DOMINICAN PRESIDENT FERNANDEZ'S CONFERENCE ON THE

C O N F I D E N T I A L SANTO DOMINGO 002908 SIPDIS SIPDIS DEPT FOR WHA/CAR, EB/ESC/IEC/EPC, INR/IAA; TREASURY FOR J LEVINE E.O. 12958: DECL: 09/07/2016 TAGS: ENRG ECON DR SUBJECT: DOMINICAN PRESIDENT FERNANDEZ'S CONFERENCE ON THE ELECTRICITY SECTOR Classified By: Classified By: Ambassador Hans H. Hertell for reasons 1. 4 (b) and (d) ¶1. (U) Summary. On September 8-9 President Fernandez is hosting a national conference with roughly 300 public and private participants from the electricity sector. The conference will focus on a report presented to President Fernandez in March 2006 by Adam Smith International (ASI) regarding the electricity sector in the Dominican Republic. Industry heads believe that Fernandez will highlight new actions that the government plans to take to fix the 30-year electricity problem. End Summary. ¶2. (U) On September 8-9 President Fernandez is hosting a national conference with roughly 300 public and private participants from the electricity sector. The conference will focus on a report presented to President Fernandez in March 2006 by Adam Smith International (ASI) regarding the electricity sector in the Dominican Republic. ASI's report recommends policy changes to combat poor collection and high levels of theft resulting in large distribution losses within the electricity sector. ASI also recommends a strengthening of central policy through the creation of a new ministry (of energy/electricity) focused on policy making, planning, regulation, but with no responsibility for running state electricity distribution companies. ¶3. (U) ASI's first recommendation on collection shortfalls is not new. A USAID study completed in 2003 also highlighted low collection levels and the need for better enforcement measures and more independence at the regulator level. In the last five conferences regarding the electricity sector, both consultants and CEO's of the generation and distribution companies recommended, and in some cases demanded, that the government "stop the theft and the corruption!" The World Bank reported in 2000 that the Dominican Republic ranked as the 9th worst country in the world for distribution losses. In 2002, the Bank ranked the country 7th and in 2005 it ranked 4th worst. Movement was steadily retrograde. ¶4. (SBU) Since taking office President Fernandez and sector officials have approached the problem with short-term or unfocussed solutions: proposal of renegotiation of the Madrid Accord on tariff rate changes in exchange for up-front compensation, a proposal to renegotiate the power purchasing agreements (PPAs) with the independent power producers, and the signature of contracts for the purchase of two new 600MW coal-powered plants. The renegotiation proposal failed, a positive sign for future foreign investment, but the two new plants went forward, (to date, they have yet to break ground due to a lack of external financing or government guarantees). The construction initiative was undertaken even though the Dominican Republic has over 3000MW of installed capacity; the current demand is about 1600MW with peaks of about 2200MW. The addition of two new coal plants would bring total installed capacity to 4200MW, well in excess of what the is needed to meet demand. The presume motivation is to create pressure on already established generators, so as to force a renegotiation of the Madrid Accord and the PPAs, according to one senior level Dominican official. ¶5. (SBU) The theft and corruption problems are not new. Energy consultants, company presidents, regulator Francisco Mendez, Technical Secretary Temistocles Montas, and President Fernandez all know that corruption and theft are the root cause of the sector's troubles. What is new is that on August 16 Fernandez' PLD party took control of both houses of Congress for the first time ever. They should have the votes to implement reforms to curb corruption and theft. What is unknown is whether the President and party have the political will. -------------- -------------- Further privatization of the electricity sector? -------------- -------------- ¶6. (C) The governmen-owned Dominican Corporation of State Electric Companies (CDEEE) currently controls the transmission sector, all hydroelectric plants, and two-thirds of the distribution sector. According to AES country manager Manuel Perez, this government operation has a US$ 1 billion cash flow; he doubts that the government will let go of an operation that fills government coffers and feeds the political party with power and influence. ¶7. (C) CDEEE has the greatest resources and is the most powerful government institution in the energy sector. It is headed by executive vice president Rhadames Segura, a powerful PLD member very close with Danilo Medina, President Fernandez's chief of staff. During econoff's courtesy call in July with Ruben Montas, then Director of the National Energy Commission, Montas stated that Segura is averse to further privatizing of the sector and highlighted that in fact, Segura would like more government control in the electricity sector. Montas added that Sergura has presidential aspirations and likes to be seen in public and at meetings with an army general behind him, symbolizing his elevated level of authority. -------------- Talk of a Ministry -------------- ¶8. (C) ASI's recommendation for creation of a ministry could become a reality. ASI considers that the electricity sector would benefit from firmer central policy leadership. President Fernandez could easily get buy-in from Congress. Most industry experts believe that Segura would be chosen to head the body. This would fuel his desire to see more government control of the electricity sector. Given his political ambitions, it seems unlikely he would take steps to create the necessary reforms. -------------- Expectations of the conference -------------- ¶9. (C) AES' Perez believes that Fernandez and other government officials will look to the generating companies (the private sector) for some leeway regarding existing contracts. Perez also believes that Fernandez will talk about renewable energies, projects to build ethanol plants and windmill farms. Regarding corruption and theft, Perez hopes that Fernandez will enact tougher measures to curb the problems. July's cost recovery index (CRI) for the entire sector was about 54 percent, "a failed business," as a representative of the European Commission remarked. ¶10. (SBU) Distribution companies have been rationing electricity across the country, providing limited hours of service to those communities with poor payment records. One bright note is that AES has announced that two towns in the eastern part of the Dominican Republic will receive 24 hours of electricity on a daily basis because the CRI for these two towns reached 85 percent. AES had promised 24 hour service if a sufficiently high level of collections was achieved. The result was that a solid majority of consumers paid for what they used. The project is called La Esperanza (Hope) and it should send a signal to Fernandez and the government that the electricity problem can be resolved if fraud and theft are properly addressed. Sensationalist afternoon tabloid El Nacional ran a celebratory editorial cartoon on September 7, an uncharacteristically positive treatment of news. ¶11. (SBU) Comment. The electricity problem in the Dominican Republic is more than 30 years old. Corruption and theft, deeply engrained in practice and tradition, are the main causes for this crisis. Electricity subsidies are expected to top US$ 600 million in 2006 and there is no end in sight for the problem. Contrary to recommendations of the IDB, IMF, industry consultants and experts, President Fernandez has made it a point to continue providing these subsidies. Fernandez has been in power for more than two years and nothing has changed in the electricity sector. With his PLD party in control of Congress, any future failures will be fully his. ¶12. (U) Drafted by Chris Davy. ¶13. (U) This report and extensive other material can be consulted on our SIPIRNET site, http://www.state.sgov.gov/p/wha/santodomingo/ . HERTELL