DOMINICAN ELECTRICITY SERIES #3: FINISH WHAT YOU

UNCLAS SANTO DOMINGO 003409 SIPDIS SENSITIVE SIPDIS DEPT FOR WHA/CAR, EB, EB/OFD/OIA, INR/IAA; TREASURY FOR J LEVINE; SOUTHCOM ALSO FOR POLAD E.O. 12958: N/A TAGS: ECON ENRG PREL EFIN DR SUBJECT: DOMINICAN ELECTRICITY SERIES #3: FINISH WHAT YOU STARTED OR FACE MORE LOSSES REF: A. 06 SANTO DOMINGO 3285 ¶B. 06 SANTO DOMINGO 3387 (SBU) 1. This is the third 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. - - - - - - - - - - - - - - - - WHY SEGURA IS JUST PLAIN WRONG - - - - - - - - - - - - - - - - (U) Less than two weeks after the government demanded a renegotiation of its financial contracts with the private generation companies, leading newspapers published damaging reports about the parastatal electric company's (CDEEE) poor management, high expenditures, and continued electricity losses. (SBU) CDEEE Vice-chair Rhadames Segura prefers to point the finger at the private sector and the financial contracts, such as the Madrid Accord, as cause for the electricity crisis. Segura says that the contracts are the root cause for the high level of collection losses, corruption, and theft. According to Segura, the high price of electricity dissuades businesses and households from paying their electricity bills, forces the government to subsidize the sector, and results in theft within the sector. He does not note that before these contracts were signed, the electricity sector suffered from similar levels of corruption, theft, and collection losses. (U) Technical Secretary Temistocles Montas has strongly advocated privatization of the sector. His office recently published a report titled The Energy Monitor, examining electricity losses in the sector. In contrast to Segura's claim, the report finds that the main cause for the electricity crisis is found in the distribution sector, where CDEEE manages 2 of the 3 regional companies. It has a 49 percent stake in the third distributor-Ede Este (reftel B). In the first half of 2006, the report reveals, the distribution sector sustained losses of 44 percent, including technical losses of about 6-8 percent. More striking is the breakdown of the losses: distributors charged their end-users only 64 percent of the amount of electricity the distributors bought from the generators; of that 64 percent, distributors collected only 87 percent. Resulting electricity losses of 44 percent cost the government millions of dollars, create instability in the investment sector, and are evidence of the vast amounts of theft and corruption within the sector. (U) The Technical Secretary's report further explores the distributors' fat contribution to the high price of electricity. The generators charge the distributors an average of 11 cents per kilowatt-hour (KWH). Distributors then add an additional 10 cents per KWH for charges to the end-user. This distribution charge is called value added distribution. It grossly exceeds the international standard of 5 cents per KWH. (U) The report mirrors the political row between Segura and Montas. It strongly suggests that a renegotiation of the contracts would reduce by only a fraction the annual losses of the distribution sector (reftels A and B). (SBU) Further, CDEEE's mid-year performance report shows a negative cash flow of USD 42 million. Topping the list of expenditures is CDEEE's payroll, accounting for 70 percent of its operational costs. (SBU) As described earlier in this series, Segura continues to push for more government presence in the electricity sector. In early October 2006, CDEEE proposed a draft law to Fernandez and received fierce pushback from Montas. In addition to increasing CDEEE's control of the electricity sector and creating more senior level government positions within CDEEE, Segura's proposal stipulated that the salaries of CDEEE's executive committee should be commensurate to private sector executive salaries. Rumors are that Montas and Segura engaged in a fierce a verbal debate in the government-only meeting. - - - - - - - - - - - - - COMMENT: FINISH THE JOB - - - - - - - - - - - - - (U) Some areas within the country offer models for privatization. In the resort areas of Punta Cana, Bavarro, and Las Terenas, the electricity supply is completely private. These resort areas and their local communities respond with collection rates of at least 95 percent. The methodology is simple: "If you don't pay, you don't get electricity." The result is 24/7 electricity. AES, through its management of regional distributor EdeEste, participates in the rationing of supply in conformity with CDEEE instructions, but it is providing 24/7 electricity to those towns where the cost recovery index is 85 percent or higher. The recently announced program, called "La Esperanza" (Hope), has just awarded two towns east of Santo Domingo with uninterrupted electricity. (SBU) Temistocles Montas appears to be the only high-ranking government official who wants to finish what the government started under the first Fernandez administration. Incompetent management, a lack of political will, ambition and greed fuel CDEEE's desire to increase its role in the electricity sector, a move likely to increase electricity losses and government debt. At 26 months into the second Fernandez administration,the only movement in the electricity sector has been backwards. ¶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/ . HERTELL