US embassy cable - 04YEREVAN2406

UNCLAS SECTION 01 OF 02 YEREVAN 002406 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/CACEN FOR SIDEREAS, EUR/ACE FOR LONGI, EB/ESC, 
PASS TO USAID EGAT FOR WALTER HALL 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, ETRD, EAID, AM 
SUBJECT:  POWER STRUGGLE:  ARMENIA SELLS GEORGIA CHEAP 
ELECTRICITY 
 
Ref: A. TBILISI 2773 B. YEREVAN 1453  C. YEREVAN 2216  D. 
 
YEREVAN 2367 
 
1.  This cable is sensitive but unclassified.  Please 
protect accordingly. 
 
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SUMMARY 
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2. (SBU) Sources in Armenia's energy sector claim that, 
following the October 10 sabotage of transmission lines from 
Russia (Ref A), the Georgian government forced Armenia to 
sell electricity to Georgia below cost by threatening to 
raise transport tariffs on goods bound for Armenia.  Sources 
in the Government of Armenia told us the sale was "not 
unusual" and have denied allegations that Georgia threatened 
to raise tariffs if it did not receive cheap electricity. 
Whatever the story behind the deal, the concessionary sale 
to Georgia costs the Armenian energy sector USD 300,000 per 
month, and illustrates a current feeling of vulnerability to 
transport through Georgia exacerbated by the recent closing 
of the Russia Georgia border (Refs C, D).  End Summary. 
 
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ARMENIA EXPORTS POWER TO GEORGIA ON THE CHEAP 
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3. (SBU) Armenia has started exporting electricity (60MW) to 
Georgia below the cost of production, in effect subsidizing 
Georgia's electricity market.  Following the October 10 
sabotage of transmission lines from Russia, ArmRosGazProm 
and United Distribution Company of Georgia entered into an 
agreement that Armenia will export electricity to Georgia at 
last year's rate of 2.5 U.S. cents kW/h through the end of 
March 2005, with a price adjustment mechanism if the gas 
price rises before that time.  According to Armenian law, 
only the highest marginal cost electricity may be used for 
export.  Based on current operations, the highest cost 
generation plant is Hrazdan Thermal Power Plant, which is 
operating at about 50 percent capacity.  Its tariff for 
Armenian consumers is 15.22 ADM (about 3.05 U.S. cents) per 
kW/h.  According to technical advisors to the Public 
Services Regulatory Commission (PRSC), which set the price 
in this case, the difference between the actual cost of 
generation and transmission and the 2.5 U.S. cents per kW/h 
tariff for 60 MW could be as high as USD 300,000 per month. 
Armenian consumers will bear the cost in the form of higher 
electricity tariffs. 
 
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POWER AND INFLUENCE 
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4. (SBU) PA Consulting, which serves as the technical 
advisor to the Ministry of Energy and the PRSC in Armenia 
and is also the buyer of the electricity in Georgia, told us 
that Georgia's Prime Minister called on the Government of 
Armenia to use Armenia's excess generation capacity to meet 
Georgia's unmet demand.  Sources disagree about whether 
Georgia threatened to raise the transit tariffs of Armenia- 
bound goods through Georgian territory by 20 percent if 
Armenia refused to deliver the electricity at last year's 
rates.  (Note:  More than 90 percent of Armenia's non- 
diamond trade transits Georgia.  End Note.)  In any case, 
there was doubtless uncertainty about what price to charge 
Georgia.  Before the dissolution of ArmEnergo October 1, the 
GOAM itself would have made the export through the state- 
owned single buyer of electricity (Ref B).  With ArmEnergo 
out of the picture, Armenia's PRSC lacks market rules on 
which to rely when setting price rules for foreign 
governments or, for that matter, the private distributor. 
Although the private distributor, Electricity Networks of 
Armenia (ElNetArm), inherited ArmEnergo's export contracts, 
the government effected the export through the state- 
controlled ArmRosGazProm (55 percent Russian and 45 percent 
Armenian owned). 
 
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COMMENT:  CAUCASIAN HOSTAGE? 
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5. (SBU) While stories conflict about whether there were any 
threats from Georgia, no one disputes that Armenia is 
exporting electricity to Georgia at a rate less than 
marginal cost.  If Georgia is seeking to profit from the 
perception of vulnerability and isolation in Armenia, its 
timing could not be better.  The recent temporary, month- 
long closure of the Verkhniy-Lars border crossing between 
Russia and Georgia stranded hundreds of trucks bound for 
Armenia and diverted trade through the Georgian ports of 
Poti and Batumi at extra cost.  Although Russia opened the 
border October 22 (Ref D), a recent visit by the Russian 
Minister of Transport did little but highlight the 
implausibility of alternative routes for Russian goods, 
including via the Caspian Sea and through Iran.  As the 
transport of goods through Georgia faces more expense and 
obstacles, the GOAM is not likely to forget that more than 
half of the electricity that Armenia generates depends on 
gas that flows through from Russia through Georgia.  While 
Armenia's Ministry of Trade has long pushed to reduce 
Georgia's transit tariffs on goods bound for Armenia, recent 
events remind the GOAM that Armenia's bargaining position is 
weak. 
 
EVANS