ENERGY CRISIS AVERTED - FOR NOW

C O N F I D E N T I A L SAN SALVADOR 000905

SIPDIS

E.O. 12958: DECL: 07/29/2018
TAGS: ECON EPET ENRG EINV ES
SUBJECT: ENERGY CRISIS AVERTED - FOR NOW

Classified By: Charge d'Affaires Robert I. Blau, Reason 1.4 (b),(d)


1. (C) Summary. Electricity generators and distributors met
with Econoffs July 29 to warn of possible brownouts and
blackouts within two weeks. They feared ripple effects if
the GOES called in US-owned electricity distributor AES,s
bond that day to cover subsidy payments that the company is
financing for the GOES. AES would not obtain another bond
and the GOES would be forced to cut AES off from the electric
grid. AES distributes 80% of the electric power in El
Salvador. The other distributor, Delsur, was facing a
similar fate in the next several weeks. The Charge on July
29 raised the U.S. companies' concerns with President Saca's
Chief of Staff Eduardo Ayala Grimaldi. Ayala was aware of
the grave situation and said the GOES would resolve the issue
within the week and take steps to limit the amount of
subsidies the companies will finance in the future. If the
GOES follows through on its commitment the immediate crisis
may be averted, but the underlying problem will not be
resolved until the GOES reforms its unsustainable subsidy
programs. End Summary.

Problem Mounting for Awhile
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2. (U) Electricity rates in El Salvador have not risen since
June 2006. In November 2006, President Saca announced that
electric rates would remain frozen at least through the end
of his term as President, June 2009. The electricity
regulator, Superintendencia General de Electricidad y
Telecomunicaciones (SIGET) has made sure that Saca's promise
has been kept. However, the GOES and private companies have
been paying for the subsidized electric rates. The state
electric generator, Comision Ejecutiva del Rio Lempa (CEL)
has been instructed to pay the subsidy but the private
companies have been required to finance the subsidy for six
month periods, until they get reimbursed by CEL.


3. (SBU) When fuel prices were lower, the financing burden
was not too extreme. The companies would collect the set
rate for the period and receive an adjustment payment six
months later, based upon the actual price paid for the fuel.
In 2003, AES carried approximately $2 million for six months.
As fuel prices rose, the subsidy cost rose to $4 million per
month in 2007 and to over $20 million a month in April-June

2008. In 2007, when fuel was below $100/barrel, CEL
estimated the subsidy would cost the GOES $239 million
through June 2009. The financial rating company Fitch more
recently estimated the subsidy cost would run $400 million.
Due to its concerns about the GOES ability to maintain the
subsidy and GOES interference in the sector, Fitch reduced
AES,s credit rating in June.

AES Reaches its Limit
--------------


4. (C) In early July, AES warned the GOES that it would be
forced to forfeit its bond, which would jeopardize its future
power purchases if it did not receive a payment for the
subsidy by July 21. After meeting with Chief of Staff Ayala,
CEL, and SIGET, the parties agreed to postpone any action
until July 28. On July 29, representatives from distributors
AES, Delsur and electric generators Duke Energy and Nejapa
Power met with Econoffs to discuss the urgent situation.


5. (C) AES Country Manager Fernando Pujals and the other
participants agreed that unless something was done
immediately brownouts and blackouts would occur by August 12,
if not before. AES needed $17 million or it would forfeit
its bond. Under Salvadoran law, the GOES would then demand
that AES replenish the bond, which AES said it would be
unable to do. The next step would be that SIGET would tell
the electric grid manager Unidad de Transacciones (UT),to
cut off AES from the electric grid. According to the
companies, if the law was strictly followed, this would mean
that AES, which distributes 80% of the electricity in the
country, would be cut off by August 12. Delsur,s
representatives said they would be in a similar financial
situation in about three weeks.


6. (C) The electric generators, US-owned Duke Energy and
Nejapa Power, said they would not be able to sell electricity
if there was no guarantee they would get paid. In addition,
they too have carried 50% of the subsidy financing for the
GOES.


7. (C) The generators and distributors were concerned that
the GOES would not act in time to avoid the serious
consequences of bond forfeitures and electricity shutdowns.
They asked for three things. First, they wanted an advance
payment of the April-June subsidy that they would not receive
until October under the current scheme. Second, they wanted
the GOES to reduce the six month adjustment period down to
one-to-three months. Third, they wanted the GOES to
re-examine its subsidy policy. They acknowledged that
President Saca,s July 22 announcement that he would
eliminate the subsidy for non-residential users was a good
first step. However, they noted that Saca said the subsidy
would be eliminated in three phases over an unspecified
period and it would not address the electric companies,
immediate liquidity crisis.

Charge Raises Concerns to Saca,s Chief of Staff
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8. (C) Soon after Econoffs met with the electric companies
(July 29),Charge was meeting with Ayala in Ayala's capacity
as Chairman of the Board of the GOES's Millennium Challenge
Account implementing agency, FOMILENIO. Charge used the
occasion to raise the concerns of the electric companies and
relayed the urgency of their financial situation. Ayala had
just emerged from a meeting with President Saca, and said the
GOES wanted to avoid any bond forfeitures and certainly did
not want any electric outages. He said President Saca
instructed CEL to take money out of its reserve fund to pay
the electric companies, without being specific as to the
amount. (Note: The electric companies told Econoffs July 29
that they doubted CEL had additional funds at its disposal.
End note.) Ayala added that the GOES would reduce the period
that the companies would have to carry the subsidy from six
months to two months. The CEL financing would be done within
a week, according to Ayala. In the interim, the GOES would
make sure that AES would not have to forfeit its bond. The
outlines of this deal are lead stories in July 30 media.

Comment
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9. We think the GOES will try to deliver on its promise to
resolve the immediate problem by paying the companies (though
it may not be all at once) and reducing the time that the
companies have to finance the subsidy. The GOES will also
save itself $70 million by eliminating the subsidy for the
non-residential electricity users. However, the resultant
higher electricity prices for the industrial and commercial
sectors (estimated to be as much as 38%) are likely to be
passed on, at least in part, to their clients, further
fueling inflation, which stood at an annual rate of 9% for
the first six months of the year. The electric companies'
liquidity problems caused by GOES subsidies also raise
questions about El Salvador,s investment climate, possibly
delaying needed investment in new power generation projects.
BLAU