US embassy cable - 05TEGUCIGALPA1831

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 001831 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN 
TREASURY FOR DDOUGLASS 
STATE PASS AID FOR LAC/CAM 
DOL FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, EPET, ENRG, PGOV, HO 
SUBJECT: HONDURAN CONGRESS LOOKS AT RE-OPENING ELECTRICITY 
CONTRACTS WITH A VIEW TO FORCING RATE REDUCTIONS 
 
REF: TEGUCIGALPA 1742 
 
1. (U) Summary:  The National Congress has reportedly dropped 
its recent plan to eliminate the fuel adjustment surcharge 
from residential electricity bills, citing costs.  However, 
Congress now plans to examine and potentially re-open certain 
existing contracts with electricity generators, noting that 
costs in these contracts run as high as 22 cents per 
kilowatt, versus only 6 cents for more recent contracts.  At 
least one private sector group has come out in favor of a 
Congressional review of the contracts.  Post shares 
well-founded concerns about possible corruption in the 
contracting process, but is also sensitive to the risk of 
undermining investor confidence by re-opening and 
re-negotiating existing contracts.  Post will follow this 
issue with interest as a bellwether for investor security. 
End Summary. 
 
2. (U) As reported reftel, on August 10, President of the 
National Congress (and Nationalist Party presidential 
candidate) Porfirio "Pepe" Lobo submitted a legislative 
initiative to eliminate the fuel adjustment surcharge from 
household electricity bills.  Finance Minister William Chong 
Wong responded that the initiative would have to meet the 
Constitutional requirement that new proposed expenditures 
also identify revenues to pay for it, and the proposal would 
have to be vetted with the International Monetary Fund (IMF). 
 Chong assured EconChief that the President would not approve 
any proposal that did not fit within the IMF agreement. 
 
3. (U) As Post predicted (reftel), it appears that Congress, 
faced with the necessity of cutting subsidies to the poor to 
fund this extravagant initiative, came to its senses and 
shelved this proposal.  On August 16, National Party 
Congressional Whip Juan Orlando Hernandez announced that the 
Executive had determined there was no way to eliminate the 
adjustment, given that the cost would come to an estimated 40 
percent of the total electricity bill. 
 
4. (U) Instead, Hernandez said, representatives of all five 
parties in the National Congress are calling for a review of 
certain power purchase contracts with private sector 
electricity generators.  ENEE's current contracts with 
private power generators (70 percent of which are thermal) 
allow the generators to pass-through to ENEE any increase in 
the cost of fuel.  Hernandez complained that the contracts 
are "onerous" and are costing the GOH five billion lempiras 
(approximately USD 265 million) annually. 
 
5. (U) Vice President of Congress Ramon Velasquez Nazar 
announced that Congress would begin looking into how previous 
administrations awarded energy generation contracts, seeking 
any evidence of "irregularities."  The Special Commission 
looking into the contracts has noted, for example, that 
energy contracts signed in the Callejas Administration 
(1990-1994) cost more than 12 cents per kilowatt, newer 
contracts cost approximately 8 cents, and the newest 
contracts only 5.6 cents (with an adjustment for fuel prices 
that has recently driven prices as high as 6.8 cents). 
Energy analysts are quoted publicly as saying this variation 
in costs is due to energy efficiency improvements over time, 
and due to economies of scale (older contracts were 
reportedly for 39 and 60 megawatts, a more recent project was 
for 80 megawatts, and the newest is a mega-project generating 
420 megawatts).  Angelo Botazzi, Director of the parastatal 
electricity company ENEE, meanwhile, said in a recent 
interview that the most expensive four contracts now cost 22 
cents per kilowatt, up from 18 cents last year.  All of these 
contracts were approved by Congress at the time they were 
signed, and have reportedly been renewed for periods ranging 
from 2012 through 2018. 
 
6. (U) Benjamin Bogran, Executive Director of private-sector 
umbrella group COHEP, publicly endorsed the revision of these 
contracts, even if that means re-opening the contracts and 
re-negotiating rates with the Energy generators.  Bogran said 
that the GOH "has every right to revise these contracts" and 
agreed that they are "onerous."  Bogran also raised the 
possibility of seeking concessional oil from Mexico or 
Venezuela, as a way of reducing costs. (The GOH has 
repeatedly said this is not possible, since these governments 
do not provide concessional oil, only soft credit that the 
GOH cannot take advantage of, both because of debt ceilings 
and because the private sector, not the GOH, is responsible 
for oil imports into Honduras.  Honduras currently gets only 
4 percent of its oil from Venezuela.) 
 
7. (SBU) Comment:  Post will attempt to verify the per 
kilowatt costs of these contracts, and to ascertain other 
important details (capacity, whether they are take-or-pay, 
whether they are peaking or base-load.)  If the reported 
figure of 22 cents per kilowatt is accurate, this really is 
an "onerous" cost for the GOH.  Nevertheless, the contracts 
were duly negotiated, and then renewed, and reportedly have 
7-13 years left until they expire.  Post begins to worry any 
time the GOH starts talking of re-opening contracts with a 
view towards forcing suppliers to reduce prices.  Investments 
in expensive infrastructure projects like energy generation 
require predictability, enforceability, and, frequently, long 
depreciation periods.  Reopening contracts threatens all of 
these elements.  On the other hand, corruption ran rampant 
for years in GOH project solicitations, so we are sensitive 
to the possibility that these contracts are potentially 
deeply flawed.  To our knowledge, no U.S. firms are currently 
among those generating electricity for ENEE, but Post will 
follow this issue with interest as a bellwether for investor 
security. End Comment. 
 
Williard 
Williard