GE AND TAIPOWER IN CONTRACT DISPUTE OVER FOURTH

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 001499

SIPDIS

SIPDIS

STATE PASS ALEX BURKART; DEPT OF ENERGY FOR
INTERNATIONAL-PUMPHREY

E.O. 12958: DECL: 07/02/2012
TAGS: ECON ENRG KNNP US TW
SUBJECT: GE AND TAIPOWER IN CONTRACT DISPUTE OVER FOURTH
NUCLEAR POWER PLANT

REF: TAIPEI 00719

Classified By: ECONOMIC SECTION CHIEF HANSCOM SMITH FOR REASONS 1.4 B/D


1. (C) SUMMARY. On June 27, AIT met with Yao Ching-chuan,
Taipower Director of Nuclear Engineering, who is overseeing
the completion of Taiwan's fourth nuclear power plant (NPP)
at Lungmen, on the northeast coast. The Lungmen project has
been under construction for 10 years and was slated for
completion in 2000. The Legislative Yuan approved funding
this year to allow its completion by 2009. GE's contract
with Taipower ends July 15. Both GE and Taipower want to
extend the contract but are mired in disputes over the cost
of delays which GE claims are solely Taipower's fault, while
Taipower claims both are responsible. Since the start of the
project, Taipower claims it has paid GE US$250 million in
late penalties, and is now trying to stave off an additional
claim by GE of US$160 million in late fees. Further delays
could result if both sides fail to reach an agreement by
mid-July, but it is unlikely that GE's contract will be
terminated. END SUMMARY

PROJECT DELAYED MULTIPLE TIMES
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2. (C) The 4th NPP project was originally slated for
completion in 2000, but was stopped by President Chen
Shui-bian for political reasons and then restarted in 2001.
The 4th NPP is now scheduled to begin operation in July 2009.
GE engineers have told AIT privately that this date is
overly optimistic, and a delay of one year or more is a
strong possibility. The Council for Economic Planning and
Development (CEPD) confirmed that an additional NT$44.7
billion (US$1.35 billion) was added to the total budget by
the Legislative Yuan this year to allow for the plant's
completion. The latest delay was blamed on the late
completion of generators 1 and 2 at the plant. The total
budget allocation for the 4th NPP is NT$233.5 billion (US$7.2
billion) of which about NT$40 billion has not been obligated
yet. It is believed that the reasons for the latest delay
have to do with the changing of subcontractors, failures in
the bidding process for machinery, and inconsistency or poor
coordination within the project management. This marks the
fourth delay since the inception of the project, which, with
the exception of the recently completed high speed rail line,
is the second most expensive public project ever undertaken
in Taiwan.

WHO'S RESPONSIBLE FOR DELAYS?
--------------


3. (C) According to Yao, GE is responsible for the design
and provision of equipment for the project as well as
ensuring the project follows safety guidelines. GE has
already collected about US$250 million in late fees in
connection with the first delay in 2000. Yao said that at
the time, Taipower had a claim against GE for late delivery
of equipment, but because of the project's cancellation had
to pay GE compensation instead. The current contract dispute
is again about money. Yao said GE wants to collect an
additional US$160 million in fees it says are due to
additional delays in the project. According to Yao, GE
claims that it has to maintain a contractual force of 500
technical personnel while the Lungmen project stagnates.
However, those experts have already been put on another
nuclear project in the U.S. while they wait to be called in
case the GE contract is renewed. GE's position is that the
salaries and fees of those experts have to be paid by
Taipower, while Taipower claims those costs need to be shared
since it is not the only cause for delays (Note: Taipower
claims GE has not been on time with equipment deliveries.)

UNLIKELY THAT GE WILL LOSE CONTRACT
--------------


4. (C) AIT ESTH officer asked Yao whether there was a
possibility that GE's contract might be given to one of its
competitors, such as Toshiba or Hitachi. Yao said the
nuclear division of GE and Hitachi will in fact merge on July
1 (Note. Hitachi and GE will in fact enter into a 40/60
strategic partnership to establish joint companies in Japan,
U.S. and Canada. Toshiba, the other player in the nuclear
power plant market, has already bought out Westinghouse. End
note). Yao said this merger with Hitachi will not change
GE's obligations under the previous contract, and in spite of

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the disagreement between Taipower and GE, the likelihood of
GE's contract being terminated is slim. Taipower is
committed to completing the 4th NPP, said Yao, and failure is
simply not an option given the huge investment in this
project. Yao added that both parties will try to come to an
agreement before the July 15 contract expiration.



5. (C) COMMENT. GE has sought AIT assistance in its
negotiations with Taipower. AIT representatives have held
separate meetings with GE and Taipower counterparts, and have
advised GE that the matter should be resolved between the two
parties. Given the willingness on both sides to see the
project completed, AIT is optimistic that GE's contract will
be extended. END COMMENT


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