GOB ESTABLISHES ELECTRICITY "DIGNITY TARIFF"

UNCLAS LA PAZ 000817

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/AND LPETRONI
COMMERCE FOR JANGLIN
ENERGY FOR SLADISLAW
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: ETRD EINV ECON PGOV BL
SUBJECT: GOB ESTABLISHES ELECTRICITY "DIGNITY TARIFF"

REF: LA PAZ 600


1. (U) Summary: The GOB established an electricity "dignity
tariff" March 21, introducing a 25 percent reduction in rates
for consumers who use fewer than 70 kilowatt hours of
electricity per month. The 16 companies comprising Bolivia's
national electricity network agreed to accept the rates and
to bear an estimated $4.5 million in annual costs, but only
under heavy government pressure. Company representatives
told Econoffs March 22 that the Morales administration's
decree differed slightly from a draft negotiated with
electricity companies and worried that GOB officials would
continue to tinker with electricity prices. The tariff is
further evidence of Bolivia's deteriorating investment
climate, and many observers believe it is part of the
government's push to buy popular support in advance of the
Constituent Assembly. End summary.


2. (U) In a March 21 supreme decree, the GOB established a
"dignity tariff" for electricity, introducing a 25 percent
reduction in rates for low-consumption, low-income
households. The new rates will apply to households connected
to Bolivia's national electricity network and consuming fewer
than 70 kilowatt hours per month (kwh/mo) and to households
connected to isolated, mostly rural, systems and using fewer
than 30 kwh/mo. According to press reports and private
sector estimates, 40 to 50 percent of all consumers will
benefit from the change.


3. (SBU) The 16 generation, transmission, and distribution
firms comprising Bolivia's national electricity network
agreed to accept the new rates and to bear an estimated $4.5
million in annual costs, but only under heavy government
pressure. In earlier conversations with Econoffs, company
executives said GOB officials threatened to make rate changes
with or without private sector support, suggesting firms
could best serve their own interests by supporting the GOB's
initiative (reftel). Companies subsequently entered into a
"strategic alliance" with the GOB and agreed to accept rate
cuts in exchange for GOB commitments to respect existing
concessions and licenses, honor established pricing
arrangements, and solve problems with the electricity
industry's price stabilization fund.


4. (SBU) According to company executives, the fund was
designed to prevent consumer price fluctuations by taking
deposits when state-established electricity tariffs exceeded
generation, transmission, and distribution costs and by
covering deficits when tariffs fell below costs. At first,
the fund worked well, but as a result of rising costs and
Presidents Rodriguez and Morales' unwillingness to raise
electricity rates in the run-up to and immediate aftermath of
the December 2005 presidential elections, companies have
begun losing money. They anticipate that these losses will
continue until at least October 2006, as the March 21 decree
prohibits consumer rate increases until that date.


5. (SBU) Representatives of Elfec, a subsidiary of U.S.-based
PPL Corporation and Bolivia's second-largest electricity
distribution company, told Econoffs March 22 that the decree
establishing the dignity tariff differed slightly from a
draft negotiated with electricity companies. The GOB
extended the deadline for solving problems with the price
stabilization fund until October, one month longer than
expected, and expressed interest in making an off-cycle
revision of tariffs, typically established every four years
by the superintendent of electricity. Elfec executives
pointed out that the GOB had never established procedures for
such revisions and worried that officials would further lower
rates to unacceptable levels.


6. (SBU) While the exact mechanism for dividing the new

tariff's costs among generation, transmission, and
distribution firms has yet to be determined, Elfec
representatives expect the GOB's initiative to cost the
company more than $300,000 per year. Another firm, Empresa
Electrica Corani, a subsidiary of U.S.-based Duke Energy
International, expects to lose as much as $500,000 per year.
The companies only reluctantly accepted the rate reduction,
considering the GOB's proposal the "least bad" option and
recognizing they had little choice but to give in to
government pressure. Company executives worry that GOB
officials will continue to tinker with electricity prices,
noting that Minister of Public Works Salvador Ric privately
told them the dignity tariff "was only the beginning" of
changes affecting the electricity industry.


7. (SBU) Comment: Company fears may be well founded. The
scheduled election of Constituent Assembly delegates is less
than four months away, and the government has strong
incentives to boost popular support for its candidates. Many
observers see the electricity "dignity tariff" as part of the
Morales administration's populist push to buy such support.
End comment.
GREENLEE