US embassy cable - 04SANTODOMINGO4421

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 004421 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA; 
NSC FOR SHANNON AND MADISON; 
LABOR FOR ILAB; USCINCSO ALSO FOR POLAD;TREASURY FOR 
OASIA-LAMONICA 
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION 
USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS ITURREGUI 
 
E.O. 12958: N/A 
TAGS: PGOV, EFIN, DR 
SUBJECT: TRANSITION #9 - DOMINICAN ELECTRICITY: NO ONE'S 
RESPONSIBLE, EVERYONE SUFFERS 
 
1.    (SBU) This is number 9 in our series covering the 
transition between the Mejia and the Fernandez governments. 
 
ELECTRICITY: NO ONE'S RESPONSIBLE, EVERYONE SUFFERS 
 
The slow-motion collapse of the electricity sector during the 
countdown to the August 16 presidential election has finally 
reached a stage where frustration in the barrios exceeds the 
hopes offered by the prospect of a new administration.  The 
sporadic neighborhood outbreaks of rock throwing, gunshots 
into the air and tire-burning to protest blackouts extended 
at least twice during this past week to the auto route 
connecting the capital with "Las Americas" airport and other 
points east.  Neighborhoods along the road had been without 
electricity for 72 hours.  No one has been killed yet, but 
police report three injured and a number of arrests. 
 
President Meja, in off-the-cuff comments to the press corps, 
says that the electricity problem will have to be solved by 
the incoming administration.  At this point the Dominican 
electric system is bankrupt. Finance Secretary Calderon is on 
the record stating that the government owes nothing to the 
generators.  Electricity Council head George Reinoso says the 
government owes no more than $18 million -- and Mejia 
announced on July 29 that this amount was being disbursed for 
fuel purchases for generators.  All agree that accumulated 
debts to entities in the sector exceed $400 million. The 
government has been the only shareholder in two of the three 
major distribution companies since last November, when it 
bought out Spanish interests. 
 
In June PLD economist Julio Ortega commented to the DCM in 
passing that the crisis in the electricity sector "already 
happened, three months ago, and will need a lot of work." 
Leonel Fernandez is not making any promises.  Leaders in the 
sector have taken a road show to the IMF, to Treasury, and to 
others, advocating a restructuring, but no one has found any 
additional financing, domestic or international, to keep the 
lights on. 
 
And the lights are progressively going out.  Peak demand in 
the Dominican Republic is about 1600 megawatts.  After the 
May 16 election, the electricity on-line fell to around 1100 
megawatts, and then dropped in late June and early July to 
around 800 megawatts.  Last week (July 18-24) it dropped 
further, falling below 600 megawatts.  The system is back up 
to the mid-800's this week, but wide regions of the north 
went dark starting on July 27 when the Smith-Enron plant ran 
out of fuel.  (Calderon's comment: "We paid them $3 million 
last Friday.")  The country has about 3000 megawatts of 
installed capacity, though about one-third of that is 
inefficient and would be idle if the system were fully 
functioning. 
 
The violence along the airport highway was only the most 
visible evidence of the discontent caused by this financial 
failure of capacity.  Outside the capital, some regions or 
towns have regularly been without power for 16 hours or more; 
at the current low levels of service the distribution 
companies are now shutting off swathes of Santo Domingo, as 
well, often for lengthy periods.  Traffic lights frequently 
do not work; many businesses cannot function; sales of frozen 
foods have dropped by 80 percent since consumers doubt store 
refrigeration and can,t be sure of storing goods at home. 
Without power, household fans do not work and many in the 
barrios have difficulty getting to sleep.  The diesel-run 
generators in ubiquitous use at commercial properties and 
apartment buildings are in service for such lengthy periods 
that they are overheating and breaking down.  Electricians 
and generator repair personnel are busy, as are the 
installers of "inverters" - - contraptions linking 4 to 8 
heavy-duty car batteries to provide current when all other 
services go down. 
 
The beach resorts far from the capital feel few effects, for 
they are self-sufficient in generating power - - in fact, 
they have a sideline in selling power to distributors in the 
"spot market." 
 
- - - - - - - - - - - - - - - 
Better?  No Time Soon 
- - - - - - - - - - - - - - - 
 
The electricity sector consists of a variety of large plants 
of different capacities, owned by different interests and 
fueled variously by gas, coal, diesel and hydropower.  The 
Fernandez government of 1996-2000 "capitalized" the three big 
distribution companies (EDESTE, EDENORTE and EDESUR, serving 
the east, north and south respectively) but sold only 50 
percent of the shares.  Mejia justifies his November 2003 
decision to buy back the shares of EDENORTE and EDESUR from 
Spanish firm Union Fenosa (UF), asserting that UF management 
failed to collect on time, borrowed from UF Spain at usurious 
rates and was deceiving the government.  U.S.-owned firm AES 
operates EDESTE but made a corporate decision in December 
2003 to divest itself of shares and management whenever it 
can - - thereby earning the rancor of the regulatory 
authorities.  On July 28 AES brought to call on the 
Ambassador two executives from the California-based "Trust 
Company of the West," specialists in acquisition of high-risk 
energy assets.  AES expects to sell to them but to remain for 
the time being as administrator of EDESTE.  Mejia named a 
commission in late 2003, which included in its terms of 
reference, a mandate to advise him on legal requirements for 
privatization of distributors, including private sector 
purchases of up to 75 percent of shares. Their report 
advocating divestiture was delivered in June but did not get 
into the papers until early this week.  And the Mejia 
government has made no move in that direction. 
 
Plants are idle for various reasons.  The sector is choked 
with debt and firms have exhausted reserves of working 
capital.  Suppliers of fuel no longer extend credit but 
instead demand cash ten days before delivery. Some 40 percent 
of electricity consumption is unpaid, either because the 
power is tapped without meters or because distribution 
companies fail to sanction non-payment.  The monthly sector 
deficit is around $25 million, not including subsidies. The 
Mejia government,s policy of subsidizing electricity and 
cooking gas consumption, intended to protect the poorest 
households, continues despite the government,s clear 
inability to pay - - the government spent in six months the 
full amount budgeted for electricity subsidies for all of 
2004.  It is unclear how much of the monthly $25 million 
deficit the government is currently managing to pay. Some of 
the plants are under repair and some of this downtime may be 
at managerial discretion, awaiting the change of government. 
 
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A New Administration Is Not A Clean Slate 
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Pessimists such as outgoing Technical Secretary Carlos 
Despradel think that the street protests will get steadily 
worse, especially as the population understands that the new 
administration has no quick fix  or "purple magic," to use 
Mejia,s grim rebuke in the February 27 state of the nation 
address.   We know that the PLD transition team has been 
seeking an approach to subsidies on cooking gas but they have 
shown no similar devotion to a fix for the electricity sector. 
 
-   Fernandez may surprise us by pulling out of his hat a new 
pact with Venezuela on petroleum sales. President Hugo Chavez 
could easily direct national oil company PDVSA to offer 
90-day terms on fuel sales for electricity generation.  Such 
a deal would be a big but one-time boost for Fernandez,s 
first hundred days. 
 
-   Getting IMF board approval with a revised standby will 
open the avenue for lending for the electricity sector by the 
World Bank,  including a $25 million tranche that the Mejia 
government never collected because officials couldn,t 
adequately document their spending of a March disbursement. 
Bargaining with the IMF is going to be tough, but everyone in 
Santo Domingo knows that any road to recovery has to go 
through an IMF agreement. 
 
- - - - - - - - - - - - - - - - - 
Looking Down The Tunnel 
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As frustration spreads in the barrios and even citizens in 
middle class neighborhoods like the Naco and Piantini areas 
of Santo Domingo organize demonstrations against the 
blackouts, expectations of the new government are rising. 
But as things stand, Fernandez and his administration are not 
going to be able to pay the debts and to inject fresh 
liquidity into the system.  Even if the new president pulls 
out of his hat  generous fuel concessions from Venezuela or 
an unexpectedly comprehensive financial and budget fix, the 
solution will take time. Over the last six months electricity 
industry participants worked together in seminars sponsored 
by USAID and arrived at a general agreement on an approach 
that includes raising rates, divesting the government of most 
or all of its holdings in  the industry and lowering 
subsidies while targeting them better.  The fact remains that 
the electric system needs a lot of money to put an end to 
blackouts. We are looking down a tunnel with not much 
prospect for light at the end of it.  And not even that 
glimmer will be visible unless major changes are made to the 
payment structure of the electric system and the Fernandez 
administration moves quickly to bring the IMF back to the 
table. 
 
2. (U) Drafted by Mark Kendrick, Michael Meigs. 
 
3. (U) This report and others in our transition and election 
series are available on our SIPRNET site 
http://www.state.sgov.gov/p/wha/santodomingo/  
along with extensive other material. 
HERTELL