GOB'S PROPOSED ELECTRICITY REFORMS

UNCLAS LA PAZ 000438 SIPDIS SIPDIS STATE FOR WHA/AND TREASURY FOR SGOOCH ENERGY FOR CDAY AND SLADISLAW E.O. 12958: N/A TAGS: ECON EINV ENRG BL SUBJECT: GOB'S PROPOSED ELECTRICITY REFORMS REF: A. 2006 LA PAZ 817 ¶B. 2006 LA PAZ 2967 -------------- Summary -------------- ¶1. (SBU) Vice Minister of Electricity Villarroel said that the government hopes to pass a universal access law the first quarter of 2007 to expand rural electricity coverage. In addition, the government has begun strengthening the state-owned electricity company, ENDE, and is studying ways to reform the regulatory system. The government hopes to stimulate enough investment in the sector to export electricity to neighboring countries, but such investment seems unlikely given GOB measures which have reduced company profits. U.S.-owned Duke Energy sold its 50 percent ownership interest in the Bolivian capitalized hydroelectric generator Corani to U.K.-owned Econergy on February 5 for half the price that it had paid for the assets in the 1990s. End summary. -------------- -------------- Universal Access Law to Promote Rural Electrification -------------- -------------- ¶2. (SBU) Vice Minister of Electricity Hugo Villarroel told Econoff on February 13 that, as outlined in the national development plan, the government's focus in the electricity sector is increasing access, particularly in rural areas which currently only have 38 percent coverage. He explained that the government hopes to pass a universal access law within the first quarter of 2007, which he explained, would not significantly impact the current electricity law. The expansion would be financed with internal funds and by seeking international aid. The government also aims to promote clean energy by increasing the portion of electricity provided by hydro-generators (38 percent),versus thermal-generators, and developing geo-thermal generation near Laguna Colorado in southern Bolivia. -------------- -------------- Strengthening State Company and Reforming Superintendent -------------- -------------- ¶3. (SBU) In addition, the government has begun to strengthen the state-owned company, ENDE, which was left weak after the partial privatization program of the 1990s, to fill voids left by the private sector, perhaps using the Colombian company ISA as a model. Villarroel indicated that the government plans to modify the 1995 electricity law to give ENDE the same capacity to participate in the sector as private companies. The government announced in the national development plan that it would reform the regulatory system by moving the independent superintendents under the control of the ministries. Villarroel said that the ministry is studying ways to enact this reform. -------------- -------------- Stimulating Investment: Possible Given Declining Profits? -------------- -------------- ¶4. (SBU) The government hopes to stimulate enough investment in electricity generation, which Villarroel said had been essentially frozen since 1999, to enable Bolivia to export electricity to neighboring countries. According to industry representatives, since a stabilization fund was established in 2003, consumer rates have been basically frozen. As company costs have increased, the low rates have impeded company expansion, and profits have steadily declined. In March 2006, the GOB implemented the dignity tariff (ref A), even further reducing profits by mandating lower rates for marginal consumers. When asked how the government plans to stimulate investment after implementing the lower rates, Villarroel responded that companies would invest because of the growing market, including the expected 8 percent increase in demand once the San Cristobal mine comes fully on-line in the fourth quarter. He argued that access to markets would produce investments, as it had done in the hydrocarbons sector once Bolivia secured the Argentine market (ref B). -------------- Duke Sale of Corani Assets -------------- ¶5. (SBU) U.S. company Duke Energy International announced that sale of its 50 percent ownership interest in the Bolivian capitalized hydroelectric generator Corani on February 5. Corani operates two hydroelectric power plants near Cochabamba. Duke sold its assets to a U.K. company, Econergy International, for USD 28 million, 50 percent of the price paid by Duke for the assets in the 1990s (USD 56 million). Corani President Jose De La Fuente told Econoff on February 7 that Corani would maintain its current staff, except the board members. He added that Public Works Minister Jerges Mercado was positive about the sale, and had told Econergy that the government does not plan to interfere with private sector operations. Econergy International, which has offices in Boulder, Colorado, Washington, D.C., Brazil, and Mexico, is developing 40 clean energy projects in Latin America that may sell carbon credits under the Clean Development Mechanism, an arrangement under the Kyoto Protocol that allows developed countries with greenhouse gas reduction commitments to invest in emission reducing projects in developing countries as an alternative to reducing their own emissions. De La Fuente said that the sale of carbon credits to European buyers has significant potential for future growth. -------------- Comment -------------- ¶6. (SBU) Although the vice minister argued that growing demand and market opportunities would produce additional investment, and that investors would not be deterred by increased state involvement in the sector and lower returns resulting from government-mandated low consumer rates, the sale of Duke's assets in Corani is a bad sign. The fact that Duke sold its assets for half of their purchase price indicates a loss of investor confidence in the sector. The government is correct in its assessment that the privatization program of the 1990s has not delivered the hope-for results, as 62 percent of rural resident still lack access to electricity, because it is unprofitable for private companies to serve disperse rural areas of Bolivia. However, if the country is to attract additional private investment to meet growing urban demand, the GOB must strike a balance between promoting access and allowing profits. End comment. GOLDBERG