TRANSITION #9 - DOMINICAN ELECTRICITY: NO ONE'S

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 004421

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TAGS: PGOV EFIN DR
SUBJECT: TRANSITION #9 - DOMINICAN ELECTRICITY: NO ONE'S
RESPONSIBLE, EVERYONE SUFFERS


1. (SBU) This is number 9 in our series covering the
transition between the Mejia and the Fernandez governments.

ELECTRICITY: NO ONE'S RESPONSIBLE, EVERYONE SUFFERS

The slow-motion collapse of the electricity sector during the
countdown to the August 16 presidential election has finally
reached a stage where frustration in the barrios exceeds the
hopes offered by the prospect of a new administration. The
sporadic neighborhood outbreaks of rock throwing, gunshots
into the air and tire-burning to protest blackouts extended
at least twice during this past week to the auto route
connecting the capital with "Las Americas" airport and other
points east. Neighborhoods along the road had been without
electricity for 72 hours. No one has been killed yet, but
police report three injured and a number of arrests.

President Meja, in off-the-cuff comments to the press corps,
says that the electricity problem will have to be solved by
the incoming administration. At this point the Dominican
electric system is bankrupt. Finance Secretary Calderon is on
the record stating that the government owes nothing to the
generators. Electricity Council head George Reinoso says the
government owes no more than $18 million -- and Mejia
announced on July 29 that this amount was being disbursed for
fuel purchases for generators. All agree that accumulated
debts to entities in the sector exceed $400 million. The
government has been the only shareholder in two of the three
major distribution companies since last November, when it
bought out Spanish interests.

In June PLD economist Julio Ortega commented to the DCM in
passing that the crisis in the electricity sector "already
happened, three months ago, and will need a lot of work."
Leonel Fernandez is not making any promises. Leaders in the
sector have taken a road show to the IMF, to Treasury, and to
others, advocating a restructuring, but no one has found any
additional financing, domestic or international, to keep the
lights on.

And the lights are progressively going out. Peak demand in
the Dominican Republic is about 1600 megawatts. After the
May 16 election, the electricity on-line fell to around 1100
megawatts, and then dropped in late June and early July to
around 800 megawatts. Last week (July 18-24) it dropped
further, falling below 600 megawatts. The system is back up
to the mid-800's this week, but wide regions of the north
went dark starting on July 27 when the Smith-Enron plant ran
out of fuel. (Calderon's comment: "We paid them $3 million
last Friday.") The country has about 3000 megawatts of
installed capacity, though about one-third of that is
inefficient and would be idle if the system were fully
functioning.

The violence along the airport highway was only the most
visible evidence of the discontent caused by this financial
failure of capacity. Outside the capital, some regions or
towns have regularly been without power for 16 hours or more;
at the current low levels of service the distribution
companies are now shutting off swathes of Santo Domingo, as
well, often for lengthy periods. Traffic lights frequently
do not work; many businesses cannot function; sales of frozen
foods have dropped by 80 percent since consumers doubt store
refrigeration and can,t be sure of storing goods at home.
Without power, household fans do not work and many in the
barrios have difficulty getting to sleep. The diesel-run
generators in ubiquitous use at commercial properties and
apartment buildings are in service for such lengthy periods
that they are overheating and breaking down. Electricians
and generator repair personnel are busy, as are the
installers of "inverters" - - contraptions linking 4 to 8
heavy-duty car batteries to provide current when all other
services go down.

The beach resorts far from the capital feel few effects, for
they are self-sufficient in generating power - - in fact,
they have a sideline in selling power to distributors in the
"spot market."

- - - - - - - - - - - - - - -
Better? No Time Soon
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The electricity sector consists of a variety of large plants
of different capacities, owned by different interests and
fueled variously by gas, coal, diesel and hydropower. The
Fernandez government of 1996-2000 "capitalized" the three big
distribution companies (EDESTE, EDENORTE and EDESUR, serving
the east, north and south respectively) but sold only 50
percent of the shares. Mejia justifies his November 2003
decision to buy back the shares of EDENORTE and EDESUR from
Spanish firm Union Fenosa (UF),asserting that UF management
failed to collect on time, borrowed from UF Spain at usurious
rates and was deceiving the government. U.S.-owned firm AES
operates EDESTE but made a corporate decision in December
2003 to divest itself of shares and management whenever it
can - - thereby earning the rancor of the regulatory
authorities. On July 28 AES brought to call on the
Ambassador two executives from the California-based "Trust
Company of the West," specialists in acquisition of high-risk
energy assets. AES expects to sell to them but to remain for
the time being as administrator of EDESTE. Mejia named a
commission in late 2003, which included in its terms of
reference, a mandate to advise him on legal requirements for
privatization of distributors, including private sector
purchases of up to 75 percent of shares. Their report
advocating divestiture was delivered in June but did not get
into the papers until early this week. And the Mejia
government has made no move in that direction.

Plants are idle for various reasons. The sector is choked
with debt and firms have exhausted reserves of working
capital. Suppliers of fuel no longer extend credit but
instead demand cash ten days before delivery. Some 40 percent
of electricity consumption is unpaid, either because the
power is tapped without meters or because distribution
companies fail to sanction non-payment. The monthly sector
deficit is around $25 million, not including subsidies. The
Mejia government,s policy of subsidizing electricity and
cooking gas consumption, intended to protect the poorest
households, continues despite the government,s clear
inability to pay - - the government spent in six months the
full amount budgeted for electricity subsidies for all of

2004. It is unclear how much of the monthly $25 million
deficit the government is currently managing to pay. Some of
the plants are under repair and some of this downtime may be
at managerial discretion, awaiting the change of government.

- - - - - - - - - - - - - - - - - - - - - - -
A New Administration Is Not A Clean Slate
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Pessimists such as outgoing Technical Secretary Carlos
Despradel think that the street protests will get steadily
worse, especially as the population understands that the new
administration has no quick fix or "purple magic," to use
Mejia,s grim rebuke in the February 27 state of the nation
address. We know that the PLD transition team has been
seeking an approach to subsidies on cooking gas but they have
shown no similar devotion to a fix for the electricity sector.

- Fernandez may surprise us by pulling out of his hat a new
pact with Venezuela on petroleum sales. President Hugo Chavez
could easily direct national oil company PDVSA to offer
90-day terms on fuel sales for electricity generation. Such
a deal would be a big but one-time boost for Fernandez,s
first hundred days.

- Getting IMF board approval with a revised standby will
open the avenue for lending for the electricity sector by the
World Bank, including a $25 million tranche that the Mejia
government never collected because officials couldn,t
adequately document their spending of a March disbursement.
Bargaining with the IMF is going to be tough, but everyone in
Santo Domingo knows that any road to recovery has to go
through an IMF agreement.

- - - - - - - - - - - - - - - - -
Looking Down The Tunnel
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As frustration spreads in the barrios and even citizens in
middle class neighborhoods like the Naco and Piantini areas
of Santo Domingo organize demonstrations against the
blackouts, expectations of the new government are rising.
But as things stand, Fernandez and his administration are not
going to be able to pay the debts and to inject fresh
liquidity into the system. Even if the new president pulls
out of his hat generous fuel concessions from Venezuela or
an unexpectedly comprehensive financial and budget fix, the
solution will take time. Over the last six months electricity
industry participants worked together in seminars sponsored
by USAID and arrived at a general agreement on an approach
that includes raising rates, divesting the government of most
or all of its holdings in the industry and lowering
subsidies while targeting them better. The fact remains that
the electric system needs a lot of money to put an end to
blackouts. We are looking down a tunnel with not much
prospect for light at the end of it. And not even that
glimmer will be visible unless major changes are made to the
payment structure of the electric system and the Fernandez
administration moves quickly to bring the IMF back to the
table.


2. (U) Drafted by Mark Kendrick, Michael Meigs.


3. (U) This report and others in our transition and election
series are available on our SIPRNET site
http://www.state.sgov.gov/p/wha/santodomingo/
along with extensive other material.
HERTELL