Identifier
Created
Classification
Origin
09ASUNCION42
2009-01-20 19:03:00
CONFIDENTIAL
Embassy Asuncion
Cable title:  

PARAGUAY'S ITAIPU NEGOTIATIONS: RESULTS AND OUTLOOK

Tags:  ECON PREL EAGR EPSC PA 
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FM AMEMBASSY ASUNCION
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7543
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C O N F I D E N T I A L ASUNCION 000042 

SIPDIS

STATE FOR WHA/BSC MDRUCKER, BFRIEDMAN AND MDASCHBACH,
WHA/EPSC FCORNEILE

E.O. 12958: DECL: 01/05/2029
TAGS: ECON PREL EAGR EPSC PA
SUBJECT: PARAGUAY'S ITAIPU NEGOTIATIONS: RESULTS AND OUTLOOK

Classified By: CDA, a.i., Michael J. Fitzpatrick; reasons 1.4 (b) and (
d).
C O N F I D E N T I A L ASUNCION 000042

SIPDIS

STATE FOR WHA/BSC MDRUCKER, BFRIEDMAN AND MDASCHBACH,
WHA/EPSC FCORNEILE

E.O. 12958: DECL: 01/05/2029
TAGS: ECON PREL EAGR EPSC PA
SUBJECT: PARAGUAY'S ITAIPU NEGOTIATIONS: RESULTS AND OUTLOOK

Classified By: CDA, a.i., Michael J. Fitzpatrick; reasons 1.4 (b) and (
d).

1.(C) SUMMARY: Paraguay's lead negotiator for talks on
Brazil-Paraguay's Itaipu dam -- the world's largest
hydro-electric generation plant generating over 90 million
megawatts-hour a year -- Ricardo Canese shared January 6 a
cautiously optimistic outlook for Paraguay. Canese found
Brazil surprisingly open to Paraguay's demand for a "just"
price for the electricity ceded to Brazil, and indicated that
a preliminary agreement on price is likely by March. If
Brazil concedes on the minimum price asked by Paraguay,
Paraguay could benefit from roughly 640 million USD of
additional resources to boost public spending. Canese
admitted Paraguay's limited leverage to influence Brazil's
opposition to Paraguay's selling electricity to third
countries, but hoped that President Lula's apparent affinity
for President Lugo will help ease this discussion. Brazil
agreed to have Paraguay's Controller audit Itaipu's debt, and
Paraguay is planning to restructure its share of Itaipu's
debt once the audit is completed. Brazil is facing a
Paraguayan team that is clearly intent on making right the
"wrongs" of the past. END SUMMARY.

-------------- ---
THE FIGURES: PARAGUAY-BRAZIL ITAIPU RELATIONSHIP
-------------- ---

2.(U) The highly political, often emotional, issue of "fixing
the wrongs of the past" by re-negotiating Itaipu was one of
President Lugo's top campaign promises. The 14 megawatts (MW)
binational dam Itaipu generates over 90 million
megawatts-hour (MWh) of electricity a year, equally divided
between Paraguay and Brazil. Paraguay, however, consumes just
8 million MWh a year and cedes at below market price the
remainder of its share (roughly 37 million MWh) to Brazil,
which ends up using 82 million MWh of the total electricity
generated. Excluding payments for ceded electricity,
compensation is equally distributed between the two
countries, with each country getting about 212 million USD in
royalties, 32 million USD in administrative expenses, and 21
million USD in capitalized earnings for a total of over 250

million USD.

3.(U) Including ceded electricity, Paraguay's total annual
compensation for Itaipu is 354 million USD. Paraguay earns
104 million USD a year for the 37 million MWh ceded to Brazil
at a price of 2.8 USD per MWh. Itaipu's total expenses, the
largest being debt service payments (interest and principal),
are also equally divided between Paraguay and Brazil. Itaipu
holds over 18 billion USD in debt maturing in 2023 that
carries roughly 2 billion USD a year in financing charges.

--------------
THE NEGOTIATION: RESULTS AND PROSPECTS
--------------

4.(C) Paraguay's Itaipu negotiation team-leader Ricardo
Canese told Econoff January 6 that Brazil's willingness to
discuss a Paraguay-led agenda is a positive sign. Six weeks
after assuming office in August 2008, President Lugo and his
negotiation team presented Paraguay's requests on Itaipu to
President Lula in Brazil. These points are: A) A "fair" price
for the electricity ceded to Brazil; B) Flexibility to sell
to other countries; C) Revision of Itaipu's debt; D) Joint
financial management; E) Shared controller's functions; and
F) Completion of pending infrastructure projects. Canese
opined that in the past Paraguay lacked the credibility for
Brazil to take Paraguay's demands seriously. However, now for
the first time Brazil and Paraguay are discussing Itaipu as
equals. Canese attributed Paraguay's gained credibility to
President Lugo's political image and "budding" personal
relationship with President Lula.

5.(C) Canese said the minimum price sought by Paraguay for
the electricity ceded to Brazil is 20 USD per MWh. The market
rates of Itaipu's electricity in Brazil, Canese remarked, are
190 USD per MWh for residential and 120 USD per MWh for
industrial use. (NOTE: These rates are consistent with what
Brazil's state-owned electricity distribution company
ELECTROBRAS reports as of January 2009. END NOTE.) Canese
stated that Argentina currently pays Paraguay about 22 USD
MWh for the electricity supplied by the binational
Argentina-Paraguay hydro-plant Yacyreta.

6.(C) Canese noted that Brazil is surprisingly open to
Paraguay's fair-price claims, citing an apparent affinity
between Presidents Lula and Lugo. Canese hoped that by the
end of March, Paraguay could have a preliminary agreement
about price with Brazil. (NOTE: Assuming Paraguay's minimum
asking price of 20 USD per MWh is granted, Paraguay is
looking at over 640 million USD of additional revenues in

2009. END NOTE.)

7.(C) Canese emphasized that Paraguay is also pursuing the
option to directly sell its excess electricity in the
Brazilian market using the distribution lines of Brazil's
ELECTROBRAS. He explained that Paraguay is negotiating with
Chile and Argentina in a similar modality. Chile would get
the electricity from a northern-Argentina transmission line,
and Paraguay would supply the electricity to Chile via
Argentina from a southern-Argentina connection at Yacyreta.
Canese said Paraguay plans to sell Chile 200 MW of power from
its solely-owned Acaray hydro-plant at a net price of 67 USD
per MWh.

8.(SBU) Canese was enthusiastic about the progress on the
debt revision issue. Brazil agreed in late-December 2008 to
have Paraguay's Controller office audit Itaipu's debt. Canese
expressed his surprise at Brazil's concession, considering
that even Brazil's Controller has never audited Itaipu.
(NOTE: Itaipu is independently audited each year by a private
accounting firm which submits the report to the Brazilian
Financial Director. END NOTE.) The financial burden is
equally shared, but Canese said that over 4 billion USD of
the total debt was wrongfully assumed by Paraguay in the
administration of Paraguay's President Gonzalez Macchi
(1999-2003). Canese stated the audit would help define the
correct figure, and once the amount is agreed, Paraguay would
seek options to restructure the debt and lower debt service
payments.

9.(C) Canese indicated that Paraguay's demand to sell to
third countries its share of Itaipu's electricity is by far
the most contentious and politically charged point on the
negotiation agenda. Brazil's internal political discussions
on this issue, according to Canese, center on fears of
putting at risk Brazil's currently secured supply to meet 19
percent of its electricity demand, if Paraguay is allowed to
sell to other countries. Canese reasoned that Paraguay alone
has limited leverage to change Brazil's position on this
issue, and can only hope to steer international opinion in
favor of Paraguay. Canese confided that an acceptable outcome
in the short-term is if Brazil pays a price comparable to
what Paraguay could get if it sells to other countries. He
said Paraguay will remain firm in its sovereign claim to
commercialize its share of Itaipu's electricity, and will
continue to press Brazil on this point. He noted Paraguay
plans to launch a campaign to enlist influential academic
figures and recognized experts in Brazil to build support for
Paraguay's demands.

--------------
DUARTE'S PARTING "GIFT" ON ITAIPU
--------------

10.(C) Canese expressed frustration with what he
characterized as an emblematic example of corruption and
clear attempt of the Duarte administration to "sabotage"
Lugo's negotiations even before they began. A month before
the April 2008 election, Duarte's government agreed to
Brazil's proposal to change the administrative authorization
for the use of Itaipu's strategic water reserves from an
Executive Board to a Director of Operations mandate. (NOTE:
The water reserves are maintained at 220 meters above
sea-level, but during drought seasons it can drop 3 to 5
meters, equivalent to millions of MWh. The suspicion is that
with this deal the Colorado Party's elite profited under the
table. END NOTE). The agreement gives Brazil control to
dispose of Itaipu's water reserves without the need for
Paraguay's authorization, even though Paraguay owns half. The
comparable opportunity cost of the water reserves is worth
billions of USD. The issue of using and managing the reserves
is an unexpected element of an already complex negotiation.

11.(C) COMMENT: Despite Brazil's long-standing unwillingness
to "open-up" negotiations with Paraguay on Itaipu, Canese
maintains a cautiously optimistic attitude about 2009
prospects. Lugo could have a significant amount of additional
resources to boost social spending and public investments, if
Canese's expectations come to fruition this year. While there
are some bright spots on the horizon, the negotiations have
just begun, and for some items like the freedom to
commercialize, there is a long road ahead. Brazil has the
capacity to successfully apply a carrot and stick negotiation
strategy to influence Paraguay. Beyond a "budding" personal
bond between Lugo and Lula, Paraguay ultimately lacks
sufficient leverage to effect a change of policy from
regional-superpower Brazil. We are likely to see more from
Brazil's efforts to influence the outcome of the
negotiations. One thing seems certain, however: Brazil is
facing a Paraguayan team clearly intent on making right the
"wrongs" of Itaipu. END COMMENT.

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FITZPATRICK