IMF POLICY PAPER - DRAFT SUMMARY OF THE DOMINICAN

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 006118

SIPDIS

DEPT FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA; DEPT PASS
USAID/LAC; DEPT PASS DOE; SOUTHCOM ALSO FOR POLAD; TREASURY
FOR OASIA-LCARTER

E.O. 12958: DECL: 11/08/2009
TAGS: ECON ENRG PGOV EINV DR
SUBJECT: IMF POLICY PAPER - DRAFT SUMMARY OF THE DOMINICAN
ENERGY SECTOR

REF: A. REF. A SANTO DOMINGO 01606


B. REF B. SANTO DOMINGO 05740

Classified By: EcoPol Counselor MMEIGS. Reason: 1.4 (d).

(1.) (SBU) This message forwards a draft IMF summary of the
plan of the Dominican government for dealing with energy
difficulties. The Dominican Republic is currently suffering
localized power outages of up to 12 hours a day due to poor
government management of the sector, low collection rates by
the distribution companies, the high cost of imported
petroleum and the non-payment of government subsidies. The
current accumulated sector deficit is USD 507 million and is
expected to reach USD 650 million by the end of 2005. After
the inauguration of President Fernandez on August 15, the
government borrowed USD 65 million from local banks to cover
the costs of producing 70 percent of the country's
electricity production, to continue subsidizing bottled gas
and to buy time to develop a long-term plan for the energy
sector. In consultation with the World Bank, IDB and USAID,
the administration developed a comprehensive plan to address
the current energy crisis and delivered the plan to President
Fernandez in October (REF. B).

(2.) (C) The GODR energy plan calls for short term action
until December 2005. The plan includes a timetable for: (i)
reducing losses and improving collection rates; (ii) better
targeting of subsidies; (iii) improving the regulatory
framework; (iv) reducing the cost of electricity generation;
(v) roll over arrears with private electricity companies; and
(vi) managing the power rationing. Here is a basic outline of
the plan:

- Reducing losses and improving collection rates.
With the collaboration of the distribution companies, an
aggressive loss reduction and collection increase plan will
be gradually implemented, aimed at improving the overall cash
recovery index of the distribution companies. The loss target
(for December 2005 of Ede-Norte/Sur being 27 percent (down
from 36 percent, mid-2004) and for Ede-Este 32 percent (down
from 37 percent, mid-2004). The collection rate target (for
December 2005) of Ede.Norte/Sur being 95 percent (up from 85
percent, mid-2004) and for Ede-Este 93 percent (up from 81.5
percent, mid-2004).

- Better targeting of subsidies.
Subsidies are to be focused on the small consumers,
restructuring the tariff in three steps (November 2004),
(December 2004) and (February 2005),overall resulting in an
average tariff increase of about 30 percent. A new
distribution model will be developed for the PRA (Program to
Reduce Blackouts) areas in order to improve and reduce the
targeting of this subsidy (paid with hydro, electricity)
focused at small consumers whose consumption is not measured
(third quarter 2005).

Improving the regulatory framework.
Uncontrollable costs (fuel prices, currency exchange rate and
inflation) are to be passed through automatically to the
final consumer tariffs, applying the appropriate indexation
on a monthly basis, as opposed to the former quarterly basis
(February 2005). Regulatory policies will be amended in order
to facilitate expedite fraud detection and reduction efforts.
(first quarter 2005)

Reducing the cost of electricity generation.
The plan includes an attempt at reducing the cost of
electricity generation through the renegotiation of some
power supply contracts. With a potential price reduction of
about 1.0 US cents/KWh, the plan includes the renegotiation
of the CESPM (Cogentrics) power purchase agreement contract
with CDE (second quarter 2005),the SECLP (Smith-Enron)
contract (third quarter 2005). Finally, an attempt will be
made at renegotiating the terms of the so-called Acuerdo de
Madrid (reduction of contract rates by generators in return
for a one-time payment) (latest, December 2005).

Roll over arrears with private electricity companies.
In the short term, the plan is to roll over arrears and pay
only the interest that accumulates on the debt (up to
December 2005). Total interest payments during year 2005 are,
estimated at US$60 million

Managing the power rationing.
Rationing of power will take place according to the
collections of the various circuits. The level of rationing
will linked to the overall results of the plan, the 70
percent supply restriction to be reduced only when
disbursement of public funds to coyer the current deficit gap
is reduced to manageable figures (third quarter 2005).
The need for public funds to close the current deficit gap of
the electricity sector during year 2005, as a result of a
successful implementation of this comprehensive plan, has
been estimated at USD 219 million (assuming exchange rate of
RD 40/USD and oil price of USD 50/barrel). The monthly
requirements to be included in the national budget for year
2005 are;

Year 2005 million USD
Jan /Feb /Mar 39 / 31 / 30
Apr / May / Jun 30 / 23 / 20
Jul / Aug- / Sep 13 / 14 / 12
Oct / Nov / Dec 10 / 0 / -3
Net Total 219

(3.) (C) In the medium and longer term, the plan includes
actions for: (i) clearing arrears with private electricity
companies; (ii) private sector participation in Ede-Norte/Sur
distribution companies; and (iii) reforming the regulatory
and legal framework of the sector. The details follow:

Clearing arrears with private electricity companies.
The external financing required will be procured (late 2005),
so as to develop a plan to clear arrears with private
electricity companies (starting Jan 2006). A loan from the
World Bank will be requested, reviewing the amount but, in
line with a former loan request for the sector that was not
considered viable by the Bank due to the country's failure to
meet the IMF agreement of year 2003. Consideration will also
be given to the possibility of financing the cost of
doing-away with Independent Power Producer's contracts,
having them compete in the market.

Private sector participation in Ede-Norte/Sur distribution
companies.
Studies will be made, actions will be taken and terms of
reference documentation will be made available, in order to
be ready to conduct an international bidding process to award
a performance based management contract of Ede-Este and
Ede-Norte (first quarter 2006).

Reforming the regulatory and legal framework of the sector.
An ongoing review of the proper application of the regulatory
framework in place will be done, correctives to be
implemented as necessary. The legal framework will be
reviewed and if need be, proposals for the amendment of laws
will be submitted to congress (latest third quarter 2006).

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