE FROM THE EDES, POWER SHORTAGES BEGAN DURING THE MONTH OF AUGUST, WITH ROLLING BLACKOUTS ACROSS THE COUNTRY. BLACKOUTS HAVE BECOME MORE FREQUENT AND PROLONGED OVER THE PAST FEW DAYS, LEADING TO SCATTERED DEMONSTRATIONS, DISRUPTING TRAFFIC AND BUSINESSES (SEPTEL). SANTO DOMINGO, PREVIOUSLY LESS AFFECTED, HAS BEGUN TO EXPERIENCE THE EFFECTS, ESPECIALLY IN THE PERIPHERAL NEIGHBORHOODS. WITH TRAFFIC LIGHTS OUT OF COMMISSION, TRAFFIC IN THE CAPITAL HAS BECOME EVEN MORE SNARLED THAN USUAL. ACCORDING TO REPRESENTATIVE OF U.S.-OWNED COMPANY ADS, WHOSE COMPANY HAS FIFTY-PERCENT OWNERSHIP AND MANAGEMENT CONTROL OF THE THIRD DISTRIBUTION COMPANY (EDE-ESTE),WORK CREWS HAVE HAD TO LEAVE NEIGHBORHOODS IN THE EAST OF THE COUNTRY AFTER CROWDS THREW ROCKS AT THEM. THE POLITICAL OPPOSITION IS PROBABLY ENCOURAGING THIS BEHAVIOR. ¶9. (SBU) MOST LOCAL CONTACTS ARE CRITICAL OF THE GOVERNMENT'S DECISION TO REPURCHASE THE TWO DISTRIBUTION COMPANIES, BUT NO ONE HAS EXPRESSED REGRET ABOUT THE DEPARTURE OF UNION FENOSA. DOMINICANS BLAME THE SPANISH FIRM FOR MANY ELECTRICAL SECTOR PROBLEMS AND FAULT THE GOVERNMENT FOR MISMANAGING THE PRIVATIZATION. THE PRESS AND PRESIDENT MEJIA HIMSELF HAVE PUBLICLY STATED THAT UNION FENOSA'S INITIAL PURCHASE OF THE EDES WAS FACILITATED WITH PAY-OFFS. SOME INSIST THAT THE SPANISH FIRM SUBSEQUENTLY SKIMMED MONEY FROM THE COMPANIES, AT THE EXPENSE OF ITS GOVERNMENT PARTNER. IN A PRIVATE MEETING WITH EMBOFF, A FORMER SUPERINTENDENT OF ELECTRICITY LISTED WAYS THAT UNION FENOSA "CHEATED" THE DOMINICAN REPUBLIC BY TRANSFERRING PROCEEDS TO UNION FENOSA SPAIN. HE DESCRIBED INSIDER LOANS TO THE EDES FROM THE PARENT COMPANY AT TWICE THE MARKET INTEREST RATE; INFLATED SERVICES CONTRACTS WITH SPANISH COMPANIES RELATED TO UNION FENOSA EXECUTIVES; SOFTWARE THAT UNION FENOSA SOLD THE EDES FOR $20 MILLION BUT HAD PROVIDED TO ARGENTINA FOR JUST $1 MILLION; AND IRREGULAR ACCOUNTING PRACTICES. IN THAT OFFICIAL'S VIEW, WHICH SEEMS TO REFLECT PUBLIC SENTIMENT, THE GODR SHOULD HAVE OBLIGED UNION FENOSA TO LEAVE ON TERMS MUCH MORE ADVANTAGEOUS TO THE GODR -- IN RETURN FOR NOT PURSUING CRIMINAL PROSECUTIONS AGAINST THE COMPANY. ¶10. (SBU) THE PRESS REPORTS THAT TWO GENERATING COMPANIES HAVE FILED SUIT AGAINST THE SPANISH EDES AND CDEEE TO DECLARE THE AGREEMENT AS PREJUDICING THEIR OWN CLAIMS FOR PAYMENT AND SEEKING TO BLOCK THE TRANSFER OF SHARES TO CDEEE. AN EXECUTIVE WITH INDEPENDENT POWER PRODUCER COGENTRIX TOLD ECONOFF THAT HE BELIEVES THE AGREEMENT VIOLATES HIS COMPANY'S CONTRACT AND THE COUNTRY'S ELECTRICITY LAW. U.S.-OWNED AES HAS PARTIAL OWNERSHIP OF EDE-ESTE, INVESTMENTS IN GENERATING FACILITIES AND A LIQUEFIED NATURAL GAS TERMINAL IN THE DOMINICAN REPUBLIC; AN AES OFFICIAL TOLD EMBOFFS THEY OPPOSED THE GOVERNMENT'S DECISION. AES COMMENTED THAT THEY WOULD HAVE PREFERRED A PRIVATE SECTOR SOLUTION, PERHAPS A BROKERED AGREEMENT FACILITATED BY AN INDEPENDENT CONSULTANT. NEITHER THE DISTRIBUTOR NOR THE GENERATING COMPANIES EXPECT PAYMENT CONDITIONS WILL IMPROVE UNDER GODR MANAGEMENT. -------------- IFI CONCERN -------------- ¶11. (SBU) THE EFFECT OF THE UNION FENOSA DEAL ON THE FISCAL SITUATION IS SO UNCLEAR THAT AN IMF TEAM WHICH ARRIVED THIS WEEK DEPARTED AFTER A SINGLE DAY, REPORTEDLY UNABLE TO SECURE SUFFICIENT DATA EVEN TO BEGIN AN ANALYSIS. SINCE THE IMF MAY TAKE SOME TIME TO DETERMINE THE EFFECTS ON GODR PERFORMANCE UNDER TERMS FOR THE STANDBY, IT MAY WELL DELAY THE SECOND DISBURSEMENT OF US $61.7 MILLION DUE OCTOBER 15. THE WORLD BANK HASDELAYED APPROVAL OF AN ENERGY SECTOR LOAN MEANT TO HELP RESOLVE THE ISSUE OF GODR ARREARS TO THE SECTOR. THE IDB HAS ASKED THE AMBASSADOR TO EXPLORE WHAT HELP THE UNITED STATES MIGHT PROVIDE TO THE GODR. (NOTE: USAID HAS A TEAM OF ELECTRICITY SECTOR SPECIALISTS IN SANTO DOMINGO NOW, BEGINNING A FOLLOW-UP TO LAST YEAR'S USAID-SPONSORED ANALYSIS OF THE SECTOR; THEY EXPECT TO HAVE IN HAND BY NEXT WEEK SOME OF THE DATA NEEDED BY ALL CONCERNED.) -------------- REPRIVATIZATION IN THE OFFING? -------------- ¶12. (SBU) FEW BELIEVE THAT THE GODR'S DECISION TO REPURCHASE UNION FENOSA'S FIFTY PERCENT OF THE EDES WILL RESOLVE THE COUNTRY'S ENERGY CRISIS. THE GOVERNMENT HAS SUGGESTED IT MAY TRY TO RE-SELL THE TWO DISTRIBUTION COMPANIES TO OTHER INVESTORS. SECRETARY OF INDUSTRY AND COMMERCE SONIA GUZMAN TOLD THE CHARGE SEPTEMBER 30 THAT SHE IS MEETING IN EARLY OCTOBER WITH A GROUP OF INVESTORS, INCLUDING A U.S. COMPANY, WHO HAVE EXPRESSED INTEREST IN BUYING THE COMPANIES. SHE SAID THAT PRESIDENT MEJIA WANTS TO SELL ALL OF THE SHARES TO A NEW PRIVATE SECTOR ENTITY AS SOON AS POSSIBLE. (NOTE: EARLIER, VICE PRESIDENT MILAGROS ORTIZ BOSCH HAD TOLD US THAT THE GODR WAS SEEKING ADVICE ON ORGANIZING A PUBLIC TENDER FOR THE SAME PURPOSE.) -------------- COMMENT -------------- ¶13. (SBU) PRESIDENT MEJIA HAS FAILED TO CONVINCE DOMINICANS THAT THE APPARENT RE-NATIONALIZATION OF ELEMENTS OF THE SECTOR, EVEN IF TEMPORARY, WILL GIVE THEM WHAT THEY WANT: A RELIABLE SUPPLY OF ELECTRICITY. THE ELECTRICITY ISSUES HAVE BECOME A LARGE OBSTACLE TO HIS AMBITION OF WINNING A SECOND TERM AND THEY THREATEN TO OVERSHADOW HIS ADMINISTRATION'S MANY ACCOMPLISHMENTS TO DATE. KUBISKE