ENERGY MINISTRY PLANS NEW LAWS UNDER CONSTITUENT

C O N F I D E N T I A L QUITO 000955

SIPDIS

SIPDIS

TREASURY FOR S. GOOCH
DEPT FOR WHA/EPSC FAITH CORNEILLE

E.O. 12958: DECL: 04/25/2017
TAGS: ENRG EINV ECON EC
SUBJECT: ENERGY MINISTRY PLANS NEW LAWS UNDER CONSTITUENT
ASSEMBLY

REF: A. A: 06 QUITO 1920


B. B: 06 QUITO 1735

Classified By: DCM Jefferson Brown, Reasons 1.4 (b&d)


1. (C) Summary: Ecuador's Energy Ministry hopes to use the
upcoming national constituent assembly to make major changes
to the laws regulating the sector, according to the Under
Secretaries of Petroleum, Mining, and Electricity. They plan

SIPDIS
to use the Assembly as a substitute Congress, introducing and
passing laws that would serve largely to increase and
consolidate the ministry's power over Ecuador's petroleum and
electricity sectors. Planned changes include giving state
oil company Petroecuador financial autonomy and eliminating
its role as "partner" for foreign oil companies, giving the
ministry direct control over petroleum contracts, replacing
the fund that pays electricity distributors with a
ministry-controlled holding company, and possibly restricting
large-scale mining in Ecuador. End Summary.


2. (C) Ecuador on April 15 voted in favor of holding a
constituent assembly with "full powers," and will elect
delegates for the assembly on September 30. The Assembly
would be installed by mid-November and produce a new
constitution by July 2008. Based on conversations with
senior energy officials, it appears the Energy Ministry
expects to treat the Assembly as a session of Congress,
attempting to pass new laws and alter existing laws. Under
Secretary for Hydrocarbons Jorge Alban cited the Assembly's

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"plenos poderes" (full powers),which some believe refers
only to powers to rewrite the Constitution but others believe
gives the Assembly the ability to dissolve Congress and
assume its functions.


3. (C) Alban reported that the ministry plans to make a
number of changes that would modernize and grow Ecuador's
petroleum sector. He noted that the Administration does not
want to stop new petroleum production altogether (as some
government officials have implied),but wants to "use well
what we have." First, the ministry plans to introduce a
special law to reform state oil company Petroecuador, giving
it financial autonomy. (Currently, the Ministry of Finance
controls Petroecuador's revenues and only distributes what it
deems necessary for Petroecuador's operations. Consequently,
the company is usually short of cash, unable to perform
needed maintenance on wells, and hindered from considering
new projects, ref A.) Second, the ministry would change
Ecuador's hydrocarbons law to eliminate Petroecuador's role
as the administrator of petroleum contracts with private
companies, transferring that responsibility to the ministry
itself. Petroecuador would no longer be the partner company
for foreign operators in Ecuador but would be "just another
operator," and would allegedly have to compete for contracts
along with other firms. This move would purportedly
streamline the contract process in Ecuador and eliminate
opportunities for corruption that are currently so rampant in
Petroecuador, but would also serve to give the ministry more
control over contracts with foreign companies.


4. (C) In the electricity sector, the ministry wants a "more
empresarial" structure. Currently, the sector has a
complicated ownership structure and revenue sharing process
under the quasi-governmental "Fondo de Solidaridad," which is
nontransparent and subject to manipulation. Although
distributors are government-owned, the Fund does not have
direct control over them (many are overstaffed, unable or
unwilling to collect from clients, cash strapped and poorly
run, and controlled by powerful unions, ref B). Electricity
Under Secretary Alecksey Mosquera explained that the ministry
plans to introduce a law in the constituent assembly to
eliminate the Fund entirely and create in its place a holding
company managed by the Energy Ministry that would have more
control over government-owned distributors and generators.
In addition, the law would permit efficient distributors to
take over (and essentially absorb) poorly run distributors.


5. (C) Mining Under Secretary Jorge Jurado asserted that
mining is much more environmentally damaging than petroleum
operations, and should therefore be put to a "consulta" or
referendum of the population to ask Ecuadorians for their
opinion on whether large scale mining should take place in
Ecuador (supposedly the referendum would note that the

country would lose significant resources if mining were
eliminated). It would further ask citizens for their views
on when and where this type of mining should take place.
Based on the referendum's results, provided large-scale
mining was not opposed completely, Jurado expects that the
ministry would introduce one or two broad laws or decrees in
the constituent assembly, such as forbidding mining in
environmentally sensitive "protected areas" or forbidding
"open" mining.

Comment:


6. (C) This is the first insight we've been provided into
how one ministry is thinking about how to use the constituent
assembly to advance its agenda, and we have no indication
whether this approach reflects a broader Administration
perspective. In general, the Energy Ministry appears to want
to consolidate its power over other energy sector
institutions -- but Petroecuador will resist some of these
moves, and it's not clear which side will prevail. The
ministry is making two assumptions regarding the constituent
assembly - first, that the Assembly will have powers to act
as a Congress and pass laws, not just design a new
constitution, and second, that the freely-elected Assembly
will be sympathetic to the Administration's goals. This is
likely given Correa's current popularity, but not a given,
since the elections for the Assembly will be hotly contested
by the opposition.


7. (C) There are advantages and disadvantages to the
proposed changes. They could make Ecuador's dysfunctional
energy sector decision-making process more efficient by
concentrating power within the ministry, but at the same time
would eliminate or marginalize other institutions that
provide important oversight functions and have a more
technical perspective than the ministry. The changes may not
address some of the underlying problems that hamper the
sector. For example, in the electricity area, switching to a
more powerful holding company will not necessarily solve
existing cash flow and management problems, and could permit
more centralized corruption. Also, giving Petroecuador
fiscal autonomy may provide it with more resources, but will
not necessarily address its other major constraints -
inefficiency and widespread corruption.
JEWELL