US embassy cable - 04SANTODOMINGO797

C O N F I D E N T I A L SECTION 01 OF 03 SANTO DOMINGO 000797 
 
SIPDIS 
 
DEPT. FOR WHA/CAR AND EB/ESC; 
TREASURY FOR DO: NLEE, RTOLOUI, LLAMONICA; 
DEPT. PASS TO USTR/S.CRONIN; DEPT. PASS TO AID/LAC 
 
E.O. 12958: DECL: 02/05/2014 
TAGS: ENRG, ECON, EINV, DR 
SUBJECT: GODR COMMISSION TO INVESTIGATE ENERGY GENERATORS 
RAISES CONCERNS ABOUT POSSIBLE MILITARY INTERVENTION IN 
ELECTRICITY SECTOR 
 
 
Classified By: DEPUTY CHIEF OF MISION LISA J. KUBISKE; 
REASON 1.5 (B & D) 
 
 1.  (C) SUMMARY:  The GODR appointed a six-member commission 
that includes Police General Pedro de Jesus Candelier and 
Secretary of Defense, Lieutenant General Jose Miguel Soto 
 
SIPDIS 
Jimenez, and senior GODR officials to reconcile GODR debt, 
determine fuel company fuel stocks, and review a sector 
study.  In meetings with Emboffs, GODR officials emphasized 
that there is no intent on the part of the government to 
intervene in the troubled sector. Companies fear that the 
commission is intended to intimidate and will be a step 
toward military intervention in their operations.  A local 
representative of the World Bank reported that members of the 
Bank's board and IMF representatives with whom he had spoken 
were concerned that the announcement of the commission could 
make IFI disbursements more difficult.  Ambassador Hertell, 
in a February 6 telephone conversation, told Dominican 
Ambassador to Washington Hugo Guiliani, that the creation of 
the commission was misguided and sent the international 
community the wrong message.  GODR-company talks continue. 
Finance Minister Rafael Calderon shared the GODR's hopes for 
allocation of IFI money to the electricity sector. END 
SUMMARY. 
 
2.  (SBU) The GODR and electricity generating companies are 
in a public dispute over debt the companies claim the GODR 
owes for subsidies and payment arrears following months of 
financial losses.  Cash poor in the past few weeks, companies 
have felt it impossible to continue selling power at a loss. 
Moreover, they have, in many cases, quit importing fuel and 
lowered generating levels, creating growing blackouts. 
 
3.  (SBU)  The latest development was a February 5 GODR 
announcement naming a commission made up of Finance Secretary 
Calderon, Electricity Superintendent George Reinoso, State 
Electricity Company (CDEEE) Administrator Cesar Sanchez, 
Commission for Public Enterprise Reform President Rafael 
Montilla, along with Police General Candelier and Armed 
Forces General Soto Jimenez.  (Note: Candelier, associated 
with human rights abuses and extrajudicial killings by police 
that occurred while he was National Police Commander, and 
military head Jimenez were members of the now defunct 
exchange rate commission appointed in November that was 
widely viewed as a measure to intimidate exchange traders 
into lowering the peso exchange rate.  End Note.) 
 
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More problems? 
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4.  (SBU) Local press (comment: not always accurate) reported 
that the commission was established to investigate why the 
generating companies are shut down and demanding payments for 
debt the GODR does not recognize.  The appointment of the 
commission produced an immediate reaction from generating 
companies, which view it as an attempt by the government to 
intimidate them into reducing their debt claims and 
restarting the electricity plants. 
 
5.  (C) A local World Bank representative told econoff that 
World Bank was concerned and that the latest developments 
could make approval of the $100 million electricity sector 
loan (anticipated February 12) more difficult.  He explained 
that some board members had already expressed reservations 
about the loan even prior to the announcement of the 
commission.  He reported similar assessments by International 
Monetary Fund representatives about the Standby Agreement 
scheduled for board consideration February 11.  British 
Ambassador to the Dominican Republic also told the Embassy he 
was worried about the government's intentions in establishing 
the commission.  He said that he intended to raise the matter 
with President Mejia on February 10. 
 
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No Harm, No Foul 
---------------- 
 
6.  (SBU)  In contrast, GODR and military officials asserted 
to Embassy officers that the press reports were inaccurate. 
Electricity Superintendent George Reinoso said that the 
commission was not intended to pressure the companies in any 
manner.  He explained that it was established to reconcile 
GODR debt, determine fuel company fuel stocks, and review a 
sector study done last year by international accounting and 
business advisory group Grant Thornton.  He said that the 
GODR had no intention of sending military personnel into 
power plants.  This tracked with what a military source had 
told the Embassy's Defense Attache. 
 
7.  (SBU) Secretary of Finance Rafael Calderon, also, told 
DCM late February 6 that the media had misinterpreted the 
purpose and the composition of the committee announced at the 
February 5 cabinet meeting.  Calderon said that participants 
had discussed publishing the findings of the Grant Thornton 
audit, and the President decided that a new group headed by 
officials involved with the electricity sector would decide 
which parts could be made public.  Calderon said that the 
IFIs were getting unduly alarmed about the presence of police 
and military officers on the commission and asserted that it 
was common in Latin America to call on senior military 
officers for such tasks.  He emphasized to the DCM (and 
earlier in the day, to the press) that there was &absolutely 
no intention to intimidate anyone and not the slightest idea 
of militarizing the electricity sector.  A representative 
from Virginia-based AES did report that Police General 
Candelier had contacted an AES employee the afternoon of 
February 6 to request a courtesy call at the company's Andres 
plant.  Other than this, our sources report no action taken 
by the military or non-military members of the commission to 
date. 
 
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But, Some Disagreement 
---------------------- 
 
8.  (SBU) The GODR and the electricity generators are in 
negotiations over the division of the USD 20 million from the 
IDB social sector loan to be used for the electricity sector. 
 Calderon emphasized the GODR,s flexibility and said that 
the private sector positions have been progressively 
modified; he was awaiting a reply to the GODR's most recent 
offer. 
 
9.  (SBU) Calderon is emphatic and indignant concerning the 
differences over amounts owed to generators at Haina and 
Itabo.  He maintained, as in the press, that the GODR,s net 
debt to Haina is USD 15 million, and he dismissed Haina,s 
claim of USD 40 million as an outrageous attempt to shift the 
various debts incurred by management to the GODR.  After 
discussion, Haina has suggested that the GODR accept its 
estimate of the net debt as USD 20 million.  If there is no 
agreement soon, the government will take the matter to 
arbitration. Similarly, he said, the GODR owes Itabo 
operators a net of USD 21 million or 22 million, while they 
are asking 30 million.  Calderon asserted that Haina 
operators had borrowed abroad and had made a significant 
distribution of expected profits to shareholders, even though 
they were making paper losses; the GODR returned the pesos 44 
million (about USD 80,000) check it received as a 50 percent 
shareholder.  The companies allege that the government is 
seeking to divide the group by offering conditional payments 
for amounts less than is owed. 
 
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What Next? 
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10.  (SBU) For medium-term financing of the sector, the GODR 
hopes to raise the percentages of forthcoming loans to be 
directed to the electricity sector.  In addition to the USD 
20 million now awaiting distribution: 
 
- the USD 100m World Bank loan for the social sector now 
includes USD 80 million for electricity; the GODR wishes to 
raise this to USD 90 million. 
 
- - of USD 50 million remaining to come from the IDB, the 
GODR hopes to advance disbursement to March or April and to 
devote USD 15 million to the electricity sector. 
 
11.  (SBU) If these proposals are accepted there would be USD 
105 million available between now and June, of which USD 40 
million would go for fuel purchases and USD 65 million would 
be devoted to reducing arrears to participants in the sector. 
 Calderon estimates that the USD 40 million for fuel, along 
with peso-denominated payments from clients and from the 
government would amount to approximately four billion pesos, 
sufficient for current needs with no increase in debt.  This 
is the outline of the GODR,s proposal to be made to the 
operators and to the World Bank. 
 
12.  (SBU)  Calderon believes that IFI lending and the Paris 
Club rescheduling should make sufficient foreign exchange 
available to drive the exchange rate for the dollar down from 
the current RD 55 to close to RD 40, a rate that will allow 
the sector to stabilize.  He also reiterated that the GODR 
has absolutely no interest in purchasing the EdeEste 
distributor, which AES announced it intends to sell.  The 
GODR intention is the opposite, to privatize greater 
percentages of EdeSur and EdeNorte than before. 
 
13.  (SBU) The Secretary was adamant in maintaining that the 
electricity generators were using the country's difficult 
situation as an opportunity to blackmail the GODR.  He 
pointed to reports that Haina had sent employees home that 
day in case of a militarization effort.  &We have been 
flexible, open, and cooperative.  We have not threatened 
anyone.  But the Government "cannot give in to blackmail." 
 
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COMMENT: 
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14.  (SBU) Though some agreement may be reached this week on 
the distribution of the first $20 million, the GODR and 
generating companies remain very far apart on analysis of the 
sector's problems.  A solution will probably require months 
of work, active World Bank intervention, and GODR political 
will. 
 
15.  (SBU) For now, appointment of this commission, likely 
intended as a warning to the companies and as a negotiating 
tactic by the GODR, appears to have been another 
miscalculation as the government desperately looks for ways 
to get electricity back on line.  While officials have 
downplayed the significance of the appointment of this 
commission, it nevertheless has worried companies and the 
IFIs.  Though a military/government commission may be nothing 
more than an action in keeping with local political style, it 
is not the confidence building measure the country 
desperately needs.  END COMMENT. 
HERTELL