ELECTRICITY SERIES #1: WHO'S GOT THE POWER IN THE

C O N F I D E N T I A L SANTO DOMINGO 003285 SIPDIS SIPDIS DEPT FOR WHA/CAR, EB/ESC/IEC/EPC, F; DEPT PASS DOE; DEPT PASS USAID/LAC E.O. 12958: DECL: 10/16/2016 TAGS: ECON ENRG PREL EFIN DR SUBJECT: ELECTRICITY SERIES #1: WHO'S GOT THE POWER IN THE DOMINICAN ELECTRICITY SECTOR REF: A. 06 SANTO DOMINGO 1652 ¶B. USAID STUDY: ANALYSIS OF THE SUSTAINABILITY OF THE ELECTRICAL POWER SECTOR Classified By: EcoPol counselor Michael Meigs, Reasons 1.4(b),(d) ¶1. (U) This is the first cable of a series on the politics surrounding the electricity sector and why politics and not economics is the cause of the electricity crisis in the Dominican Republic. Contending institutions oversee Dominican electricity policy and regulation. Recent changes suggest a rising influence of hardliner Rhadames Segura, Vice Chair of the Dominican Corporation of State Electric Companies (CDEEE). Segura convenes a session on October 18 to apply pressure on private sector firms to renegotiate and to lower rates. WHO'S GOT THE POWER IN THE DOMINICAN ELECTRICITY SECTOR? - - - - - - - - - - - - - - - - - - - - - - - - - - - - At a government-only meeting on October 14, President Fernandez outlined to congressional leaders and senior officials three new proposed laws: a change to the electricity law that allows the government to criminalize the act of stealing electricity (good, in our opinion),a new law to create a Superintendencia de Combustibles (neutral; more bureaucracy to respond to last week's fuel shortages),and a new law to broaden the role of the state-owned electricity company, CDEEE (bad, in our opinion). A subsequent report will further analyze these proposals, but the outcome of the meeting revealed that Presidential Technical Secretary Temistocles Montas and CDEEE chair Radhames Segura are at odds with each other. Montas wants to continue the market-oriented recapitalization plan set out in Fernandez' first term and to privatize the rest of the electricity sector, while Segura wants to broaden CDEEE's role in directing the sector. Segura's eventual aims could include complete control of the state transmission and hydroelectric companies and, possibly, the nationalizing of distribution company EdeEste. On October 18, Segura is meeting with the privately-owned generators to discuss yet again a renegotiation of their generation contracts. -------------- INSTITUTIONS -------------- (U) The Dominican Republic does not have a Ministry of Energy; rather, it has several government agencies involved in the electricity sector that answer either to the President or to another agency. As reported in reftel A, the government hired London economic think tank Adam Smith Institute (ASI) to do an independent study of the energy sector. One of ASI's recommendations is to create a Ministry of Energy that is not involved with the day to day operations of running an electric company. ASI suggests that the state electric company (CDEEE) should be a holding company and nothing more. (U) The current framework used to manage and/or regulate the electricity sector consists of the Dominican Corporation of State Electric Companies (CDEEE),the Superintendency of Electricity (SIE),the Coordinating Organism (OC),the National Energy Commission (CNE),and the Ministry of Industry and Commerce (SEIC). -The Dominican Corporation of State Electric Companies (CDEEE) is the agency that is in charge of coordinating all state-owned electric companies' activities (distribution, transmission, and hydroelectric),the rural electricity program, and the contracts between the state and independent power producers (IPPs),which are the privately-owned generators. The President appoints the CDEEE head (currently Rhadames Segura). The state electric transmission company (ETED),which is in charge of transmitting electricity for the national grid, and the state hydroelectric company (EGEHID) are independent but coordinate with CDEEE's management for planning purposes. CDEEE also coordinates the activities of two of the three distribution centers (EdeSur and EdeNorte now both 100 percent government-owned) and has a minority share of a third distribution center (EdeEste). CDEEE is the most powerful government institution in the energy sector. -The Superintendency of Electricity (SIE) is the regulator of the electricity sector. The President appoints its three commissioners and designates one of them as chairman (currently Francisco Mendez). As a regulator, SIE monitors E anti-competitive practices in the market, verifies compliance with regulations, applies fines and penalties, adjudicates complaints, and grants licenses for generation, in addition to other duties. -The Coordinating Organism (OC) is independent of the government and oversees the operation of the wholesale electricity market. Specifically, the OC plans and coordinates the operation of the spot market, sets the rules for the operation of the spot market, provides a means for evaluating energy for the market based on the marginal short term cost, and coordinates with CNE and SIE to promote healthy competition, transparency, and equity in the market. The OC board is made up of one representative from the private generation companies, the state hydroelectric companies, the state transmission companies, and the distribution companies. The Superintendent of SIE presides over the OC board and may vote only in the event of a tie. -The National Energy Commission (CNE) is in charge of policy and planning for the energy sector. The President appoints the CNE head (currently Aristides Fernandez Zucco). CNE advises the President on new energy projects and proposes changes to existing laws and decrees. It monitors the market to promote better use of energy. The Minister of Industry and Commerce chairs a board that includes the Technical Secretary to the President, the Minister of Finance, the SIPDIS Minister of Agriculture, the Minister of Environment, the Governor of the Central Bank, and the Director of Telecommunications. The Board can issue regulations to the sector, which the SIE must follow and implement. -The Ministry of Industry and Commerce (SEIC) monitors the energy sector and reports on hydrocarbons and renewable energies. Secretary of Industry and Commerce Francisco Javier Garcia is the gatekeeper for all energy companies seeking business permits to work in the Dominican Republic. -------------- LEADERSHIP -------------- (SBU) In the latest rounds of cabinet shifts, Ruben Montas moved from the position of Executive Director of the National Energy Commission (CNE) to that of Director of the Dominican national refinery (REFIDOMSA). Taking Montas' place as Executive Director of the CNE is Aristides Fernandez Zucco, the formerly dismissed Director of REFIDOMSA. For Montas, this is a step down, but for Zucco, the change is a promotion and a return to public service after 9 months in seclusion. President Fernandez made no cabinet-level changes in the electricity sector, leaving in the hands of Minister of Industry and Commerce Francisco Javier Garcia a sector that plagues the country at all levels. (C) Industry experts consider the true decision makers in the electricity sector to be President Fernandez, Technical Secretary Temistocles Montas, and CDEEE's vice chair Rhadames SIPDIS Segura. Regarding electricity, Segura and Temistocles Montas run the show, with Segura holding the purse strings. The President is significantly engaged and rarely does anything happen without his approval. Industry sources indicate that CNE has few resources and no enforcement capabilities and that SIE bows to political pressure and is not as independent as it should be. (C) During econoff's courtesy call in July with Ruben Montas, then CNE's director, Montas remarked that Segura has his sights on the Dominican Presidency sometime in the future. A member of the PLD political committee, Segura is very close to Danilo Medina, President Fernandez' chief of staff, the unsuccessful PLD presidential candidate in 2000 but still with presidential hopes. Ruben Montas commented that Segura likes to be seen in public with an Army general behind him to project a higher level of authority than his peers. Montas stated that Segura is averse to further privatization of the sector and stressed that Segura's desire is to nationalize parts of the electricity sector. (SBU) In March of 2006 U.S. firm Applied Energy Services' (AES) president Manuel Dubuc Perez met with the DCM regarding rumors about CDEEE's attempt to gain management and operational control over Ede Este, the last privately-managed distributor on the national grid. No expropriation was attempted, but Segura continued in April 2006 to call for a renegotiation of the Madrid Accord. That agreement consists of power purchasing agreements signed between privately owned generator companies and the government signed during the recapitalization efforts in 1999 (reftel A). After the May mid-term elections, the topic of renegotiation was heard only within the walls of Segura's office. A successful renegotiation might benefit the government in the short term, but could prove disastrous because of negative long term effects on the investment climate in the Dominican Republic. -------------- COMMENT -------------- (C) The Dominican government's failure to date to effect change in the spectacularly failing electricity sector is a fiscal disaster and an obstacle to its relations with the international financial institutions. USAID helped put together a "sustainability program" for 2005, intended to stop the growth in cross-sector debts; a key component was the undertaking of the distribution companies to improve their collections rate progressively. The World Bank approved a loan of USD 150 million for the sector with disbursement criteria prominently including the targets for raising collections from the then-current less than 50 percent. None of the three companies has met the goals; the two companies that are 100 percent government-owned have improved almost not at all. Technical Secretary Temistocles Montas, facing fiscal problems for the country in 2007, is asking President Fernandez to seek USG influence on the World Bank and other lenders to exhibit more "flexibility" for the Dominican problems. (C) Montas told the DCM on October 16 that he disliked the approach being taken to the sector; he believes that the government should return to the principles of the first Fernandez administration (when Montas was a major influence in seeking privatization). It appears that the statist antithesis of Montas, Rhadames Segura, is gaining influence within the administration. CEOs of some privately owned generators told emboff that they distrust his assurances that the project of renegotiating their contracts for delivery of electricity will be fair and amicable. Today's opening of the discussions could be the start of a long, complex process -- but unless the President and senior officials show some political will in identifying and prosecuting corporations and individuals openly stealing electricity, it will count for relatively little. ¶2. (U) Drafted by Chris Davy. ¶3. (U) This report and extensive other material can be consulted on our SIPIRNET site, http://www.state.sgov.gov/p/wha/santodomingo/ . BULLEN