Identifier
Created
Classification
Origin
04CARACAS1552
2004-05-12 15:03:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

VENEZUELA'S POWER SECTOR: HEADING FOR ANOTHER

Tags:  ENRG VE 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L CARACAS 001552 

SIPDIS


NSC FOR CBARTON

E.O. 12958: DECL: 05/10/2014
TAGS: ENRG VE
SUBJECT: VENEZUELA'S POWER SECTOR: HEADING FOR ANOTHER
CRISIS?

Classified By: Economic Counselor Richard Sanders for reasons 1.4 (b) a
nd (d)

------
SUMMARY
-------

C O N F I D E N T I A L CARACAS 001552

SIPDIS


NSC FOR CBARTON

E.O. 12958: DECL: 05/10/2014
TAGS: ENRG VE
SUBJECT: VENEZUELA'S POWER SECTOR: HEADING FOR ANOTHER
CRISIS?

Classified By: Economic Counselor Richard Sanders for reasons 1.4 (b) a
nd (d)

--------------
SUMMARY
--------------


1. (C) After dodging the drought bullet in 2003, Venezuela's
power sector is once again (still?) in a fragile state. This
time, however, other weaknesses in the electric power system
caused by lack of investment, government inattention, and
political meddling are taking center stage. The problems are
centered around CADAFE, a state-owned company that is largely
responsible for the national transmission grid. Legendarily
inefficient and corrupt, CADAFE is described as "untouchable"
under the Chavez regime, according to industry sources. In
fact, CADAFE is reportedly a test case for populist
"co-management" structures for the GOV. The Chavez
Government has also shown a willingness further to threaten
the electric power system with political retaliation against
top managers. End Summary.

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THE RAINS SAVE THE DAY
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2. (U) Venezuela's installed electrical generation capacity
is 20,908 MW, of which about 13,500 MW or approximately 65
percent is provided by hydroelectric stations. The largest
of these, Guri (the world's third largest dam by one
measure),located in the southwest of the country, delivers
9.025 MW alone. In 2003, the water levels in the Guri
reservoir reached historic lows. This led to fears that
power would have to be drastically rationed. The early onset
of the rainy season, however, forestalled what might have
been yet another blow to Venezuela's battered economy. As of
April 29, 2004, the dam's water level stood at 252.45 meters
above sea level or about 7.90 meters higher than the historic
minimum set in 2003. While the water level is low, the
operations of Guri's turbines are not expected to be at risk
in 2004. Instead, other weaknesses in the Venezuelan
electric power system caused by lack of investment,
government inattention, and political meddling are taking
center stage. Much of the concern about the system is
focused on CADAFE (Compania Anonima de Administracion y
Fomento Electrico),a state-owned company that, in addition
to managing thermal electric plants such as the Planta
Central plant near Caracas, is also responsible for the
national transmission grid and transmits and distributes

electricity to about 80 percent of Venezuela.

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ELECTRICAL SECTOR FAILURE
--------------


3. (C) On March 31, emboffs met with Carlos Mibelli,
President of the Venezuelan Association of Power Companies
(CAVEINEL),for a sectoral overview. Mibelli praised GOV
efforts to introduce a regulatory framework in 2001 but
cautioned that signficant work needed to be done to create a
truly competitive market. He pointed to CADAFE, the largest
national operator, as the source of most of the sector's
inefficiency. Mibelli estimated CADAFE's average
"non-technical losses," i.e., theft by illegal hook-ups, at
40 percent and said he did not foresee any real effort to
streamline the company's corrupt operations and management
because of CADAFE's untouchable status under the Chavez
administration. Mibelli described the industry's public
enterprises as well into a process of "slow death" since
rates were only allowed to increase by 10 percent in the last
two years, far below inflation. He predicted the GOV's
maintenance of a populist stance towards the sector would
result in long-term system failure.


4. (C) Miguel Lara, General Manager of OPSIS, the Office for
the Operation of Interconnected Systems, identified the main
problem for Venezuela's power sector as the lack of long-term
planning on the part of the GOV. In an April 1 meeting, Lara
explained that OPSIS had been created in 1968 to manage the
planning, operation and interchange of energy between the
largest public and private generation companies in Venezuela.
As a large part of the country's power is hydro-generated,
said Lara, periodic droughts can have a significant impact on
the system's ability to deliver electricity. 2003 saw one of
the biggest droughts in Venezuelan history, resulting in a
season of rolling blackouts. Lara called Venezuela's thermal


generation facilities deficient. He said a crisis was
averted in 2003 only because a long-anticipated contribution
from the Caruachi Dam on the Caroni River in southwestern
Venezuela finally entered the grid and demand fell
dramatically due to the economic contraction.


5. (C) Lara expected demand for power to grow 5-6 percent in
2004 putting significant additional stress on an already
overloaded system. Caruachi may be able to generate enough
power to meet increasing demand in the next few years,
however, there are no long range plans for other projects in
development at this time. Lara predicted this lack of
long-term infrastructural planning would inevitably lead to a
system crisis at some point in the future.

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POLITICIZATION OF THE POWER SECTOR
--------------


6. (C) The power sector has also felt the effects of the
political retaliation that has followed the effort to force a
presidential recall election. On March 19, econoff met with
Ciro Portillo, former Vice President of ENELVEN (Energia
Electrica de Venezuela),a state-owned utility serving the
western part of Zulia state. According to Portillo, 18
Enelven managers were informed by their supervisors on March
2 that they would be immediately fired unless they agreed to
retract their signatures on the presidential recall
petitions. One manager subsequently retracted but the
remaining 17, each with an average of 20 years of experience
and a total of 350 years of power sector experience between
them, were either forced to retire or given severance
packages. Portillo, who had had 36 years in ENELVEN,
reported that it was made clear to him that if he did not go
quietly he would not receive any retirement benefits. In the
March 31 meeting with CAVEINEL President Mibelli, Mibelli
told econoffs he had seen another list of 80 mid-level
ENELVEN employees who were being pressured to recant their
signatures. Other politically-motivated harrassment has been
reported in EDELCA (Electrificacion del Caroni),the
state-owned company that handles the massive hydroelectric
projects on the Coroni river. Finally, econoff learned on
April 2 that Miguel Lara and two other top OPSIS managers
would also be forcibly retired because they had signed
presidential recall petitions.

--------------
CADAFE: A FAILING EXPERIMENT?
--------------


7. (C) On April 6, Econoff called on Andres Gluski, President
of Electricidad de Caracas (majority U.S.-owned by AES
Corp.),to ask his opinion about the dire predictions for the
stability of the electrical power sector. Gluski confirmed
that Venezuela's power system is in a fragile state. Gluski
said that in early March the system had come close to a major
blackout. At that time, EDC had a turbine down for scheduled
maintenance and, while this should not have been a problem,
CADAFE also had had two of its three turbines at Planta
Central off-line because of unexpected problems. Gluski
noted his concern that a blackout affecting Caracas would
give the GOV an excuse to call for a state of emergency.
Ultimately, a blackout was avoided. Given CADAFE's problems,
Gluski commented that the entire Venezuelan electricity
system could be at risk of destabilization. He also pointed
to the critical role played by OPSIS in managing national
load factors, stating that if Miguel Lara and other top OPSIS
managers depart, OPSIS will not be handled as efficiently and
the effects of CADAFE's shortcomings will be magnified.


8. (C) Miguel Lara noted to econoff that CADAFE has routinely
incurred huge losses since its inception due to corruption,
bad management, a flawed billing system and low rate
increases. He added that these problems have been
exacerbated because of the political impossibility of
criticizing CADAFE under this administration. According to
Lara and Mibelli, CADAFE is being used as a test case for
"co-management" structures under which a three tier system of
circles (operations, management and executive circles) has
been created to manage the company. In the operations
circle, groups of approximately 20 workers jointly decide on
company policies. Mibelli noted that as opposed to similar
systems implemented in countries such as Japan where the
managers would take the advice of workers and make a
decision, in CADAFE the workers can override decisions by
managers. Gluski added that a radical wing of the Patria


para Todos Party (PPT - Fatherland for All) has been trying
to infiltrate the electrical unions and has been particularly
active in CADAFE. In sum, without a fundamental
restructuring of CADAFE, these men predict uneven power
distribution as a fact of life for the future.

--------------
COMMENT
--------------


9. (C) CADAFE was expected to be restructured as a result of
a framework law governing generation, transmission and
distribution passed by the Chavez Government in 2001. The
law was intended to unbundle service activities and to create
competition and a spot electricity market. Instead, it
appears increasingly likely that the Chavez Government will
not implement the law and CADAFE's many shortcomings will not
be addressed. The Chavez Government has also shown a
willingness further to threaten a fragile electric power
system with the implementation of populist management
structures and political retaliation against top managers.
While the GOV should be considering steps to prepare for
rationing, it apears to be ready to take the risk of a major
power failure instead.
SHAPIRO


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2004CARACA01552 - CONFIDENTIAL