2006 WRAP-UP OF THE DOMINICAN ELECTRICITY SECTOR

UNCLAS SANTO DOMINGO 000022 SIPDIS SENSITIVE SIPDIS DEPT FOR WHA/CAR, WHA/EPSC, EB/ESC/IEC/EPC, EB/IFD/OIA; SOUTHCOM ALSO FOR POLAD E.O. 12958: N/A TAGS: ECON ENRG EINV PGOV DR SUBJECT: 2006 WRAP-UP OF THE DOMINICAN ELECTRICITY SECTOR REF: 06 SANTO DOMINGO 3733 ¶1. (U) Summary. In 2006, the Dominican government was hard pressed to find a way to resolve the decades-old electricity crisis. After atwelve conferences the Dominican Republic comes up empty handed for the year. The government could not reduce the electricity subsidies or the distribution losses, renegotiate current contracts, increase the cost recovery index and collection rates, or pass a law to criminalize the theft of electricity. End Summary. ¶2. (SBU) After 12 conferences, most of which included government executives, government experts, internationally acclaimed consultants, private sector executives and industry experts, the Fernandez' administration cannot point to a single positive step forward toward ending the electricity crisis. Both government and industry officials consider that the country made no advances toward reforming the mismanaged and inefficient energy sector. When Leonel Fernandez took office in 2004, he promised to the public that he would find a solution to this problem, calling it his "number one priority." After two and half years of his presidency, the situation remains as follows: - No reduction in the ever-growing electricity subsidies (for 2006, subsidies cost the government around USD 650 million). - No significant reduction in the distributors' technical and non-technical losses (their goal was to reduce losses to 38 percent, but at year's end, losses stood at 44 percent. Technical losses (8 percent) are attributed to poor infrastructure, transmission failures, and weak connections while non-technical losses (36 percent) are attributed to low collection rates, theft, and corruption. - No positive movement regarding the proposal of renegotiation of contracts between the government/distributors and the independent power producers (IPPs). Recently, vice chairman of the the state electric company (CDEEE) Rhadames Segura, who sits on the renegotiating council, threatened to renegotiate the contracts on terms to be imposed by the government and not in a mutually or business-friendly environment. The IPPs have requested the government's renegotiating team to work with them, but have yet to hear a response from Segura or the renegotiating council. CDEEE is trying to portray the IPPs' contracts as the root cause for the electricity crisis, an unsubstantiated assertion that has been refuted by the IPPs and the press. One reason why CDEEE is trying to renegotiate the contracts is to ensure that planned coal-fired generating plants will be able to sell their electricity on the local spot market without having to compete with the contract terms established between the IPPs and the government, in effect until 2016. Another reason is that Segura believes that a renegotiation will substantially lower the costs of electricity for the end-user, which will then increase the collection rates because the end-user will be more willing to pay the "lower" rate. Industry experts and the press both believe that a renegotiation will have only a minor affect on the electricity price and that the real problem lies in the lack of collection and the high levels of corruption within the sector (see reftel). - Failure to meet the cost recovery index (CRI) goal set with the World Bank at 0.64 for 2006. The CRI for 2006 was 0.57. The CRI is a mathematcal formula that indicates how much electricity s invoiced and how much of that is collected. CIs can be used in different industries and, according to industry experts, the CRI in the Dominican Republic signifies an extremely inefficient indusry. - Slow movement on electricity reform. President Fernandez has submitted a bill to Cngress that criminalizes the theft of electricity. The bill is still in Congress but is expected to pass in early 2007; - No ground breaking ceremony for the two new, long-discussed coal-fired electricity-generating plants that were scheduled to begin construction in 2006. The coal plants are intended to provide 600MW each to a country that already has roughly 1000MW of extra installed capacity waiting to be used. Both companies proposing the project, one Chinese and the other from the Mideast, are lacking the financial capital to break ground, due in part to the current contractual framework that the government has with the other generating companies (IPPs). - Backward movement on electricity reforms and a potential return to the framework of the early 1990's of extensive state ownership. CDEEE's Segura proposed a bill to Fernandez that brings all the state-owned electricity companies (transmission, hydroelectric, and electric) under the CDEEE roof, chaired by Segura. Embassy contacts indicate that Fernandez plans to send the bill to Congress. If this bill becomes law, CDEEE will then become one of the most powerful institutions in the country. As we reported on our SIPRNET website, this legislation will not solve the energy problem in the Dominican Republic. The proposal counters Fernandez' original plan to privatize the sector and is strongly opposed by other high level government officials, including Technical Secretary to the President Temistocles Montas. Industry experts agree that continued state ownership of the electricity sector will only worsen the electricity crisis because the government does not have the capital to invest in the sector. Fernandez, however, appears to be playing party politics and wants to appease Segura, who is a powerful PLD party member. ¶3. (U) The electricity sector in the Dominican Republic is inefficient and woefully mismanaged. Due to improper billing for 2006, the electricity regulator has instructed the distributors to return RD 133 million pesos (USD 4 million) to their clients. Since September, the cost of electricity has dropped because of the fall in oil prices and the appreciation of the Dominican peso against the dollar. However, the government has not let the clients enjoy the drop in price because the government is using this surplus to help pay for the electricity subsidies that went way over budget. ¶4. (SBU) Comment. The Dominican electricity crisis will continue until the government decides to take effective action to stop the corruption and theft (i.e., enforce the current laws),to increase collection rates, to reduce electricity subsidies, and to work with the private sector, . The government knows this and doesn't need another 12 conferences in 2007 to tell them so. The unfortunate state of affairs in the electricity sector will most likely not improve because of political considerations. The political parties are already in a ferment over choosing candidates for the presidential elections of 2008. Fernandez, never one to go through when he could go around, is not about to start displaying decisiveness in breaking down privilege or redistributing turf. End Comment. ¶5. (U) This report and extensive other material can be consulted on our SIPRNET site, http://www.state.sgov.gov/p/wha/santodomingo/ HERTELL