US embassy cable - 05TEGUCIGALPA1971

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 001971 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, AND EB/ESC 
STATE FOR DS/IP/WHA - MFLYNN, DS/ITA - KHALL, DS/DSS/OSAC - 
CMEDEIROS 
COMMERCE FOR MSEIGELMAN 
TREASURY FOR DDOUGLAS 
ENERGY FOR IA 
DOL FOR ILAB 
 
E.O. 12958: DECL: 09/22/2015 
TAGS: EPET, ECON, ELAB, PGOV, KSAC, HO 
SUBJECT: HONDURAS DECLARES ENERGY EMERGENCY, RESTRICTS 
MARKET 
 
REF: A. A) TEGUCIGALPA 1851 
 
     B. B) TEGUCIGALPA 1873 
     C. C) TEGUCIGALPA 1910 
 
Classified By: ECONCHIEF PDUNN FOR REASONS 1.5(B AND D) 
 
1. (C) Summary. In an emergency session on September 22, the 
GOH Council of Ministers declared an energy state of 
emergency in Honduras.  The decree imposes a number of energy 
conservation measures, but does not directly address fuel 
prices, which remain frozen without benefit of a 
Congressional decree.  The Commission of Notables -- formed 
to investigate fuel prices and recommend reforms -- continues 
to disintegrate as politicization and mission creep 
reportedly overshadow the difficult and necessary work of 
reforming the fuel pricing formula and gaining public support 
for the new policy.  Four commission members of the ten have 
already resigned or announced their intentions to do so.  The 
Council of Ministers decisions are notable in their lack of 
action on the more incendiary Commission proposals, though 
separate talks with the oil sector continue (reported 
septel).  End Summary. 
 
2. (U) In an emergency session on September 22, the GOH 
Council of Ministers declared an energy state of emergency in 
Honduras.  This declaration -- a response to the recent civil 
unrest stemming from sharp increases in fuel prices (refs A 
and B) -- imposed a number of measures designed to reduce 
fuel consumption.  The Council decree mandated that for a 
period of 15 days the "unlimited consumption" of electricity 
would be restricted.  Specific restrictions include:  store 
owners must turn off store signs and electric billboards 
after 10 p.m.; gasoline stations will remain closed on 
Sundays; bus and taxi routes will be re-designed to reduce 
congestion in urban areas; cargo deliveries to businesses in 
urban areas will be restricted to off-peak hours; rush hour 
will be eased by mandating that public and private sector 
workers report for work at different hours; and import duties 
on fuel-efficient vehicles will be reduced. 
 
3. (C) The decree does not address the issue of the current 
price freeze on gasoline, imposed on September 7 for ten days 
by congressional decree and extended de facto (but not de 
jure) for another ten days on September 17 without a 
congressional decree.  The first price freeze rolled back 
prices at the retail level to pre-Hurricane Katrina prices 
(ref B) and mandated that the GOH would reimburse retailers 
for the difference.  The de facto continuation of that price 
freeze, however, is not spelled out in any decree, and it 
remains unclear who will foot the bill for that policy. 
Public speculation is that the importers will absorb the cost 
differential (oil sector responses to this proposal reported 
septel).  Catholic Priest Jesus Mora, representing Cardinal 
Oscar Rodriguez as a non-voting member of the Commission, 
told PolChief September 21 that it appeared that importers 
would in fact do so for public transportation.  International 
Monetary Fund (IMF) Resident Representative Hunter Monroe 
told EconChief that the Fund remains concerned about the 
potential fiscal impact of this new policy, but is 
withholding judgment until the costs and payment mechanisms 
are made clear. 
 
4. (C) The report that spurred this Council of Ministers 
meeting was authored by the Commission of Notables -- a group 
of ten high-profile persons formed by the GOH on September 7 
to examine energy pricing policies in Honduras (refs B and 
C).  The group contains no experts on the petroleum sector 
and has been plagued by politicization and internal dissent 
since it began to meet.  Irma Acosta de Fortin was the first 
to resign from the Commission, publicly criticizing it for 
both exceeding its mandate and failing to fulfill its 
mandate.  According to Fortin, the commission has not 
examined the fuel pricing formula, and has not proposed a 
transparent and efficient reform to that formula that the 
public can both understand and accept.  The commission has, 
however, proposed revising thermo-electric generating 
contracts, and exploring nationalized fuel imports and 
approaching Venezuela for concessional fuel sales, all of 
which, she said, goes well beyond the Commission's mandate. 
Privately, Fortin told Post that she was frustrated by the 
political grandstanding of several other commission members, 
who seemed more interested in talking to the press about the 
fuel crisis than in talking to one another. 
5. (C) According to IMF ResRep Monroe, Jorge Bueso has also 
decided to leave the commission.  Bueso has long counseled 
adoption of a responsible, practical fuel policy that 
recognizes its centrality to the modern economy and that 
respects fiscal limits imposed on the GOH by its available 
resources and by the IMF and other international donors. 
Emilio Larach, a businessman considered to be moderate on the 
fuel issue, has also publicly declared his intention to 
abandon the commission.  Larach previously sought to refuse 
nomination to the commission in the first place, but was 
reportedly persuaded to accept the post by the Casa 
Presidencial.  On September 22, another commission member, 
President of the Honduran Private Sector Council (COHEP) Jose 
Maria Agurcia, told EconChief that he, too, will leave the 
commission this weekend.  "I won't be making a scandal of (my 
departure)," he said, "but I won't be going back next week." 
Agurcia has been tasked with reporting on any limitations in 
vertical integration in the U.S. gasoline markets.  Post has 
provided him with information from the Federal Energy 
Regulatory Commission (FERC) and from the Federal Trade 
Commission (FTC).  Agurcia intends to recommend that Honduras 
adopt a structure that does not limit a priori the ability of 
firms to vertically integrate (that is, for importers to also 
distribute and market fuel products), but that has strong 
anti-monopoly provisions.  He favors strengthening the 
Ministry of Commerce's Technical Petroleum Unit (UTP) to give 
it the technical and financial capacity to appropriately 
enforce consumer protections in the retail fuel sector while 
maximally opening the sector to competition. 
 
6. (C) The Council of Ministers also did not take up the 
issue of state-run fuel imports, long a favorite theme of 
Commission member Juliette Handal (a National Party 
politician, wife of Vice President of Congress Johnny Handal, 
and former President of the "Patriotic Coalition" -- a group 
formed last year to promote increased state involvement in 
the gasoline sector).  The Commission, in addition to 
exploring state-run importation based on the Costa Rica 
model, also pointed out that under Decree 94 of 1983, the 
state is permitted to contract with the private sector for 
fuel storage.  (Note:  It appears to Post from an examination 
of that decree that such contracts would be on market terms 
and would not constitute nationalization or expropriation of 
the storage facilities.  End Note.)  Texaco Country Manager 
Luis Mayorga told EconChief that Texaco (owner of much of the 
fuel storage capacity in Honduras, based in Puerto Cortes) 
would be willing to contract for storage of fuel on behalf of 
the GOH, as it does with other oil companies, but that any 
such contract would be at prevailing market rates. 
 
7. (C) The Commission also suggested that the GOH investigate 
and re-negotiate contracts with electricity generators (a 
theme that has been much in the press recently but which goes 
well beyond the Commission's mandate.)  The Council of 
Ministers took no action on that recommendation.  General 
Manager of parastatal electric company ENEE Angelo Botazzi is 
publicly quoted saying, "We are agreeable to reviewing the 
contracts with thermo-electric generating companies.  There 
has been no intervention by the Commission of Notables; there 
is an open dialogue."  Botazzi went on to endorse the 
Council's emphasis on energy conservation. 
 
8. (C) Comment:  While the ill-defined status of the current 
de-facto price freeze on fuel prices remains troubling, the 
measures proposed by the Council of Ministers seem largely 
laudable to us.  Using the fuel crisis as pretext, the 
Council has cracked down on traffic congestion and illegal 
taxi and bus routes, and begun taking steps to encourage 
energy conservation.  We would prefer to see price 
pass-throughs used as a signal to consumers to conserve 
energy, rather than a government mandate, but that seems 
unlikely in the highly-charged political atmosphere only two 
months before the November 27 presidential elections. 
Closing gas stations on Sundays seems largely symbolic, and 
runs the risk of encouraging the development of illegal sales 
by unlicensed dealers.  The Council has attempted to address 
these risks by also mandating steep fines for violators, but 
the GOH political will and capacity for enforcement is 
historically weak.  See septel for Post analysis of impacts 
on U.S. and other petroleum sector companies.  End Comment. 
 
Williard 
Williard