DOMINICAN ELECTRICITY: THE LAZARUS EFFECT

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 005740

SIPDIS

SENSITIVE

DEPT FOR WHA, WHA/CAR, WHA/EPSC, EB/ESC; DEPT PASS
USAID/LAC; DEPT PASS DOE; NSC FOR SHANNON AND MADISON;LABOR
FOR ILAB;SOUTHCOM ALSO FOR POLAD;TREASURY FOR OASIA-LCARTER

E.O. 12958: N/A
TAGS: DR ECON ENRG PGOV EINV
SUBJECT: DOMINICAN ELECTRICITY: THE LAZARUS EFFECT

REF: SANTO DOMINGO 01606


1. Summary (SBU) The Dominican electrical sector is still in
great difficulty. Generation is running consistently below
peak demand. Blackouts occur regularly, although they are
less prolonged than in the last days of the Mejia
administration. The government is keeping the lights through
the end of the year on with money borrowed from Dominican
commercial banks. The strapped Dominican government is
rationing payments to electricity producers, providing just
enough for purchases of increasingly expensive fuel. USAID
and the World Bank are supporting a government effort to
define a stabilization plan. With no sign of any profit
until at least the end of 2005, U.S. firm AES is close to
selling off its generating and distributing operations.

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Chunky payments
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2. (U) When Leonel Fernandez took office on August 16, power
output had been running as low as 700 megawatts (MW),less
than half of the daily peak demand of around 1600 MW. This
meant 12-20 hour blackouts across the country. The new
administration obtained a USD 65 million loan to purchase
fuel for the sector, coordinated by Santo-Domingo-based Banco
Popular. Most was to purchase fuel (USD 50 million) and the
rest was for bottled cooking gas (USD15 million). The plan
is to spend roughly USD 10 million a month on fuel for power
plants. One unforeseen issue with the program is that the
generators need to purchase fuel in bulk and these limited
payments are not enough to buy a full shipment. The
consequence has been that generators have to hold the cash
until they have enough for a full shipload -- purchased on
the spot market at a premium. The first disbursements from
the loan were made in September.

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Current generation
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3. (U) The most recent statistics show that the system is
typically producing between 1100 and 1200 megawatts in the
early morning hours. This is similar to or better than what
we've seen for much of the past year, and it means that much
of the country suffers sporadic blackouts. The system is
decapitalized, burdened with debts of between USD 400m and
450m. Distributors fail to collect sufficient funds with
which to pay generators, due to the continued high rate of
theft and the simple refusals to pay by many users. The
government consistently fails to cover promised subsidies.
Without payments the generators cannot rapidly replenish the
imported fuel needed for generating the electricity.


4. (U) Currently, distribution companies, Edeste (run by
AES) and government-owned Edenorte and Edesur (formerly run
by Union Fenosa of Spain),lose about 40 percent of the
electricity that they distribute, a quarter of that from
technical losses and the rest coming from theft. Collections
for power delivered and billed range from 66-77 percent for
the distribution companies. Users have few incentives to pay
and continue to tap into lines illegally or ignore bills.
Encouraging the theft and hindering collections are rules
that prohibit distributors from cutting off power for
non-payment; companies have to pass through an arduous legal
process involving the courts.
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Trying to renegotiate, again
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5. (U) Rhadames Segura, Director of Dominican electricity
agency CDEEE has said publicly that the government intends to
re-negotiate the contracts with the generating companies.
Still starved of cash, it has nothing to offer the companies
in those talks in exchange for a permanent lowering of
contract rates. The figure previously negotiated with most
generators in the Madrid Accords, now essentially defunct,
was about USD 200, to be financed by the World Bank -- but
the government's failure to stay on track with the IMF
blocked that lending program. A USAID-supported study on the
prospects for the sector is almost ready for discussion with
sector participants. It will offer all of them, including
U.S. companies such as AES, Cogentrix, El Paso and Seaboard,
a better basis for determining whether they will want to
renegotiate.

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AES - Getting Out of Dodge
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6. (SBU) Julian Nebreda of AES-Dominican Republic and Blair
Thomas, Managing Director of the Trust Company of the West
(TCW),a California based private financial services firm,
told the Ambassador on July 28 that AES would sell its 50
percent holding of electrical distribution company Edeste for
an undisclosed amount. AES will continue to manage Edeste
for TCW. On October 8, George Dewey, Chief Commercial
Officer of Coffeyville Resources of Kansas City, told the
Ambassador of interest in purchasing other AES assets - - the
500 MW complex named AES Andres and Los Mina and its Itabo
partnership with El Paso and Globaleq with up to 650 MW of
generation capacity.

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Energy Shortage Leads to Expensive Schemes
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7. (SBU) Press accounts have the GODR inquiring about the
purchase of two 500 MW coal burning power plants that were
originally intended for India but are waiting in Houston for
a buyer. Each power plant costs USD 750 million and would
notionally be located on the north side of the country near
Monti Cristi. Smith Enron (future name: Prisma) currently
has the only major power plant in the north, with 185MW of
capacity in Puerto Plata. The proposal to import more
generating capacity is a non-solution. At the moment the
Dominican Republic has plenty of capacity - - the compound
problem is debt, non-collection, a lack of direction and
uncertainty about the government's intentions.

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Stabilizing Dominican Electricity until December 2005
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8. (U) USAID in collaboration with the World Bank is
financing work on a plan to stabilize the Dominican
electrical sector over the period running to December 2005.
The study is under discussion with sector participants and
will probably be submitted to President Fernandez later this
week (October 20-22). The plan is a minimal proposal,
intended to keep the lights on over the next 18 months: it
does not address the issue of debt repayment to the
generating or distribution companies. It is focused
initially on the need to stop the continued accumulation of
losses. It includes the rationale and recommendations for
raising rates, reducing technical losses and piracy,
increasinge collections and reducing subsidies. If consensus
is possible, this aproach would be the basis for seeking
multilateral bank financing to cover a financing gap
estimated at 200-300 million dollars. The draft plan does
not pretend to be a cure-all; it would require a technical
and financing miracle to get this Lazarus to rise and walk.
Instead, the plan aims at providing electricity to meet 75
percent of demand expected over a 24-hour period. To help
encourage payment, the proposal recommends rationing power
and allocating it to areas of the country according to their
records of payment.

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Intrasector Debt Drags On
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9. (U) There is currently an accumulated intrasector debt of
USD 400m to 450m for the Dominican electricity grid. In 2002
the distribution companies were able to collect about 12
cents of the 14 cents it cost to generate electricity. By
2003 the three distributors were able to collect only 7 to 8
cents while the cost of generation rose to between 16 to 18
cents a KWH. This huge discrepancy resulted from several
factors: tariffs paid to generators are fixed in dollars, as
are fuel prices; the peso rapidly devalued from 18 pesos to
55 pesos to the dollar over the last two years without no
corresponding adjustment of peso tariffs; the government
made a political decision in April 2003 to subsidize
electricity, despite its lack of resources to cover these
payments; the government's response to massive bank frauds in
2003 led to a multiplication of public sector debt and
further hampered its ability to pay; and the fact that more
than 50 percent of users do not pay their electric bills.
Private and public sector collections by distribution
companies are equivalent to only about 48 percent of
potential.


10. (U) There is general agreement on the level of debts
except for a dispute between AES-managed Edeste and the
government corporation CDEEE. A 50 million dollar difference
in calculations is due to two factors: a dispute on whether
Edeste should pay for government-installed substations, and
the cost of the government-imposed lag of two months between
billings and receipt of payment. Edeste maintains that
standard business practice allows for no more than a 30-day
payment delay and that the CDE should pay for the financing
cost of the extra month. The lag is especially costly
because of the sharp increase in peso interest rates after
mid-2003 and the uncertainties of the exchange rate.


11. (U) Drafted by Mark Kendrick


12. (U) This report and others can be read on the SIPRNET at
http://www.state.sgov.gov/p/wha/santodomingo/ index.cfm along
with extensive other current material.
HERTELL