Identifier
Created
Classification
Origin
03SANTODOMINGO5391
2003-10-02 21:42:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Santo Domingo
Cable title:  

BLACKOUTS DARKEN DOMINICAN PROSPECTS

Tags:  DR ECON EFIN ENRG PGOV 
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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


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