DOMINICAN ELECTRICITY CRISIS CONTINUES--NO CHANGE

UNCLAS SANTO DOMINGO 000987 SIPDIS SIPDIS DEPT FOR WHA/CAR, EB/IFD/OMA, EB/ESC/IEC/EPC E.O. 12958: N/A TAGS: DR ENRG PGOV SUBJECT: DOMINICAN ELECTRICITY CRISIS CONTINUES--NO CHANGE EXPECTED BEFORE MAY ELECTIONS REF: A. 2005 SANTO DOMINGO 04036 ¶B. 2004 SANTO DOMINGO 02988 ¶C. 2004 SANTO DOMINGO 02957 ¶D. 2006 SANTO DOMINGO 00006 ¶1. Summary. The Dominican Republic continues to experience frequent localized electrical power blackouts that can last more than twelve hours a day. Energy sector problems hinder economic competitiveness and create widespread public dissatisfaction. Supply shortfalls in the sector can be attributed mainly to the distributors' inability to collect sufficient funds from consumers. Contributing to the problem, authorities have declined to allow electricity tariffs to adjust to reflect world fuel price levels. The Dominican electric sector subsidy has grown in the last 18 months to USD 712 million. The projected subsidy for 2006 is USD 600 million. The executive, focused on the May 2006 congressional elections, is unlikely to make any controversial sector reforms*-including allowing the tariff to increase, reducing subsidies to the poor, or increasing collections. End Summary -------------- IMF/WB Programmatic Power Sector Reform Loan -------------- ¶2. The World Bank has sought for years to achieve consensus on reform in the energy sector. In 2002 the Bank supported negotiation of the "Madrid Accord," which would have resulted in a one)time payment to generators by the World Bank, in return for renegotiated contract rates. Because of the financial crisis resulting from major banking frauds, which came to light in 2003, the government was never able to qualify for the loan (reftels B and C). ¶3. In 2004, the World Bank redesigned the structural loan, which was associated with a USAID energy stabilization plan. The policy-based loan of USD 150 million was designed to support the initial phases of the financial recovery of the sector, using conditionality to encourage collections and to deal with arrears. Collection improvement criteria were specified for the three electricity distributor companies, two of which are entirely government owned. ¶4. The World Bank planned to disburse the loan in three tranches of USD 50 million. The first tranche, for June 2005, required that the distribution companies reduce losses and improve collections to specified percentages of electricity furnished. It also required that the government remain current on its electricity bills, transfer the budgeted funds to the distribution companies via the Dominican Corporation of State Electric Companies (CDEEE), and allow the automatic adjustment of retail tariffs for variations in the exchange rate, fuel prices, and inflation. Sector participants failed to satisfy these conditions and the World Bank did not release the loan. While the USAID plan estimated government subsidies of USD 350 million for 2005, the final figure, owing in part to higher world petroleum prices, was USD 500 million. ¶5. Since January the CDEEE has refused to authorize increases in electricity tariffs. Director General Radhames Segura complained publicly about World Bank intransigence, prompting the Bank,s office to issue an explanation of the agreed criteria for the loan. Segura advocated "triangulation" of financing, a euphemism for a bridge loan from the government-owned Banco de Reservas. The reality is that the administration wants to avoid tariff rises during the congressional election campaign that culminates in the May 16 elections. -------------- -------------- The Anti-Blackout Program -------------- -------------- ¶6. Poor neighborhoods are particularly affected by power outages because almost no one has a backup generator. The shortage of electricity in these areas increases the risk of night crime and worsens already meager medical and educational services. It disrupts local businesses. ¶7. In 2001 the administration of President Mejia created electricity subsidies for poor urban neighborhoods with the Blackout Reduction Program (Programa Nacional de Reduccion de Apagones ) PRA). PRA offered consumers in subsidized poor neighborhoods electricity for 20 hours a day, with 75 percent of the cost financed by the government and 25 percent by the distributors. PRA consumers were assigned fixed monthly payments, not affected by changes in fuel prices or the exchange rate. ¶8. The system had some initial success in addressing social unrest created by blackouts, but it established negative incentives. The system of fixed payments encouraged energy waste and the cheap service attracted migration to the PRA areas. Originally scheduled to last only 2 years, the PRA is still in place, five years after its inception. -------------- -------------- A Misguided Approach: Increasing Generation Capacity -------------- --- ¶9. The Fernandez administration's response to the nation's electricity problems has included a push to increase generating capacity, even though experts on energy agree that there is no lack of capacity. The Dominican Republic's installed generation capacity is over 3000 megawatts while the average daily peak demand is around 1800 megawatts (reftel A). ¶10. The government recently contracted the construction of two coal-fired electric generation plants. It awarded the first plant contract to United Arab Emirates corporation Emirates Power DR, S.A. and is negotiating with Chinese firm Sichuan Machinery for construction of the second facility. The 600-megawatt plants, to be located in the northwestern coastal town of Monte Cristi and the southwestern town of Azua, represent an estimated combined investment of USD 1.2 to 1.4 billion and are projected to be operational in 2009. The government contends the new plants will produce electricity at less than half the cost of plants powered with gas and fuel oil (USD 0.03/kwh versus USD 0.08/kwh). Proponents, including the President, argue that finding a cheaper source of fuel is key to eliminating regular blackouts. ¶11. With cheaper coal-generated electricity, distribution companies stand to save significantly over more expensive energy from current generators. One possible motive for adding coal-fired generating capacity is that the government plans to use the alternative source of electricity to force existing generators to renegotiate their contracts to include lower energy tariffs. ¶12. The outcome of the initiative is not clear. The authorities have not included externalities such as environmental damage in the cost calculation. Nor have they provided estimates of the cost of building high-tension transmission lines to connect the new installations to the grid. It is unclear how the government, already pressed to find funds for subsidies to keep the system running, intends to finance completion of the project. -------------- Uncertain Prospects for 2006 -------------- ¶13. On March 1, the government, distributors, and most generators signed the "General Agreement of the Dominican Electricity Sector for 2006." The agreement is a promise of timely payment for all electricity purchased by the distributors from the generators, valued at about USD 90 million per month. The agreement freezes the remainder of pre-2006 debt, estimated at more than USD 500 million, although the government commits to paying interest on the debt. ¶14. Several days after the agreement was signed, Finance Minister Vicente Bengoa publicly complained that his ministry had not been consulted. Bengoa indicated that he was not willing to approve the agreement until after a thorough review. ¶15. President Fernandez acknowledges electricity problems to be one of the biggest challenges facing his government, and his administration is focusing on coal fired production and securing energy deals with coal- or petroleum-rich countries, including Venezuela, Mexico, Colombia, and Qatar (reftel D). The administration has also decided, once again, to establish an energy commission of generators, distributors, and international organizations to help design approaches to the sector's problems. ¶16. The fundamental flaw of the system is the culture of nonpayment for energy services. Contracts, commissions, and new coal plants may address small parts of the electricity sector dilemma but the core problem--poor performance of the distribution companies on collections--remains unresolved, although in late 2005 the two government-owned distributors hired experienced Latin American expatriates to direct their operations. The distribution companies collect around USD 0.50 of every USD 1.00 of electricity sold and the consequent delay in payments to generators results in plants being off line when they need to be producing electricity. Raising tariffs, enforcing collections, and reducing subsidies are necessary steps to fix the sector's problems. Due to the population's great sensitivity to these proposed changes, it is unlikely that the government will make any considerable reforms in these areas prior to May congressional elections. End cable HERTELL