Minister States GOE Will Pay $38 Million in Arrears to

UNCLAS QUITO 000322 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EINV ENRG EPET EC SUBJECT: Minister States GOE Will Pay $38 Million in Arrears to Machala Power Ref. a) Quito 314, b) 06 Quito 2218 ¶1. (SBU) Summary. The Minister of Electricity publicly announced that the GOE would pay $38 million of the arrears due to U.S. electricity company Machala Power. Machala Power reports that the GOE has said it intends pay all of the $70 million in arrears, but needs to develop a legal mechanism to pay the balance. The Minister's remarks followed an arbitration panel's ruling that it will proceed with an arbitration case filed by Machala Power. If the government clears the arrears, Machala Power and other electricity companies will switch some of Ecuador's thermal electric plants from imported diesel to inexpensive locally produced natural gas. End summary. ¶2. (U) On March 28, Minister for Electricity and Renewable Energy Alexi Mosquera announced in the media that the Government of Ecuador would pay $38 million, a substantial portion of the arrears that the state-owned electricity distributors owe to U.S.-owned electricity company Machala Power. He added that there is an agreement with the Ministry of Finance to make the payment. ¶3. (SBU) On April 2, Machala Power president John Tomich told EconCouns that he had yet to talk to Mosquera about the statement. He said that he had had a meeting with senior GOE officials on April 1, but the senior energy officials, including Mosquera, were called away by the President and could not make the meeting. Tomich said the remaining officials gave positive signals but could not address the specifics of the government's plans. ¶4. (SBU) Tomich said that the total arrears to Machala Power are about $70 million, and that the government acknowledges that it needs to clear all the arrears. He said that the $38 million mentioned by Mosquera corresponds to the arrears due to Machala Power up through 2005. A 2006 law established a legal mechanism for the GOE to pay electricity generators for arrears incurred by electricity distributors between 1999 and 2005 (reftel b). Tomich added that previously Mosquera had said that the government intends to also pay the roughly $32 million in arrears from 2006 onwards, but the government needs to find a mechanism to do so. Arbitration Case Moves Forward -------------- ¶5. (SBU) On March 5, an ICSID arbitration panel ruled that it has jurisdiction over an arbitration request filed by Machala Power. �0A;Machala Power has asked for $370 million in arrears and other losses, although Tomich has repeatedly stressed that his company would prefer to reach a settlement than continue with arbitration. Mosquera's public comments about paying part of the arrears followed the March 21st public announcement of the panel's decision. Tomich opined that losing the jurisdictional argument may spur the GOE to settle the arrears. A Potential Win-Win for the GOE and Machala Power -------------- -------------- ¶6. (SBU) Machala Power is owned by Noble Energy. Noble also owns a parallel company in Ecuador, EDC, which produces natural gas that is consumed by Machala Power to generate electricity. The gas is produced in the Gulf of Guayaquil and piped to the electricity plant located in Machala, the capital of El Oro province. In an earlier meeting with the Ambassador, Tomich described an ambitious plan that Noble Energy would implement if the arrears are paid. ¶7. (SBU) Machala Power is planning to merge its electricity operations with those of another U.S. company, Duke Energy. Duke would bring its generating equipment, currently in Guayaquil and running on subsidized diesel and fuel oil, to Machala, where it would use natural gas produced by EDC. Duke would also manage the electricity operations for Noble/Machala Power. A third company, which has a barge that uses diesel to generate electricity, might also move to Machala and use natural gas. Noble/EDC would focus on natural gas production, which would require more investment to generate the additional gas that would be used the converted generating units. ¶8. (SBU) Tomich said that the GOE would save over $100 million annually from this program, since the locally produced natural gas is significantly cheaper than the diesel and fuel oil that Ecuador imports and the GOE subsidizes. For this to happen, the GOE would have to clear its arrears and install additional electricity transmission lines from Machala to the national grid. ¶9. (SBU) Tomich said that Electricity Minister explained this program to President Correa. Correa reportedly ordered his economic team to come up with a plan to clear the arrears with Machala Power and address other requirements for the program to go forward. According to Tomich, Correa has expressed frustration that Machala Power's problems have not been resolved. ¶10. (SBU) Comment: Tomich said that he is cautiously optimistic that the government will settle Machala Power's arrears, given the benefits this would bring Ecuador. He did caution that Machala Power had received hopeful indications from previous governments that were never fulfilled. One difference this time around is that the Correa administration is flush with cash and might be anxious to avoid arbitration with Machala Power after paying at least $100 million to settle an arbitration award in favor of Occidental Petroleum (reftel a). JEWELL