US embassy cable - 04CARACAS1552

C O N F I D E N T I A L  CARACAS 001552 
 
SIPDIS 
 
 
NSC FOR CBARTON 
 
E.O. 12958: DECL: 05/10/2014 
TAGS: ENRG, VE 
SUBJECT: VENEZUELA'S POWER SECTOR: HEADING FOR ANOTHER 
CRISIS? 
 
Classified By: Economic Counselor Richard Sanders for reasons 1.4 (b) a 
nd (d) 
 
------ 
SUMMARY 
------- 
 
1. (C) After dodging the drought bullet in 2003, Venezuela's 
power sector is once again (still?) in a fragile state.  This 
time, however, other weaknesses in the electric power system 
caused by lack of investment, government inattention, and 
political meddling are taking center stage.  The problems are 
centered around CADAFE, a state-owned company that is largely 
responsible for the national transmission grid.  Legendarily 
inefficient and corrupt, CADAFE is described as "untouchable" 
under the Chavez regime, according to industry sources.  In 
fact, CADAFE is reportedly a test case for populist 
"co-management" structures for the GOV.  The Chavez 
Government has also shown a willingness further to threaten 
the electric power system with political retaliation against 
top managers.  End Summary. 
 
---------------------- 
THE RAINS SAVE THE DAY 
---------------------- 
 
2. (U) Venezuela's installed electrical generation capacity 
is 20,908 MW, of which about 13,500 MW or approximately 65 
percent is provided by hydroelectric stations.  The largest 
of these, Guri (the world's third largest dam by one 
measure), located in the southwest of the country, delivers 
9.025 MW alone.  In 2003, the water levels in the Guri 
reservoir reached historic lows.  This led to fears that 
power would have to be drastically rationed.  The early onset 
of the rainy season, however, forestalled what might have 
been yet another blow to Venezuela's battered economy.  As of 
April 29, 2004, the dam's water level stood at 252.45 meters 
above sea level or about 7.90 meters higher than the historic 
minimum set in 2003.  While the water level is low, the 
operations of Guri's turbines are not expected to be at risk 
in 2004.  Instead, other weaknesses in the Venezuelan 
electric power system caused by lack of investment, 
government inattention, and political meddling are taking 
center stage.  Much of the concern about the system is 
focused on CADAFE (Compania Anonima de Administracion y 
Fomento Electrico), a state-owned company that, in addition 
to managing thermal electric plants such as the Planta 
Central plant near Caracas, is also responsible for the 
national transmission grid and transmits and distributes 
electricity to about 80 percent of Venezuela. 
 
------------------------- 
ELECTRICAL SECTOR FAILURE 
------------------------- 
 
3. (C) On March 31, emboffs met with Carlos Mibelli, 
President of the Venezuelan Association of Power Companies 
(CAVEINEL), for a sectoral overview.  Mibelli praised GOV 
efforts to introduce a regulatory framework in 2001 but 
cautioned that signficant work needed to be done to create a 
truly competitive market.  He pointed to CADAFE, the largest 
national operator, as the source of most of the sector's 
inefficiency.  Mibelli estimated CADAFE's average 
"non-technical losses," i.e., theft by illegal hook-ups, at 
40 percent and said he did not foresee any real effort to 
streamline the company's corrupt operations and management 
because of CADAFE's untouchable status under the Chavez 
administration.  Mibelli described the industry's public 
enterprises as well into a process of "slow death" since 
rates were only allowed to increase by 10 percent in the last 
two years, far below inflation.  He predicted the GOV's 
maintenance of a populist stance towards the sector would 
result in long-term system failure. 
 
4. (C) Miguel Lara, General Manager of OPSIS, the Office for 
the Operation of Interconnected Systems, identified the main 
problem for Venezuela's power sector as the lack of long-term 
planning on the part of the GOV.  In an April 1 meeting, Lara 
explained that OPSIS had been created in 1968 to manage the 
planning, operation and interchange of energy between the 
largest public and private generation companies in Venezuela. 
 As a large part of the country's power is hydro-generated, 
said Lara, periodic droughts can have a significant impact on 
the system's ability to deliver electricity.  2003 saw one of 
the biggest droughts in Venezuelan history, resulting in a 
season of rolling blackouts.  Lara called Venezuela's thermal 
 
 
generation facilities deficient.  He said a crisis was 
averted in 2003 only because a long-anticipated contribution 
from the Caruachi Dam on the Caroni River in southwestern 
Venezuela finally entered the grid and demand fell 
dramatically due to the economic contraction. 
 
5. (C) Lara expected demand for power to grow 5-6 percent in 
2004 putting significant additional stress on an already 
overloaded system.  Caruachi may be able to generate enough 
power to meet increasing demand in the next few years, 
however, there are no long range plans for other projects in 
development at this time.  Lara predicted this lack of 
long-term infrastructural planning would inevitably lead to a 
system crisis at some point in the future. 
 
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POLITICIZATION OF THE POWER SECTOR 
---------------------------------- 
 
6. (C) The power sector has also felt the effects of the 
political retaliation that has followed the effort to force a 
presidential recall election.  On March 19, econoff met with 
Ciro Portillo, former Vice President of ENELVEN (Energia 
Electrica de Venezuela), a state-owned utility serving the 
western part of Zulia state.  According to Portillo, 18 
Enelven managers were informed by their supervisors on March 
2 that they would be immediately fired unless they agreed to 
retract their signatures on the presidential recall 
petitions.  One manager subsequently retracted but the 
remaining 17, each with an average of 20 years of experience 
and a total of 350 years of power sector experience between 
them, were either forced to retire or given severance 
packages.  Portillo, who had had 36 years in ENELVEN, 
reported that it was made clear to him that if he did not go 
quietly he would not receive any retirement benefits.  In the 
March 31 meeting with CAVEINEL President Mibelli, Mibelli 
told econoffs he had seen another list of 80 mid-level 
ENELVEN employees who were being pressured to recant their 
signatures. Other politically-motivated harrassment has been 
reported in EDELCA (Electrificacion del Caroni), the 
state-owned company that handles the massive hydroelectric 
projects on the Coroni river.  Finally, econoff learned on 
April 2 that Miguel Lara and two other top OPSIS managers 
would also be forcibly retired because they had signed 
presidential recall petitions. 
 
------------------------------ 
CADAFE:  A FAILING EXPERIMENT? 
------------------------------ 
 
7. (C) On April 6, Econoff called on Andres Gluski, President 
of Electricidad de Caracas (majority U.S.-owned by AES 
Corp.), to ask his opinion about the dire predictions for the 
stability of the electrical power sector.  Gluski confirmed 
that Venezuela's power system is in a fragile state.  Gluski 
said that in early March the system had come close to a major 
blackout.  At that time, EDC had a turbine down for scheduled 
maintenance and, while this should not have been a problem, 
CADAFE also had had two of its three turbines at Planta 
Central off-line because of unexpected problems.  Gluski 
noted his concern that a blackout affecting Caracas would 
give the GOV an excuse to call for a state of emergency. 
Ultimately, a blackout was avoided.  Given CADAFE's problems, 
Gluski commented that the entire Venezuelan electricity 
system could be at risk of destabilization.  He also pointed 
to the critical role played by OPSIS in managing national 
load factors, stating that if Miguel Lara and other top OPSIS 
managers depart, OPSIS will not be handled as efficiently and 
the effects of CADAFE's shortcomings will be magnified. 
 
8. (C) Miguel Lara noted to econoff that CADAFE has routinely 
incurred huge losses since its inception due to corruption, 
bad management, a flawed billing system and low rate 
increases.  He added that these problems have been 
exacerbated because of the political impossibility of 
criticizing CADAFE under this administration.  According to 
Lara and Mibelli, CADAFE is being used as a test case for 
"co-management" structures under which a three tier system of 
circles (operations, management and executive circles) has 
been created to manage the company.  In the operations 
circle, groups of approximately 20 workers jointly decide on 
company policies.  Mibelli noted that as opposed to similar 
systems implemented in countries such as Japan where the 
managers would take the advice of workers and make a 
decision, in CADAFE the workers can override decisions by 
managers.  Gluski added that a radical wing of the Patria 
 
 
para Todos Party (PPT - Fatherland for All) has been trying 
to infiltrate the electrical unions and has been particularly 
active in CADAFE.  In sum, without a fundamental 
restructuring of CADAFE, these men predict uneven power 
distribution as a fact of life for the future. 
 
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COMMENT 
------- 
 
9. (C) CADAFE was expected to be restructured as a result of 
a framework law governing generation, transmission and 
distribution passed by the Chavez Government in 2001.  The 
law was intended to unbundle service activities and to create 
competition and a spot electricity market.  Instead, it 
appears increasingly likely that the Chavez Government will 
not implement the law and CADAFE's many shortcomings will not 
be addressed.  The Chavez Government has also shown a 
willingness further to threaten a fragile electric power 
system with the implementation of populist management 
structures and political retaliation against top managers. 
While the GOV should be considering steps to prepare for 
rationing, it apears to be ready to take the risk of a major 
power failure instead. 
SHAPIRO 
 
 
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      2004CARACA01552 - CONFIDENTIAL