ELECTRICITY COMPANIES WORRY ABOUT POLITICAL

C O N F I D E N T I A L SAN SALVADOR 001257 SIPDIS E.O. 12958: DECL: 11/05/2013 TAGS: ECON ENRG EPET EINV ES SUBJECT: ELECTRICITY COMPANIES WORRY ABOUT POLITICAL FALLOUT FROM SUBSIDY DISPUTE REF: A. SAN SALVADOR 1140 ¶B. SAN SALVADOR 1241 Classified By: Ambassador Charles L. Glazer for reasons 1.4 (b),(d) ¶1. (C) SUMMARY: Managers of El Salvador's four private electricity companies are contesting a GOES decree forcing distribution companies to restore subsidized rates without any GOES commitment to pay subsidies to the companies. They believe they are following the law by applying unsubsidized rates, but they fear government and public backlash and reported that some customers are already withholding payments until the conflict is resolved. Companies warn that by freezing rates without paying subsidies, the GOES is risking a financial crisis that may disrupt power supplies during an election year. The DCM assured the companies that the Embassy will continue to privately support efforts to resolve of this issue but will refrain from raising it publicly. END SUMMARY. GOES CANNOT PAY SUBSIDIES BUT WON,T RAISE RATES -------------- -- ¶2. (SBU) In meetings on October 31 and November 3, managers of AES, Duke Energy, Del Sur and Cenergica updated DCM, FCSoffs, and Econoffs on a dispute over subsidy payments and electricity tariffs. To avoid a rate increase, the GOES needed agree by October 12 to repay $93.7 million in electricity subsidies accumulated from April-October 2008. The Finance Ministry insists that state-owned generation company, CEL, is responsible for the entire subsidy even though average monthly subsidies have exceeded CEL's average monthly revenue. CEL reportedly offered to pay $28 million and is soliciting a $66 million loan from the Central American Integration Bank (BCIE) to cover the remainder. ¶3. (C) Electricity companies want a signed GOES commitment to monthly payments of $15.6 million to pay off the current subsidy debt by April 2009, when a new payment schedule will need to be negotiated for the October-April subsidies. One company manager noted the GOES has routinely provided such commitments in the past, but commented that "this time, the hand is shaking" because the GOES does not have funds to fulfill this commitment. The GOES proposed to make partial subsidy payments until December, when the GOES would hope to confirm funding for the remainder. Electricity firms rejected this offer, but proposed that, if the government cannot make full payments, they could use partial payments to maintain the subsidy for low income consumers, while allowing other customers and industry to pay unsubsidized rates. Company managers were also skeptical that the GOES could obtain loans from "a development bank" to cover subsidy shortfalls. ¶4. (SBU) Lacking a GOES commitment to pay the subsidy, electricity companies published new rates on October 12, as required by law, and started to apply them on October 13. The GOES later issued decrees postponing the deadline for 15 days until October 27 and an additional month until November ¶27. Electricity companies believe these decrees are invalid since the first decree was not published until after the original deadline. On October 31, the electricity regulator, SIGET, issued a resolution ordering companies to restore subsidized rates and reimburse customers for past charges exceeding these rates. FOLLOWING THE DOMINICAN REPUBLIC'S EXAMPLE -------------- ¶5. (SBU) Distribution companies plan to appeal SIGET's order to the SIGET board, which they expect will be rejected, and then to the Supreme Court, but do not expect a quick resolution. The firms warned that the sector may face a financial crisis with resulting blackouts like those in the Dominican Republic if the GOES does not continue full subsidy payments or allow rates to rise. The distributors need the next subsidy payment by November 20 in order to pay their monthly energy bills and allow generators to continue ordering fuel. ¶6. (C) Company managers expressed concern that the GOES has publicly promised subsidized electricity rates even after distribution companies started applying unsubsidized rates on October 13. AES manager Fernando Pujals commented that the conflict is likely to confuse customers, who are already starting to withhold payments to await the resolution of the dispute (NOTE: electricity companies cannot cut off a customer until after 60 days of non-payment. END NOTE). The companies plan to issue public statements, to meet with business associations, customers and influential Salvadorans to explain the situation, and, at the advice of the Salvadoran Embassy in Washington, to write letters to President Saca. U.S.-based AES, the country's largest distributor, is also considering an investor rights complaint under CAFTA-DR. The companies are confident that they can legally increase rates, but worry that more publicity during an election will serve no one's interest. ¶7. (C) DCM informed the company representatives that the Embassy had and would continue to raise the issue privately with senior GOES officials but not publicly criticize the GOES. DCM also cautioned that the representatives needed to make certain all their actions complied with existing Salvadoran laws. ¶8. (C) DCM advised the company representatives that he'd also discussed their situation with ARENA Vice-Presidential Candidate Arturo Zablah on November 3 (septel). Zablah responded that the GOES must abide by its contracts and stated that, together with Presidential candidate Rodrigo Avila, he would raise the issue with President Saca. The company representatives said that they, too, met with Zablah on November 3 and received similar assurances. They added that Zablah had also called Minister of Finance Handal, but Handal had responded that this subsidy was CEL's problem. ¶9. (C) COMMENT: Unless CEL secures a loan to cover the subsidy, the GOES faces an unappealing choice between backtracking on its political commitment to maintain electricity rates, or risk a financial crisis that may seriously disrupt power supplies during an election year. Even if CEL is able to obtain outside financing and defuse the current crisis, the GOES will owe the electricity companies at least another $42 million in subsidies in April ¶2009. In the long run, focused subsidies would be more sustainable and could alleviate some of the GOES's short-term liquidity problems (ref B). In the short term, GOES edicts are forcing power companies to lose money, an experience that will hurt El Salvador's image as a business friendly country. GLAZER