GODR COMMISSION TO INVESTIGATE ENERGY GENERATORS

C O N F I D E N T I A L SECTION 01 OF 03 SANTO DOMINGO 000797

SIPDIS

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: DECL: 02/05/2014
TAGS: ENRG ECON EINV DR
SUBJECT: GODR COMMISSION TO INVESTIGATE ENERGY GENERATORS
RAISES CONCERNS ABOUT POSSIBLE MILITARY INTERVENTION IN
ELECTRICITY SECTOR


Classified By: DEPUTY CHIEF OF MISION LISA J. KUBISKE;
REASON 1.5 (B & D)


1. (C) SUMMARY: The GODR appointed a six-member commission
that includes Police General Pedro de Jesus Candelier and
Secretary of Defense, Lieutenant General Jose Miguel Soto

SIPDIS
Jimenez, and senior GODR officials to reconcile GODR debt,
determine fuel company fuel stocks, and review a sector
study. In meetings with Emboffs, GODR officials emphasized
that there is no intent on the part of the government to
intervene in the troubled sector. Companies fear that the
commission is intended to intimidate and will be a step
toward military intervention in their operations. A local
representative of the World Bank reported that members of the
Bank's board and IMF representatives with whom he had spoken
were concerned that the announcement of the commission could
make IFI disbursements more difficult. Ambassador Hertell,
in a February 6 telephone conversation, told Dominican
Ambassador to Washington Hugo Guiliani, that the creation of
the commission was misguided and sent the international
community the wrong message. GODR-company talks continue.
Finance Minister Rafael Calderon shared the GODR's hopes for
allocation of IFI money to the electricity sector. END
SUMMARY.


2. (SBU) The GODR and electricity generating companies are
in a public dispute over debt the companies claim the GODR
owes for subsidies and payment arrears following months of
financial losses. Cash poor in the past few weeks, companies
have felt it impossible to continue selling power at a loss.
Moreover, they have, in many cases, quit importing fuel and
lowered generating levels, creating growing blackouts.


3. (SBU) The latest development was a February 5 GODR
announcement naming a commission made up of Finance Secretary
Calderon, Electricity Superintendent George Reinoso, State
Electricity Company (CDEEE) Administrator Cesar Sanchez,
Commission for Public Enterprise Reform President Rafael
Montilla, along with Police General Candelier and Armed
Forces General Soto Jimenez. (Note: Candelier, associated
with human rights abuses and extrajudicial killings by police
that occurred while he was National Police Commander, and
military head Jimenez were members of the now defunct
exchange rate commission appointed in November that was
widely viewed as a measure to intimidate exchange traders
into lowering the peso exchange rate. End Note.)

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More problems?
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4. (SBU) Local press (comment: not always accurate) reported
that the commission was established to investigate why the
generating companies are shut down and demanding payments for
debt the GODR does not recognize. The appointment of the
commission produced an immediate reaction from generating
companies, which view it as an attempt by the government to
intimidate them into reducing their debt claims and
restarting the electricity plants.


5. (C) A local World Bank representative told econoff that
World Bank was concerned and that the latest developments
could make approval of the $100 million electricity sector
loan (anticipated February 12) more difficult. He explained
that some board members had already expressed reservations
about the loan even prior to the announcement of the
commission. He reported similar assessments by International
Monetary Fund representatives about the Standby Agreement
scheduled for board consideration February 11. British
Ambassador to the Dominican Republic also told the Embassy he
was worried about the government's intentions in establishing
the commission. He said that he intended to raise the matter
with President Mejia on February 10.

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No Harm, No Foul
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6. (SBU) In contrast, GODR and military officials asserted
to Embassy officers that the press reports were inaccurate.
Electricity Superintendent George Reinoso said that the
commission was not intended to pressure the companies in any
manner. He explained that it was established to reconcile
GODR debt, determine fuel company fuel stocks, and review a
sector study done last year by international accounting and
business advisory group Grant Thornton. He said that the
GODR had no intention of sending military personnel into
power plants. This tracked with what a military source had
told the Embassy's Defense Attache.


7. (SBU) Secretary of Finance Rafael Calderon, also, told
DCM late February 6 that the media had misinterpreted the
purpose and the composition of the committee announced at the
February 5 cabinet meeting. Calderon said that participants
had discussed publishing the findings of the Grant Thornton
audit, and the President decided that a new group headed by
officials involved with the electricity sector would decide
which parts could be made public. Calderon said that the
IFIs were getting unduly alarmed about the presence of police
and military officers on the commission and asserted that it
was common in Latin America to call on senior military
officers for such tasks. He emphasized to the DCM (and
earlier in the day, to the press) that there was &absolutely
no intention to intimidate anyone and not the slightest idea
of militarizing the electricity sector. A representative
from Virginia-based AES did report that Police General
Candelier had contacted an AES employee the afternoon of
February 6 to request a courtesy call at the company's Andres
plant. Other than this, our sources report no action taken
by the military or non-military members of the commission to
date.

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But, Some Disagreement
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8. (SBU) The GODR and the electricity generators are in
negotiations over the division of the USD 20 million from the
IDB social sector loan to be used for the electricity sector.
Calderon emphasized the GODR,s flexibility and said that
the private sector positions have been progressively
modified; he was awaiting a reply to the GODR's most recent
offer.


9. (SBU) Calderon is emphatic and indignant concerning the
differences over amounts owed to generators at Haina and
Itabo. He maintained, as in the press, that the GODR,s net
debt to Haina is USD 15 million, and he dismissed Haina,s
claim of USD 40 million as an outrageous attempt to shift the
various debts incurred by management to the GODR. After
discussion, Haina has suggested that the GODR accept its
estimate of the net debt as USD 20 million. If there is no
agreement soon, the government will take the matter to
arbitration. Similarly, he said, the GODR owes Itabo
operators a net of USD 21 million or 22 million, while they
are asking 30 million. Calderon asserted that Haina
operators had borrowed abroad and had made a significant
distribution of expected profits to shareholders, even though
they were making paper losses; the GODR returned the pesos 44
million (about USD 80,000) check it received as a 50 percent
shareholder. The companies allege that the government is
seeking to divide the group by offering conditional payments
for amounts less than is owed.

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What Next?
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10. (SBU) For medium-term financing of the sector, the GODR
hopes to raise the percentages of forthcoming loans to be
directed to the electricity sector. In addition to the USD
20 million now awaiting distribution:

- the USD 100m World Bank loan for the social sector now
includes USD 80 million for electricity; the GODR wishes to
raise this to USD 90 million.

- - of USD 50 million remaining to come from the IDB, the
GODR hopes to advance disbursement to March or April and to
devote USD 15 million to the electricity sector.


11. (SBU) If these proposals are accepted there would be USD
105 million available between now and June, of which USD 40
million would go for fuel purchases and USD 65 million would
be devoted to reducing arrears to participants in the sector.
Calderon estimates that the USD 40 million for fuel, along
with peso-denominated payments from clients and from the
government would amount to approximately four billion pesos,
sufficient for current needs with no increase in debt. This
is the outline of the GODR,s proposal to be made to the
operators and to the World Bank.


12. (SBU) Calderon believes that IFI lending and the Paris
Club rescheduling should make sufficient foreign exchange
available to drive the exchange rate for the dollar down from
the current RD 55 to close to RD 40, a rate that will allow
the sector to stabilize. He also reiterated that the GODR
has absolutely no interest in purchasing the EdeEste
distributor, which AES announced it intends to sell. The
GODR intention is the opposite, to privatize greater
percentages of EdeSur and EdeNorte than before.


13. (SBU) The Secretary was adamant in maintaining that the
electricity generators were using the country's difficult
situation as an opportunity to blackmail the GODR. He
pointed to reports that Haina had sent employees home that
day in case of a militarization effort. &We have been
flexible, open, and cooperative. We have not threatened
anyone. But the Government "cannot give in to blackmail."

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COMMENT:
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14. (SBU) Though some agreement may be reached this week on
the distribution of the first $20 million, the GODR and
generating companies remain very far apart on analysis of the
sector's problems. A solution will probably require months
of work, active World Bank intervention, and GODR political
will.


15. (SBU) For now, appointment of this commission, likely
intended as a warning to the companies and as a negotiating
tactic by the GODR, appears to have been another
miscalculation as the government desperately looks for ways
to get electricity back on line. While officials have
downplayed the significance of the appointment of this
commission, it nevertheless has worried companies and the
IFIs. Though a military/government commission may be nothing
more than an action in keeping with local political style, it
is not the confidence building measure the country
desperately needs. END COMMENT.
HERTELL