WATER AND ELECTRICITY WOES SHOCK KYRGYZ INTO ACTION

C O N F I D E N T I A L SECTION 01 OF 03 BISHKEK 000501

SIPDIS

DEPT FOR SCA (GEHRENBECK/DEUTSCH)

E.O. 12958: DECL: 05/19/2018
TAGS: ENRG ECON PREL SOCI KG
SUBJECT: WATER AND ELECTRICITY WOES SHOCK KYRGYZ INTO ACTION

REF: A. BISHKEK 195

B. BISHKEK 478

C. BISHKEK 444

D. 07 BISHKEK 1395

E. 07 BISHKEK 966

F. 06 BISHKEK 1792

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Classified By: Amb. Marie L. Yovanovitch, Reason 1.4 (b) and (d).


1. (C) Summary: Water shortfalls in the Kyrgyz
hydroelectric cascade have resulted in power blackouts
throughout the country as well as irrigation shortages for
downstream farmers. While Kyrgyz officials advocate
multilateral solutions to regional water issues, President
Bakiyev ventured to Tajikistan May 16 to develop common water
and electricity policies with his Tajik counterpart.
Domestic electricity tariff increases have finally been
agreed while Kyrgyz officials focus on expanding power
generating infrastructure. Meanwhile, PM Chudinov has
approached U.S. firm AES to discuss AES managing three of the
Kyrgyz Republic's four electricity distribution companies.
However, the largest distribution company and the Bishkek
thermal plant may have already been ceded to an outside
operator in advance of the planned summer tender. Balancing
water, natural gas and electricity ties with downstream
Uzbekistan will prove tricky for Kyrgyz officials as domestic
shortages limit options and hinder Kyrgyz engagement on the
planned regional CASA electricity export project linking
Central and South Asia. End summary.

Water Woes
--------------


2. (C) Despite the generous snowfalls last winter, the main
Toktogul hydroelectric reservoir is only filled to about 30%
of capacity. (Note: The snows fell largely on mountain
ranges that do not feed into the reservoirs. End note.)
Contrary to the Minister of Energy's assurances in February
(reftel A) about sufficient water being available for
generation needs this year, a prime ministerial advisor
confirmed to Embassy May 16 that the reservoir is at its
lowest level in 30 years. With fears of replicating
Tajikistan's serious winter electricity shortfalls, Kyrgyz
officials have instituted electricity rationing with lengthy
blackouts (reftels B and C) in order to conserve water in the
hydroelectric reservoirs.


3. (C) Conservation in the reservoirs has rankled downstream
farmers, and local commentators are already encouraging
Kyrgyz officials to be "tough" with Uzbekistan during
anticipated talks over water releases to supply Uzbek
agricultural fields. Chief presidential economic advisor
Azamat Dikambayev told the Ambassador May 15 that the water
situation in southern Kyrgyzstan "is worse than you realize,"
and cautioned that forecasts show lower precipitation than
normal in the coming months.


4. (C) Kyrgyz MFA Department of International Economic
Cooperation Chief Batyrkan Syrgabayev emphasized to Emboff
May 15 the importance of a multilateral Central Asian water
agreement, which, he reasoned, would be preferable to
previous bilateral arrangements. (Note: The Kyrgyz-Uzbek
agreement bundling water and electricity supplies for 2007,
reftel F, has not apparently been repeated this year. End
note.) Despite his emphasis on a multilateral agreement,
Syrgabayev later noted that President Bakiyev's May 16 visit
to northern Tajikistan for consultations with Tajik President
Rahmon aimed to achieve bilateral consensus between
Tajikistan and the Kyrgyz Republic on water and energy
issues. As a signal of the growing importance of water
issues, presidential advisor Dikambayev also told the
Ambassador May 15 that the previously independent Kyrgyz

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water management agency may be resuscitated as a result of a
potential government reorganization. A prime ministerial
advisor confirmed to Embassy May 16 that the water management
agency, which had been folded into the Ministry of
Agriculture in 2005, would be established under the prime
minister's office.

Raising Tariffs and Capacity Building
--------------


5. (SBU) Having advocated tariff increases while serving as
Minister of Energy, Prime Minister Chudinov finally pushed
through domestic electricity tariff increases April 23. The
tariff increases, scheduled to start June 1 and continue
through 2012, envision a 13% increase for residential users
(up to 2.6 U.S. cents per kilowatt hour) and higher rates for
other consumers. However, due to persistent delays in
obtaining approval and providing sufficient public notice,
implementation of the new tariffs may be delayed until later
in the summer.


6. (SBU) Amidst concerns over diminishing generation
capacity, President Bakiyev on May 2 appointed former Prime
Minister Felix Kulov head of a new, "self-sustainable"
(likely meaning self-financing) Directorate for Small and
Medium-Sized Energy Industry electricity generation programs.
The appointment coincides with renewed donor interest in
small hydroelectric facilities. Andreas Clausing, local
representative of the German sustainable development
organization GTZ, told Emboff May 15 that his organization
would be assisting in small-scale hydroelectric feasibility
studies.


7. (C) Renewed construction on the Soviet-era Kambarata 2
hydroelectric project is absorbing millions of dollars of
Kyrgyz government funds, and is contributing significantly,
in the view of the local IMF representative, to the
likelihood of the central government running out of money
later this year. PM Chudinov has previously told Embassy
that Kambarata 2 can only operate for five years without the
completion of the larger (and much more expensive) Kambarata
1 project. While GTZ's Clausing told Emboff that his
organization would be providing vocational training to the
welders needed for the Kambarata 2 project, Kyrgyz officials
have been appealing to former workers, who have since
emigrated to Russia and elsewhere, to return to work on the
project.

Privatizing on Favorable Terms
--------------


8. (C) Kulov's appointment to lead the new Small and
Medium-Sized Energy Industry Directorate comes amidst new
momentum to introduce private operators into the Kyrgyz power
generation and electricity distribution networks. AES
Kazakhstan Country Manager Michael Jonagan (Amcit, please
protect) briefed Embassy May 14 about his meeting earlier in
the day with PM Chudinov. Chudinov's office initiated the
meeting, and Jonagan was asked if AES would consider managing
the Osh, Jalalabad and Vostok (Eastern) electricity
distribution companies. (Note: These three smaller
distribution companies are currently less lucrative and have
received less investment than the Sever (Northern)
distribution company. End note.) AES, which had closed its
local office a few months back due to limited business
prospects, had originally been interested in the Bishkek
thermal station and the Sever electricity distribution
company. On the sidelines of the Chudinov meeting, a Kyrgyz
White House official whispered to another AES representative
"not to bother" participating in the planned summer tender
for the Bishkek plant and Sever electricity distribution
company.

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9. (C) Jonagan told Emboff he would discuss the idea of
managing these three Kyrgyz electricity distribution
companies with his senior management. He reasoned that AES
had met similar challenging assignments in neighboring
Kazakhstan, and that success with these companies would
position AES well for future Kyrgyz projects. Jonagan
believed that the summer tender would be nominally
"transparent," but signaled his conclusion that the foreign
partner for those facilities had already been selected. This
AES report correlates with previous indications that any
privatization or management contracts for the Bishkek station
and Sever electricity distribution network would be fixed.

Foreign Entanglements
--------------


10. (C) Given the contentious nature of water issues with
neighboring Uzbekistan and concerns about the reliability of
Uzbek natural gas supplies for the coming winter, Kyrgyz
officials are doubly concerned about the external and
domestic impacts of limited water supplies and poor power
generation prospects. Earlier in the year, PM Chudinov had
mentioned plans to sell electricity this summer to
neighboring Kazakhstan at the rate of 3.5 cents per kilowatt
hour. With the current shortages, however, these plans may
now be on hold.


11. (C) These problems also impact the Kyrgyz Republic's
role in the CASA-1000 project for future export of
electricity to South Asia. Although the Kyrgyz finally
provided the technical data required to plan for the CASA
1000 project, the data have not yet been analyzed and the
Kyrgyz Republic is now behind the other three countries in
the venture. The lead Kyrgyz delegate at the last CASA
gathering in Kabul apparently did not have the authority to
sign the memorandum of understanding agreed there. While the
Kyrgyz are still committed to the CASA-1000 project,
electricity problems at home may limit Kyrgyz flexibility.

Comment
--------------


12. (C) The Kyrgyz face difficult times ahead on the
electricity front. As the existing electricity generation
and distribution system is plagued with "technical losses"
officially reaching 40%, a push to offload inefficient
distribution companies in order to streamline electricity
supplies is a gamble. The gamble, however, is likely mixed
with nontransparent deal-making for the Bishkek thermal plant
(and the Sever electricity distribution company). Earlier
this month, presidential advisor Valentin Bogatyrev told the
Ambassador that Israeli-Kazakh (and former Kyrgyz)
businessman Alexander Mashkevich had the inside advantage for
these assets. Due to long-delayed maintenance work, the
Bishkek thermal plant is barely operating at half capacity.
We understand that one scenario for the Bishkek thermal plant
involves generating electricity for export to Kazakhstan.
Embassy will continue to monitor developments.
LITZENBERGER