US embassy cable - 05GUATEMALA2250

UNCLAS SECTION 01 OF 02 GUATEMALA 002250 
 
SIPDIS 
 
DEPT PASS USTR 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, BEXP, ETRD, SENV, GT 
SUBJECT:  Energy producers worried about energy sector 
investment climate 
 
 
1. (SBU) Summary:  In early September, a delegation of energy 
producers, including three US firms, complained to the Embassy 
that their contracts are under threat by the regulator, which 
claims their prices are too high.  They fear legislation that 
would give the regulator a hand in setting prices, and decried 
a skewed subsidy structure.  In addition, some new energy 
investments could be stalled or made more expensive by a 
system of consultation with local communities.  Government 
officials (the Economy Minister and Deputy Competition 
Commissioner) do not agree with the producers' complaints, and 
appeared more concerned with the popular unrest high 
electricity prices could cause.  On CAFTA, producers hope for 
economic growth that will raise consumption, but wondered 
whether small producers would be able to compete in a more 
open market.  End summary 
 
2.  (U) Background:  Although the energy sector in Guatemala 
is stable, there are significant challenges ahead.  Energy 
producers and the government fear a crisis in the near future 
if there are no significant new investments and if energy 
prices keep rising.  Several small projects are in the 
planning phase but no active major projects.  Future 
investment hinges as much on new investment opportunities as a 
commitment by the GOG to transparency and honoring contracts. 
The current administration has demonstrated a willingness to 
improve the investment climate, and has made attracting new 
infrastructure-related investment one of its priorities.  The 
Embassy has supported this by inviting teams from Treasury, 
TDA and other USG agencies to help the GOG improve the laws 
and regulations that govern the energy sector and improve 
Guatemala's investment climate. 
 
3.  (U) There are three types of energy production facilities 
in Guatemala:  traditional oil-fired power plants; co- 
generation plants using sugar cane by-products, and 
hydroelectric plants.  During the rainy season, May to 
October, 58% of production is hydroelectric and 42% is oil 
fired.  In the drier season, supply is 35% hydroelectric and 
65% oil-fired.  The sector is regulated by the National 
Commission for Electric Energy. 
 
4.  (SBU) The price of energy is distorted by government 
subsidies.  Consumers are subsidized by a system that charges 
more to those who use a monthly average above 300 kilowatts. 
Critics, such as the National Association of Generators (see 
below) argue that a subsidy to consumers based on wattage use 
and not economic need places a burden on the 10% of high- 
wattage users, who in effect subsidize all other residential 
users.  Generators see this subsidy scheme as a political tool 
to placate the indigenous and rural poor. 
 
5.  (SBU) On September 7, a twelve-person delegation from the 
National Association of Generators, which lobbies on behalf of 
energy producers, came to the Embassy to complain about 
developments in the sector.  Aside from the lopsided 
government subsidy structure, they claimed that the regulator 
is threatening to rescind contracts if producers do not lower 
prices to the electricity distributors and ultimately to 
consumers.  Legislation has been introduced that could give 
the regulator some control over the prices the generators are 
allowed to charge, while not regulating their input costs. 
The association president returned on September 21 with a 
letter from the regulator to one of the energy distributors, 
which all but asked the firm to cancel the contract with its 
supplier - in this case a majority US-owned firm - if the 
latter would not lower its price.  A major concern of the 
association is that not honoring contracts will send a very 
negative signal to potential energy sector investors, which 
could be particularly dangerous in a time of rising energy 
prices.  A worst-case scenario would be severe energy 
shortages, which could lead to popular unrest. 
 
6.  (SBU) Some see this new development as merely a tactic to 
bring the power generators to the negotiation table. 
Association members reluctantly admit that their current rate 
of compensation is higher than the international median. 
However, they have different ideas on how to correct this than 
the regulator, which is taking a hard, somewhat populist line. 
On behalf of the US firms in the association, Emboffs brought 
this matter up with the Minister of Economy and the Deputy 
Competitiveness Commissioner.  They confirmed that the 
contracts to the producers are generous, with the latter 
adding that it is probably positive that the regulator is 
becoming more forceful.  (Note:  There are three major 
generators that are majority US-owned: Duke Energy, Prisma 
Energy, and Teco Power Services.  Prisma Energy is backed 
largely by an OPIC loan.  They are concerned that unfair 
tactics by regulators may force them to accept new rates while 
excluding domestic providers with similar contracts.  End 
note). 
 
7.  (SBU) A small hydroelectric project, Rio Hondo, also US- 
owned, has faced a different problem.  As a new investment, it 
had problems getting started due to a provision in the law 
known as a "consulta" (consultation).  This provision allows 
the local community to have a voice in approving area 
investments so that they do not have negative social, economic 
or environmental impact.  Critics see consultas as a means for 
local communities to "black mail" investors.  Companies have 
been threatened with consultas unless they provide significant 
local investment and infrastructure.  So far no project has 
been stopped because of a consulta.  However, they have at 
times presented a direct challenge to the authority of the 
national government.  The constitutional courts are actively 
working to resolve this issue while attempting to preserve the 
ideals of participatory democracy on which consultas are 
based. 
 
Energy sector views on CAFTA 
---------------------------- 
8.  (SBU) The energy producers we met with generally view 
CAFTA as positive, since the economic growth it will generate 
should lead to higher energy consumption.  They hope for a 
better investment climate, but as large multinational 
companies, they have already been successful in establishing 
themselves, in spite of the - in their view - not totally 
auspicious environment.  They theorized that smaller companies 
could be hurt by CAFTA, since it will attract additional 
investment and competition, for which they may not be ready. 
 
Wharton