AES DOMINICANA TO SELL OFF ELECTRICITY

UNCLAS SECTION 01 OF 02 SANTO DOMINGO 000685

SIPDIS

SENSITIVE

DEPT. FOR WHA/CAR AND EB/ESC;
TREASURY FOR DO: NLEE, RTOLOUI,LLAMONICA;
DEPT PASS TO USTR/S.CRONIN; DEPT PASS TO AID/LAC

E.O. 12958: N/A
TAGS: BTIO ENRG EINV ECON DR
SUBJECT: AES DOMINICANA TO SELL OFF ELECTRICITY
DISTRIBUTION OPERATIONS


1. (SBU) SUMMARY: AES Dominicana President Julian Nebreda
and local generating facilities President Kevin Manning
told DCM and Emboffs on February 3 that Virginia-based AES
intends
to sell its 50 percent share of Dominican distribution
company EdeEste,
which AES manages. Nebreda cited monthly losses of $10
million
and the bleak outlook for the Dominican electrical sector as
the
main reasons. AES will keep its investment in generating
facilities
and will remain the largest energy sector investor in the
Dominican
Republic. END SUMMARY.


2. (SBU) AES Dominicana President Julian Nebreda and local
generating
facilities manager Kevin Manning called on the DCM and
emboffs on
February 3 to advise that AES will announce on February 6
the company's plans to sell its 50 percent ownership of
EdeEste, the
power distribution company which serves the East of the
country. Its
U.S.-based parent company has made the firm decision and is
writing
off the investment entirely in its 2003 accounts. Nebreda
said
the company has already contacted potential buyers. AES
would like
to sell to a firm that would agree to a award a management
contract to AES.


3. (U) EdeEste, along with the other two electricity
distribution
companies, was partially privatized in the late 1990s under
the
Fernandez administration. Spanish-based Union Fenosa bought
fifty
percent of EdeSur and EdeNorte; AES bought the same
percentage of
EdeEste. The government maintained half ownership in each.
Last September
the GODR repurchase of Union Fenosa's shares led to
suspension of the
International Monetary Fund Standby Agreement that had been
signed in
August.


4. (SBU) AES officials said Edeste is losing about $10
million a
month and that in the present circumstances there are no
prospects for
the sector improving in the short term. Nebreda noted that
consumer
collections were at about 90 percent of billing, but if GODR
nonpayment
is included, the percentage drops to about 83. He said that
does
not take into account arrears in subsidy payments, unpaid
since October. Both Manning and Nebreda expected that
consumer
collections would drop further, noting the continuing peso
depreciaiton
and that many customers do not pay when there are frequent
blackouts.


5. (SBU) Nebreda and Manning predicted that the GODR would
intensify
its negative campaign against the company after its February
6
announcement. Manning cited January 25 remarks by Finance
Minister Calderon
on television disputing the government's debt to AES and
claiming the
company actually owed money to the GODR. They said that the
sale
will make moot a recent GODR decree requiring the company to
divest
shares in one of the generating companies within the next 60
days.
The decree, initially issued last fall, stated that AES was
in violation
of the Dominican Electricity Law, which limits the amount of
generating
capacity that an entity could own if it also had ownership of
distribution.

COMMENT


6. (SBU) AES is widely respected as an effective operator
and an
important voice for the electricity sector. The company has
led efforts
to reform the sector. Its decision to withdraw comes as a
GODR committee is
studying requirements to re-privatize the other two
distribution companies, with
a mandate from President Mejia to propose sale of up to 75
percent of shares.
The AES move will be highly dissuasive to that effort and
will hand the
Mejia administration a vote of no confidence from the private
sector.
The Mejia administration is likely to continue its rhetoric
of recrimination
against generators and against distributors -- assuming that
any private
operator is willing to take over AES shares, the last
remaining private
sector ownership in the bad business of electricity
distribution in the
Dominican Republic.


7. (SBU) When Union Fenosa got out last September, the GODR
plunged into
a debt-financed buyback, blowing up its new IMF standby in
the process.
The renewal of the standby is expected, finally, for next
week. Given the
very different operating styles of Union Fenosa and AES as
well as the
administration's long investment of effort in meeting IMF
conditionalities,
we do not -- repeat not -- predict a repeat performance.
HERTELL