Argentina: AES Energy Faces Challenges in Electric Sector -

UNCLAS BUENOS AIRES 001324 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ENRG ECON EINV PGOV AR SUBJECT: Argentina: AES Energy Faces Challenges in Electric Sector - As Does the GoA REF: BUENOS AIRES 6; 08 BUENOS AIRES 1218 ¶1. (U) This is the first in a series of cables which will examine U.S. company operations in the energy sector in Argentina. The series will conclude with an overview of the sector based largely on U.S. company views. Summary -------------- ¶2. (SBU). AES Argentina management described their business operations in Argentina to Ambassador, noting that low tariff rates and delayed payments from the government are placing them in a financial squeeze. The delayed payments are part of the government's own financial challenges, as the GoA has been subsidizing increasingly more expensive electricity generation and distribution for years, in addition to keeping retail and wholesale tariffs frozen. The GoA has also postponed both discussion of and already agreed-upon tariff rate increases affecting AES, though AES is optimistic that these will be addressed in early 2010. Criminal charges against AES dating to December 2008 are not being pursued actively, but remain pending. END SUMMARY. Subsidies: No Longer Enough to Go Around -------------- -------------- ¶3. (SBU) AES Energy Argentina, the largest U.S. company in electricity generation in the country, met with the Ambassador on November 25 to detail their challenges and opportunities in doing business in Argentina. Country Manager Fernando Pujals called the sector "highly regulated," noting that tariff rates fell well short of actual costs and that the sector was only remaining afloat thanks to "huge" government subsidies. The bulk of these subsidies go to GoA-owned electricity wholesaler CAMMESA, which purchases all of the electricity CAMMESA generates. According to Pujals, tariffs are so low that "CAMMESA collects only 25% of its costs" from electric retailers, and the rest of its income is government subsidies. ¶4. (SBU) Electricity tariff rates - both at the wholesale and retail level - have been frozen by the GoA since the 2001/2 economic crisis, with the GoA subsidizing the differences, primarily through payments to CAMMESA. Pujals noted that the GoA's overall fiscal situation was essentially healthy up until 2008, which allowed the GoA to continue to pay growing subsidies without fiscal discomfort (see Ref B). However, he stated that subsidies in areas such as transportation and construction, combined with financial woes related to the current economic downturn, have reduced that ability to subsidize the electric sector. Payments to CAMMESA have fallen, and CAMMESA's response has been to withhold payments due to its suppliers - including AES. ¶5. (SBU) According to a Resolution issued in 2008 by Planning Minister Julio De Vido, CAMMESA will pay arrears to a company immediately if an equivalent amount has been reinvested by the company in projects to maintain power generation capacity. AES to date has received approvals for disbursement of nearly USD84 million under this program, but has received only USD4 million. This is the second-lowest rate for the ten companies which, according to CAMMESA data, have qualified for payments under this program, and far below the average payment of 38% of approvals; AES' approved total is the largest of all companies. This sizeable debt, compounded by the low rates AES has been receiving for years, has put the company in its own financial squeeze. As Guillermo Baistrocchi, AES Institutional Relations Manager, told the Ambassador, "If we don't collect (on this debt) in the first half of 2010, we're going to be in trouble." Tariff Rates and Court Cases -------------- ¶6. (SBU) In 2005, the GoA published a formal notification that EDELAP's (an electricity retailer owned by AES which serves La Plata, the capital of Buenos Aires province) concession would be renegotiated; such negotiations would include new tariff rates that were to take effect in February, 2006. The renegotiations and dates for new tariffs have since been postponed several times. According to Baistrocchi, Secretary of Energy Daniel Cameron has told AES that a meeting to review tariff rates will take place in January 2010. Pujals told Ambassador that "De Vido knows he needs to increase tariffs," both at the retail and wholesale levels, but admitted that it wouldn't be easy politically. The GoA learned this the hard way after allowing electricity rates to rise in a Buenos Aires suburb in November 2008, only to roll them back after protests and judicial orders. Baistrocchi noted that, following an investment by AES and other companies in two new power plants which just came fully online, the GoA has yet to fulfill its own regulation, issued in 2004, to raise the payment for electricity from those plants from 12 pesos (about USD 3.25) to USD 10. ¶7. (SBU) In December 2008, GoA-owned electricity regulator ENRE filed civil and criminal charges against AES and its directors, publicly alleging "grave accounting irregularities" at EDELAP. AES leadership met in January 2009 with Minister De Vido and immediately afterward announced new investment in Argentina (see Ref A). While the GoA has taken no further legal action against AES, the charges remain pending. Baistrocchi expressed his hope that the charges would soon be dismissed, but noted that there is no court date set to address the issue. Pujals does not believe that the EDELAP charges are the reason for AES to receive such small payments from CAMMESA, but did not rule that out. AES Company Background -------------- ¶8. (SBU) AES entered Argentina in 1993 with the acquisition of an existing power plant in north Buenos Aires province, which was AES's first investment anywhere outside of the U.S. Since then, AES has invested more than $1 billion in the country's power sector, and runs a combination of gas, coal, oil and hydro power plants and two electric utility companies. AES produces over 2,800 MW, about 13% of the country's total power generation capacity, and employs 1,050 people in Argentina. AES's two distribution businesses serve over 450,000 customers in the province of Buenos Aires. Comment -------------- ¶9. (SBU) Challenges in power generation explain much about GoA policy. While keeping rates low following the 2001/2 crisis helped stabilize the socio-political situation, keeping them low proved too tempting to ignore. However, this has required increasing inflows of cash, which is one reason the GoA sought new revenues from farmers in 2008, and is one reason for its current efforts to repair relationships with international credit markets via offers to bond holdouts and Paris Club creditors. Should those efforts fail, the GoA may well have no choice but to let rates rise, despite the uncertain reaction. Should the GoA indeed access new credit lines, pressure to normalize the electric sector would fall, and AES might still be left empty-handed - or more likely, with just enough cash to keep them producing at current levels. MARTINEZ