US embassy cable - 04SANTODOMINGO5740

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 005740 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA, WHA/CAR, WHA/EPSC, EB/ESC; DEPT PASS 
USAID/LAC; DEPT PASS DOE; NSC FOR SHANNON AND MADISON;LABOR 
FOR ILAB;SOUTHCOM ALSO FOR POLAD;TREASURY FOR OASIA-LCARTER 
 
E.O. 12958: N/A 
TAGS: DR, ECON, ENRG, PGOV, EINV 
SUBJECT: DOMINICAN ELECTRICITY: THE LAZARUS EFFECT 
 
REF: SANTO DOMINGO 01606 
 
1. Summary (SBU) The Dominican electrical sector is still in 
great difficulty. Generation is running consistently below 
peak demand. Blackouts occur regularly, although they are 
less prolonged than in the last days of the Mejia 
administration.  The government is keeping the lights through 
the end of the year on with money borrowed from Dominican 
commercial banks.  The strapped Dominican government is 
rationing payments to electricity producers, providing just 
enough for purchases of increasingly expensive fuel.  USAID 
and the World Bank are supporting a government effort to 
define a stabilization plan.  With no sign of any profit 
until at least the end of 2005, U.S. firm AES is close to 
selling off its generating and distributing operations. 
 
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Chunky payments 
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2. (U) When Leonel Fernandez took office on August 16,  power 
output had been running as low as 700 megawatts (MW), less 
than half of the daily peak demand of around 1600 MW.  This 
meant 12-20 hour blackouts across the country. The new 
administration obtained a USD 65 million loan to purchase 
fuel for the sector, coordinated by Santo-Domingo-based Banco 
Popular.  Most was to purchase fuel (USD 50 million) and the 
rest was for bottled cooking gas (USD15 million).  The plan 
is to spend roughly USD 10 million a month on fuel for power 
plants.  One unforeseen issue with the program is that the 
generators need to purchase fuel in bulk and these limited 
payments are not enough to buy a full shipment.  The 
consequence has been that generators have to hold the cash 
until they have enough for a full shipload -- purchased on 
the spot market at a premium.   The first disbursements from 
the loan were made in September. 
 
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Current generation 
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3. (U) The most recent statistics show that the system is 
typically producing between 1100 and 1200 megawatts in the 
early morning hours.  This is similar to or better than what 
we've seen for much of the past year, and it means that much 
of the country suffers sporadic blackouts.   The system is 
decapitalized, burdened with debts of between USD 400m and 
450m.   Distributors fail to collect sufficient funds with 
which to pay generators, due to the continued high rate of 
theft and the simple refusals to pay by many users.  The 
government consistently fails to cover promised subsidies. 
Without payments the generators cannot rapidly replenish the 
imported fuel needed for generating the electricity. 
 
4.  (U) Currently, distribution companies, Edeste (run by 
AES) and government-owned Edenorte and Edesur (formerly run 
by Union Fenosa of Spain), lose about 40 percent of the 
electricity that they distribute, a quarter of that from 
technical losses and the rest coming from theft.  Collections 
for power delivered and billed range from 66-77 percent for 
the distribution companies. Users have few incentives to pay 
and continue to tap into lines illegally or ignore bills. 
Encouraging the theft and hindering collections are rules 
that prohibit distributors from cutting off power for 
non-payment; companies have to pass through an arduous legal 
process involving the courts. 
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Trying to renegotiate, again 
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5. (U) Rhadames Segura,  Director of Dominican electricity 
agency CDEEE has said publicly that the government intends to 
re-negotiate the contracts with the generating companies. 
Still starved of cash, it has nothing to offer the companies 
in those talks in exchange for a permanent lowering of 
contract rates. The figure previously negotiated with most 
generators in the Madrid Accords, now essentially defunct, 
was about USD 200, to be financed by the World Bank -- but 
the government's failure to stay on track with the IMF 
blocked that lending program.  A USAID-supported study on the 
prospects for the sector is almost ready for discussion with 
sector participants.  It will offer all of them, including 
U.S. companies such as AES, Cogentrix, El Paso and Seaboard, 
a better basis for determining whether they will want to 
renegotiate. 
 
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AES - Getting Out of Dodge 
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6. (SBU) Julian Nebreda of AES-Dominican Republic and Blair 
Thomas, Managing Director of the Trust Company of the West 
(TCW), a California based private financial services firm, 
told the Ambassador on July 28 that AES would sell its 50 
percent holding of electrical distribution company Edeste for 
an undisclosed amount.  AES will continue to manage Edeste 
for TCW.  On October 8, George Dewey, Chief Commercial 
Officer of Coffeyville Resources of Kansas City, told the 
Ambassador of interest in purchasing other AES assets - - the 
500 MW complex named AES Andres and Los Mina and its Itabo 
partnership with El Paso and Globaleq with up to 650 MW of 
generation capacity. 
 
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Energy Shortage Leads to Expensive Schemes 
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7. (SBU) Press accounts have the GODR inquiring about the 
purchase of two 500 MW coal burning power plants that were 
originally intended for India but are waiting in Houston for 
a buyer.  Each power plant costs USD 750 million and would 
notionally be located on the north side of the country near 
Monti Cristi.  Smith Enron (future name: Prisma) currently 
has the only major power plant in the north, with 185MW of 
capacity in Puerto Plata.  The proposal to import more 
generating capacity is a non-solution.  At the moment the 
Dominican Republic has plenty of capacity - - the compound 
problem is debt, non-collection, a lack of direction and 
uncertainty about the government's  intentions. 
 
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Stabilizing Dominican Electricity until December 2005 
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8. (U) USAID in collaboration with the World Bank is 
financing work on a plan to stabilize the Dominican 
electrical sector over the period running to December 2005. 
The study is under discussion with sector participants and 
will probably  be submitted to President Fernandez later this 
week (October 20-22).  The plan is a minimal proposal, 
intended to keep the lights on over the next 18 months: it 
does not address the issue of debt repayment to the 
generating or distribution companies.  It is focused 
initially on the need to stop the continued accumulation of 
losses. It includes the rationale and recommendations for 
raising rates, reducing technical losses and piracy, 
increasinge collections and reducing subsidies. If consensus 
is possible, this aproach would be the basis for seeking 
multilateral bank financing to cover a financing gap 
estimated at 200-300 million dollars.  The draft plan does 
not pretend to be a cure-all; it would require a technical 
and financing miracle to get this Lazarus to rise and walk. 
Instead, the plan aims at providing electricity to meet 75 
percent of demand expected over a 24-hour period.  To help 
encourage payment, the proposal recommends rationing power 
and allocating it to areas of the country according to their 
records of payment. 
 
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Intrasector Debt Drags On 
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9.  (U) There is currently an accumulated intrasector debt of 
USD 400m to 450m for the Dominican electricity grid.  In 2002 
the distribution companies were able to collect about 12 
cents of the 14 cents it cost to generate electricity.  By 
2003 the three distributors were able to collect only 7 to 8 
cents while the cost of generation rose to between 16 to 18 
cents a KWH.  This huge discrepancy resulted from several 
factors: tariffs paid to generators are fixed in dollars, as 
are fuel prices;  the peso rapidly devalued from 18 pesos to 
55 pesos to the dollar over the last two years without no 
corresponding adjustment of peso tariffs;  the government 
made a political decision in April 2003 to subsidize 
electricity, despite its lack of resources to cover these 
payments; the government's response to massive bank frauds in 
2003 led to a multiplication of public sector debt and 
further hampered its ability to pay;  and the fact that more 
than 50 percent of users do not pay their electric bills. 
Private and public sector collections by distribution 
companies are equivalent to only about 48 percent of 
potential. 
 
10.  (U) There is general agreement on the level of debts 
except for a dispute between AES-managed Edeste and the 
government corporation CDEEE.  A 50 million dollar difference 
in calculations is due to two factors: a dispute on whether 
Edeste should pay for government-installed substations, and 
the cost of the government-imposed lag of two months between 
billings and receipt of payment. Edeste maintains that 
standard business practice allows for no more than a 30-day 
payment delay and that the CDE should pay for the financing 
cost of the extra month.  The lag is especially costly 
because of the sharp increase in peso interest rates after 
mid-2003 and the uncertainties of the exchange rate. 
 
11. (U) Drafted by Mark Kendrick 
 
12. (U) This report and others can be read on the SIPRNET at 
http://www.state.sgov.gov/p/wha/santodomingo/ index.cfm along 
with extensive other current material. 
HERTELL