HONDURAS DECLARES ENERGY EMERGENCY, RESTRICTS

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 001971

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, AND EB/ESC
STATE FOR DS/IP/WHA - MFLYNN, DS/ITA - KHALL, DS/DSS/OSAC -
CMEDEIROS
COMMERCE FOR MSEIGELMAN
TREASURY FOR DDOUGLAS
ENERGY FOR IA
DOL FOR ILAB

E.O. 12958: DECL: 09/22/2015
TAGS: EPET ECON ELAB PGOV KSAC HO
SUBJECT: HONDURAS DECLARES ENERGY EMERGENCY, RESTRICTS
MARKET

REF: A. A) TEGUCIGALPA 1851


B. B) TEGUCIGALPA 1873

C. C) TEGUCIGALPA 1910

Classified By: ECONCHIEF PDUNN FOR REASONS 1.5(B AND D)


1. (C) Summary. In an emergency session on September 22, the
GOH Council of Ministers declared an energy state of
emergency in Honduras. The decree imposes a number of energy
conservation measures, but does not directly address fuel
prices, which remain frozen without benefit of a
Congressional decree. The Commission of Notables -- formed
to investigate fuel prices and recommend reforms -- continues
to disintegrate as politicization and mission creep
reportedly overshadow the difficult and necessary work of
reforming the fuel pricing formula and gaining public support
for the new policy. Four commission members of the ten have
already resigned or announced their intentions to do so. The
Council of Ministers decisions are notable in their lack of
action on the more incendiary Commission proposals, though
separate talks with the oil sector continue (reported
septel). End Summary.


2. (U) In an emergency session on September 22, the GOH
Council of Ministers declared an energy state of emergency in
Honduras. This declaration -- a response to the recent civil
unrest stemming from sharp increases in fuel prices (refs A
and B) -- imposed a number of measures designed to reduce
fuel consumption. The Council decree mandated that for a
period of 15 days the "unlimited consumption" of electricity
would be restricted. Specific restrictions include: store
owners must turn off store signs and electric billboards
after 10 p.m.; gasoline stations will remain closed on
Sundays; bus and taxi routes will be re-designed to reduce
congestion in urban areas; cargo deliveries to businesses in
urban areas will be restricted to off-peak hours; rush hour
will be eased by mandating that public and private sector
workers report for work at different hours; and import duties
on fuel-efficient vehicles will be reduced.


3. (C) The decree does not address the issue of the current
price freeze on gasoline, imposed on September 7 for ten days
by congressional decree and extended de facto (but not de
jure) for another ten days on September 17 without a
congressional decree. The first price freeze rolled back
prices at the retail level to pre-Hurricane Katrina prices
(ref B) and mandated that the GOH would reimburse retailers
for the difference. The de facto continuation of that price
freeze, however, is not spelled out in any decree, and it
remains unclear who will foot the bill for that policy.
Public speculation is that the importers will absorb the cost
differential (oil sector responses to this proposal reported
septel). Catholic Priest Jesus Mora, representing Cardinal
Oscar Rodriguez as a non-voting member of the Commission,
told PolChief September 21 that it appeared that importers
would in fact do so for public transportation. International
Monetary Fund (IMF) Resident Representative Hunter Monroe
told EconChief that the Fund remains concerned about the
potential fiscal impact of this new policy, but is
withholding judgment until the costs and payment mechanisms
are made clear.


4. (C) The report that spurred this Council of Ministers
meeting was authored by the Commission of Notables -- a group
of ten high-profile persons formed by the GOH on September 7
to examine energy pricing policies in Honduras (refs B and
C). The group contains no experts on the petroleum sector
and has been plagued by politicization and internal dissent
since it began to meet. Irma Acosta de Fortin was the first
to resign from the Commission, publicly criticizing it for
both exceeding its mandate and failing to fulfill its
mandate. According to Fortin, the commission has not
examined the fuel pricing formula, and has not proposed a
transparent and efficient reform to that formula that the
public can both understand and accept. The commission has,
however, proposed revising thermo-electric generating
contracts, and exploring nationalized fuel imports and
approaching Venezuela for concessional fuel sales, all of
which, she said, goes well beyond the Commission's mandate.
Privately, Fortin told Post that she was frustrated by the
political grandstanding of several other commission members,
who seemed more interested in talking to the press about the
fuel crisis than in talking to one another.

5. (C) According to IMF ResRep Monroe, Jorge Bueso has also
decided to leave the commission. Bueso has long counseled
adoption of a responsible, practical fuel policy that
recognizes its centrality to the modern economy and that
respects fiscal limits imposed on the GOH by its available
resources and by the IMF and other international donors.
Emilio Larach, a businessman considered to be moderate on the
fuel issue, has also publicly declared his intention to
abandon the commission. Larach previously sought to refuse
nomination to the commission in the first place, but was
reportedly persuaded to accept the post by the Casa
Presidencial. On September 22, another commission member,
President of the Honduran Private Sector Council (COHEP) Jose
Maria Agurcia, told EconChief that he, too, will leave the
commission this weekend. "I won't be making a scandal of (my
departure)," he said, "but I won't be going back next week."
Agurcia has been tasked with reporting on any limitations in
vertical integration in the U.S. gasoline markets. Post has
provided him with information from the Federal Energy
Regulatory Commission (FERC) and from the Federal Trade
Commission (FTC). Agurcia intends to recommend that Honduras
adopt a structure that does not limit a priori the ability of
firms to vertically integrate (that is, for importers to also
distribute and market fuel products),but that has strong
anti-monopoly provisions. He favors strengthening the
Ministry of Commerce's Technical Petroleum Unit (UTP) to give
it the technical and financial capacity to appropriately
enforce consumer protections in the retail fuel sector while
maximally opening the sector to competition.


6. (C) The Council of Ministers also did not take up the
issue of state-run fuel imports, long a favorite theme of
Commission member Juliette Handal (a National Party
politician, wife of Vice President of Congress Johnny Handal,
and former President of the "Patriotic Coalition" -- a group
formed last year to promote increased state involvement in
the gasoline sector). The Commission, in addition to
exploring state-run importation based on the Costa Rica
model, also pointed out that under Decree 94 of 1983, the
state is permitted to contract with the private sector for
fuel storage. (Note: It appears to Post from an examination
of that decree that such contracts would be on market terms
and would not constitute nationalization or expropriation of
the storage facilities. End Note.) Texaco Country Manager
Luis Mayorga told EconChief that Texaco (owner of much of the
fuel storage capacity in Honduras, based in Puerto Cortes)
would be willing to contract for storage of fuel on behalf of
the GOH, as it does with other oil companies, but that any
such contract would be at prevailing market rates.


7. (C) The Commission also suggested that the GOH investigate
and re-negotiate contracts with electricity generators (a
theme that has been much in the press recently but which goes
well beyond the Commission's mandate.) The Council of
Ministers took no action on that recommendation. General
Manager of parastatal electric company ENEE Angelo Botazzi is
publicly quoted saying, "We are agreeable to reviewing the
contracts with thermo-electric generating companies. There
has been no intervention by the Commission of Notables; there
is an open dialogue." Botazzi went on to endorse the
Council's emphasis on energy conservation.


8. (C) Comment: While the ill-defined status of the current
de-facto price freeze on fuel prices remains troubling, the
measures proposed by the Council of Ministers seem largely
laudable to us. Using the fuel crisis as pretext, the
Council has cracked down on traffic congestion and illegal
taxi and bus routes, and begun taking steps to encourage
energy conservation. We would prefer to see price
pass-throughs used as a signal to consumers to conserve
energy, rather than a government mandate, but that seems
unlikely in the highly-charged political atmosphere only two
months before the November 27 presidential elections.
Closing gas stations on Sundays seems largely symbolic, and
runs the risk of encouraging the development of illegal sales
by unlicensed dealers. The Council has attempted to address
these risks by also mandating steep fines for violators, but
the GOH political will and capacity for enforcement is
historically weak. See septel for Post analysis of impacts
on U.S. and other petroleum sector companies. End Comment.

Williard
Williard