Identifier
Created
Classification
Origin
07SANTODOMINGO1748
2007-07-20 13:28:00
CONFIDENTIAL
Embassy Santo Domingo
Cable title:  

ENERGY SECTOR POWER PLAY THREATENS INVESTMENT

Tags:  ENIV ENRG DR 
pdf how-to read a cable
VZCZCXYZ0016
RR RUEHWEB

DE RUEHDG #1748/01 2011328
ZNY CCCCC ZZH
R 201328Z JUL 07
FM AMEMBASSY SANTO DOMINGO
TO RUEHC/SECSTATE WASHDC 8814
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHPU/AMEMBASSY PORT AU PRINCE 4658
C O N F I D E N T I A L SANTO DOMINGO 001748 

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PASS TO ROTHSCHILD IN WHA/CAR

E.O. 12958: DECL: 07/19/2017
TAGS: ENIV ENRG DR
SUBJECT: ENERGY SECTOR POWER PLAY THREATENS INVESTMENT
CLIMATE


Classified By: Ellen M. Dunlap, Eco-Pol, reasons 1.4(b) and (d)

C O N F I D E N T I A L SANTO DOMINGO 001748

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SIPDIS

PASS TO ROTHSCHILD IN WHA/CAR

E.O. 12958: DECL: 07/19/2017
TAGS: ENIV ENRG DR
SUBJECT: ENERGY SECTOR POWER PLAY THREATENS INVESTMENT
CLIMATE


Classified By: Ellen M. Dunlap, Eco-Pol, reasons 1.4(b) and (d)


1. (C) Summary: The Dominican corporation of state
electricity enterprises (CDEEE) is currently engaged in a
political power play to recapture greater control of the
electricity sector. CDEEE, which is the most powerful player
in a fractured energy bureaucracy, has focused on both
increasing the generation capacity within the country and
renegotiating its power purchase agreements (PPAs) with
existing independent power producers (IPPs). The CDEEE views
the construction of new generation as leverage over the
existing IPPs to force them to renegotiate their contracts,
but appears to be entering into precisely the type of
contract with the new IPPs that it wishes to renegotiate with
existing producers. This set of circumstances has led to
political posturing by the opposition Dominican Revolutionary
Party (PRD),which has criticized the structure of the new
plant deal. Ultimately the CDEEE is failing to address what
most experts agree is the prime source of inefficiency in the
electricity sector, which is the distribution system (Septel
will address distribution system problems). End Summary.


2. (SBU) CDEEE is engaged in final contract discussions with
Sichuan Machinery and Equipment and Emirates Power to build
two coal-fired power plants with an installed capacity of up
to 1200 megawatts (MW): the first phase would involve 600MW.
Mr. Radhames Segura, the Executive Vice President of CDEEE,
told Econoff that in order to leverage the financing
necessary to build these plants, CDEEE is seeking
congressional approval of letters of credit each worth $30
million that would be renewable on a revolving basis.
However, this quasi-sovereign guarantee was not part of the
original tender solicitation and has sparked concern and
speculation among the IPPs and opposition political parties.


3. (U) CDEEE is currently in the process of attempting to
renegotiate all of its PPA contracts with the IPPs, including
the U.S.-owned AES Dominicana. AES Dominicana has debt and
equity investments in the country totaling approximately $1.1
billion. It is the largest U.S. foreign investment in the

Dominican Republic and has been operating here since 1999.
AES' two power facilities produce roughly 38 percent of the
Dominican Republic's electricity.


4. (C) CDEEE has approached these renegotiations without
coming to the table with concrete offers for how they would
be in the interest of the IPPs. As a result, AES Dominicana
and the other IPPs are wary of reopening negotiations because
they do not have a clear understanding of CDEEE's real
intentions. The IPPs have little assurance that all IPPs
will be treated equally and provided with terms permitting
them to recover their investments. (Note: The IPPs have as
much as US $400 million in debt, which most producers want
paid prior to any renegotiation) Some IPPs have flatly
refused to enter into new negotiations.


5. (C) CDEEE's current negotiation with Sichuan and Emirates
is an example of how the government creates an uneven playing
field. While requesting that existing IPPs renegotiate to
bring down the cost of energy for the state owned
distribution companies, it is entering into what appears to
be a sweetheart deal with two new IPPs by issuing revolving
letters of credit to the companies. Meanwhile, the
renegotiation of the cost of energy with the IPPs is not
expected to benefit consumers until the government's
subsidies to the distribution companies are resolved, a
problem not currently being fully addressed by CDEEE.


6. (C) Mr. Roberto Herrera, the general manager of the
Electricity Company of San Pedro de Macoris (CESPM),a
company which is 40 percent U.S.-owned, said flatly that if
the sovereign guarantee had been part of the original tender
solicitation every production company in the country would
have offered to build new generation capacity. But he said
that there was little reason to build so much additional
capacity because there is currently sufficient installed
capacity in the country to meet demand. Although demand is
expected to grow by up to 6 percent a year, Mr. Herrera's
analysis adds weight to the assertion that CDEEE is seeking
to build new capacity as leverage against existing IPPs.
Giving some credence to the allegations of CDEEE's
intentions, a Bear Sterns analysis of the electricity sector
in March 2007 cited the construction of these two coal-fired
power plants as a threat to AES' operations.


7. (C) So far, the only IPP to have renegotiated with the
CDEEE is the Palamara-La Vega plant which produces 187MW of
electricity, a deal signed just last week. The agreement
involved an immediate payment of debt, approximately half the

$32 million it is owed from the distributors, with a promise
to pay additional debts in quotas over five months. The
signing of this deal is putting additional pressure on the
other IPPs to renegotiate. Former CEO of Palamara-La Vega
and current senior adviser to AES Dominicana, Mr. Kevin
Manning, told Econoff that AES has been forced to expedite is
renegotiation counter-offer as a result of the signing, but
hypothesized that the CDEEE is unlikely to accept the terms.

Politics in the Middle
--------------


8. (U) The CDEEE's muddled efforts to resolve the problems in
its electricity sector has transformed into a political fight
between the ruling Democratic Liberation Party (PLD) and the
main opposition PRD. The PRD alleged in the newspapers and
in a communication to the Embassy's Poloff that CDEEE and the
PLD leadership have overvalued the contract for the Emirates
and Sichuan plants and claimed that the letters of credit to
Sichuan and Emirates are unnecessary. The PRD claims the
contracts CDEEE signed with Emirates and Sichuan, worth an
estimated $800 million, are overvalued by as much as $270
million based on the agreed kilowatt hour purchase price for
electricity.


9. (U) As a result of this political fight, the president of
the Senate permanent commission on finances and contracts,
Senator Tommy Galan, announced that he would convene a
meeting between the PRD senators and the head of the CDEEE,
Mr. Radhames Segura, to discuss the power plant contracts in
detail and resolve any misunderstandings.


10. (C) Comment: The head of CDEEE, Mr. Segura, was an
opponent of the capitalization of the energy industry in the
first Fernandez administration and reportedly has
presidential ambitions himself. Despite the PRD allegations,
which were obviously politically motivated, there is still
internal disagreement within the PLD about how to approach
the energy sector. CDEEE's six-year energy strategy, which
was presented to President Fernandez late last year, has
never been formally adopted. Temistocles Montas, the
Secretary of State for Economy, Planning and Development, has

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publicly and privately been pushing to restrain Mr. Segura
and the CDEEE in its efforts to exert greater control over
the sector.


11. (SBU) The infighting is compounded by the fractured
nature of the government's energy bureaucracy, with multiple
agencies claiming primacy over planning and strategy.
Ultimately, however, the real dilemma in the electricity
sector stems from infrastructure and theft problems
associated with the transmission and distribution systems,
not from a lack of capacity. Ultimately, CDEEE's efforts to
pressure the IPPs to renegotiate their contracts threatens
the commercial viability of the producers as well as the
investment climate for the country. End Comment.
BULLEN