US embassy cable - 04GUATEMALA272

C O N F I D E N T I A L SECTION 01 OF 02 GUATEMALA 000272 
 
SIPDIS 
 
TREASURY FOR OASIA - CHRIS KUSHLIS AND BILL BLOCK 
ENERGY FOR GARY WARD 
 
E.O. 12958: DECL: 02/03/2009 
TAGS: ENRG, EMIN, PGOV, PINR, GT 
SUBJECT: AMBASSADOR CALLS ON NEW MINISTER OF ENERGY AND 
MINES ROBERTO GONZALEZ:  ENERGY BACKGROUND AND FRIEND OF 
MARKET ECONOMICS 
 
Classified By: EconCouns Steven S. Olson for reason 1.5(d) 
 
Summary 
------- 
1.  (C)  Ambassador called on new Minister of Energy and 
Mines Roberto Gonzalez on January 28.  Gonzalez has strong 
free-market credentials and beliefs, has a background in the 
electric power sector, and shares our views on respecting 
contracts, attracting investment, reducing subsidies, and 
preserving market based regulation.  He appreciated AID's 
assistance to date and welcomed its continuation.  Despite a 
general atmosphere of open hostility by the new government to 
its predecessor, he had the grace to recognize the strengths 
of the previous minister and of the regulatory board the 
prior government named (and tried, unsuccessfully, to 
subvert).  End Summary. 
 
New Minister Close to Berger, Free Market Background 
--------------------------------------------- ------- 
2.  (SBU)  Ambassador and EconCouns called on new Minister of 
Energy and Mines Roberto GONZALEZ Diez Duran on January 28. 
Gonzalez, 36, was personal aide to President Berger during 
the recent campaign, and his professional and academic 
background is in the electric power sector.  His views are 
decidedly pro-market.  His undergraduate work was at the 
Francisco Marroquin University (where the libertarian bent 
requires study of Austrian economists Mises and Hayek).  He 
has a Masters in Finance from the Universidad Catolica in 
Chile and has studied at the University of Chicago and at the 
Adam Smith Institute in London, where his focus was on 
"natural monopolies."  He has worked as a consultant on power 
sector regulation and pricing and on co-generation at a large 
sugar mill. 
 
Focus on Power, Investment and Cutting Subsidies 
--------------------------------------------- --- 
3.  (SBU)  Ambassador congratulated Gonzalez on recent 
comments to the press concerning the need to respect 
contracts with electrical generators and distribution 
companies.  Gonzalez said that his entire focus was on 
attracting private investment, and one had to start by 
respecting the contracts of existing investors.  He was fully 
aware of the terms of existing power purchase agreements 
(PPAs) and the functioning of the Central American merchant 
market.  He would like to try to lower PPA costs if contracts 
could be renegotiated to the satisfaction of all parties, but 
it was clear to him that the real problem in the price 
structure was the subsidized "social tariff" for users of 
less than 300 KWh per month.  (Note:  The IMF has recommended 
the social tariff's elimination.) 
 
4.  (SBU)  Gonzalez had told the press that the "social 
tariff" subsidy had to be removed or reduced for all but the 
poorest of users, and he had mentioned the concept of 
increasing rates gradually, keeping the existing rate for the 
first 100 KWh/month, a higher rate for the next 100 
KWh/month, and so on up to a flat rate at a level to be 
determined.  The overall effect would be to reduce the cost 
paid by small businesses and larger household consumers by 
requiring the middle class to pay its fair share.  300 KWh 
was simply too high for the social tariff, as it meant that a 
relative handful of small businesses and wealthier households 
bore the burden of a subsidy for the vast majority of 
Guatemalans, while the largest industries were able to 
negotiate competitive rates with the private merchant 
generators.  Market signals were being subverted and not 
conveying the proper incentives to market participants. 
Ambassador commented that all the minister had said coincided 
with our thinking. 
 
5.  (SBU)  Gonzalez said that he had President Berger's 
agreement in principle to reduce the social subsidy, but the 
President had asked him to wait 30 or 45 days before acting. 
Comment:  A little delay is probably a good thing.  It 
provides time to make the public case for why reform is 
necessary and allows the government to deliver some positive 
results in its social services agenda, e.g. healthcare, and 
not have rate hikes its first concrete action.  End Comment. 
 
Gonzalez Welcomes AID's Assistance 
----------------------------------- 
6.  (SBU)  Gonzalez had just met with AID contractor PA 
Consulting, which had produced a study of pricing and 
regulatory options for the ministry.  He welcomed AID's 
assistance and was delighted to hear that AID was willing to 
continue collaborating.  EconCouns noted that Guatemala 
served as the model for regulating the interconnected 
regional energy market and said that it was important that 
the market-oriented regulatory framework in Guatemala not 
fall prey to populist initiatives of the sort the Congress 
had been discussing over the course of the past year. 
 
Regulatory Board and Former Minister Did Well 
--------------------------------------------- 
7.  (C)  The Ambassador asked Gonzalez's opinion of the 
national electrical energy regulatory board (CNEE).  Gonzalez 
said that the FRG government had interfered with the board 
and forced changes in its membership, but the board members 
had maintained their independence and made decisions on sound 
technical criteria.  He recounted how the FRG had forced one 
member to resign and replaced him with one of its 
congressmen, but the congressman had left after a couple of 
months when he realized he couldn't cause any mischief. 
EconCouns commented that we remembered the story exactly the 
same way.  He also congratulated the minister for his 
graciousness in complimenting his predecessor Raul Archila in 
remarks to the press.  Gonzalez said that Archila (not an FRG 
member) was "a hero" for protecting the ministry from harm 
from a government that was otherwise a disaster. 
 
Wants to Meet with U.S. Investors in Guatemala 
--------------------------------------------- - 
8.  (U)  Gonzalez asked if we could help organize a meeting 
of U.S. energy and mining interests, as he would like to get 
to know them as quickly as possible and hear their concerns. 
Ambassador said we would like to arrange such an event and 
would be back in touch shortly. 
 
Comment 
------- 
9.  (SBU)  Gonzalez is personable, seemed to want to work 
with us closely, and shared our view on virtually everything 
we discussed.  He was not yet up to speed on his mining 
portfolio, though he was reading up on the Glamis Gold Marlin 
project in San Marcos Department (Glamis is headquartered in 
Reno Nevada.  The Marlin site has initial estimated reserves 
of 1.4 million ounces of gold associated with ten times that 
of silver.  Investment is estimated at close to $100 
million.)  The only deterrent to a longer and more detailed 
discussion was the minister's insistence on practicing his 
English, which was either not quite as good as he believed or 
hadn't been practiced recently.  We anticipate a good and 
fruitful relationship with him (and hope that his English 
comes back or he decides that Spanish is fine). 
HAMILTON