P 130238Z MAR 09
FM AMEMBASSY MAJURO
TO SECSTATE WASHDC PRIORITY 2261
INFO AMEMBASSY SUVA PRIORITY 
CDRUSAKA KWAJALEIN MH
CDR USPACOM HONOLULU HI
AMEMBASSY MAJURO

UNCLAS MAJURO 000020 
 
 
E.O. 12958: N/A 
TAGS: ECON ENRG PGOV RM
SUBJECT: ENERGY WOES IN THE MARSHALL ISLANDS 
 
¶1.      SUMMARY: The immediate outlook for energy issues in the 
RMI remains gloomy.  The status quo is fundamentally 
unsustainable, and thus far the political will to correct the 
problem has not been found.  The energy problems act as a severe 
damper on any attempts to promote economic development as they 
consume resources to little positive effect and add layers of 
costs to any transaction.  Efforts are underway by technocrats 
to improve long-term energy policy in the RMI, but getting the 
political buy-in remains a significant stumbling block. END 
SUMMARY 
 
¶2.      The RMI's ongoing electricity generation problems refuse 
to lie down.  The long term problems plaguing the Marshalls 
Energy Company (MEC) are representative of the problems facing 
the energy sector as a whole.  Analysis of MEC conducted by a 
USDA Graduate School team identified two major problems with 
MEC's operations. The first is ineffective or counter productive 
GRMI policies and the second is MEC implementing unsustainable 
business models in reaction to those policies.  GRMI 
interference has come in the form of manipulating tariff rates 
for electrical service, keeping them artificially low and not 
allowing them to react to fuel price changes quickly and 
efficiently.  This has forced MEC to generate electricity at a 
substantial loss, especially on Kwajalein, Jaluit and Wotje 
atolls, where MEC's costs are four times higher than on Majuro 
but their prices must be the same.  GRMI interference also 
resulted in imposition of gross revenue and import taxes on MEC 
that damaged their competitive advantage in fuel re-sales to 
fishing vessels.  Such re-sales had been MEC's one source of 
consistent profit.  MEC's response to these policies has not 
helped their operations in the long term, either.  In response 
to inflexible and unrealistic tariff rates, MEC subsidized their 
power generating operations through fuel re-sales.  When taxes 
made these non-profitable, MEC diverted funds from maintenance 
and depreciation accounts to sustain operations.  This has left 
power production and transmission efficiencies below benchmark 
standards, and MEC without the funds to correct the issue. 
 
¶3.      The situation came to a head when the oil price shocks of 
2008 finally wiped out MEC's last reserves.  In the face of 
rapidly climbing prices they found themselves unable to pay for 
the fuel shipments they receive on consignment from SK Networks 
of South Korea.  Since that time they have continued operations 
largely by subsidies from the GRMI, with the underlying funds 
coming from international donors.  However, these subsidies have 
not been managed in a coherent, transparent manner.   Some have 
been outright grants, but much of the funding has come in the 
form of advances against future GRMI utility costs.  Advancing 
funds provides MEC with immediate operating capital at the cost 
of deferring the problem to a later date when the absence of 
income from billing the GRMI will limit's MEC's cash flow.  Thus 
budgeting for the transfers is not sustainable in the medium 
term and they have been clouded by a series of loan guarantee 
arrangements the GRMI has undertaken on an ad-hoc basis.   The 
GRMI stated they had the situation under control in December of 
2008 when fuel prices dropped dramatically and the GRMI repealed 
the import and gross revenue taxes on MEC, theoretically 
re-establishing their competitive advantage in fuel re-sales. 
This has proven to not be the case. 
 
¶4.      MEC was unable to meet their most recent consignment 
payment in February, despite the payment date being extended 
from January.   The GRMI was again forced to look to outside 
sources of funding to keep the lights on, ultimately paying for 
the shipment with part of the annual Taiwan grant money and 
funds guaranteed by the Japan.  An assessment by an energy 
policy specialist in the RMI on a project funded by the European 
Commission found that fuel sales by MEC have not significantly 
increased because it has not had the cash flow needed to 
purchase sufficient stocks to make significant sales - also the 
winter months are naturally a low point in annual fuel sales as 
fewer ships are fishing in RMI waters.  The study noted the GRMI 
forced MEC to lower tariffs back to unsustainable levels as soon 
as fuel prices dropped, rather than allow MEC to recoup some of 
its operating capital.  The assessment further concluded that 
MEC's problems will not be fixed without a major 
recapitalization, something that cannot happen at this time as 
MEC does not have accurate valuations on assets and the GRMI's 
ad-hoc approach to crisis resolution consumes the resources that 
could be used for a permanent solution.  At this point there is 
no apparent solution to MEC's cash flow problems. 
 
¶5.      The RMI's energy issues do not stop there.  A series of 
projects to install home solar power units on the outer atolls 
is not working out as hoped.  While many of the units have been 
installed under a program funded by the EU, many others are tied 
up in political disputes as the change in Government brought a 
corresponding change in which outer atolls would be receiving 
the units.   Other units are waiting for installation funds to 
be found.  Beyond the problems with getting the units into 
place, MEC is finding the units are not bringing in revenue to 
make the program sustainable.  While the program is able to pay 
for the routine maintenance costs of the panels, it will not be 
able to pay for replacement batteries for the units when they 
are needed in a few years' time. 
 
¶6.      The current energy situation is proving to be a 
significant drain on economic development.  The GRMI is 
constantly scraping for resources to prop up power generation 
thus diverting money away from development and growth projects. 
It is also placing increasing strain on the already thin GRMI 
budget and in the opinion of an economist studying the problem 
is likely to push the GRMI towards an "inevitable crash."  The 
inefficient power generation infrastructure results in 
unreliable service and the constant threat of the power going 
off in the near future certainly does nothing to promote outside 
investment.  MEC's current state also prevents it from fully 
realizing the value of many of its assets, especially the large 
fuel depot, one of the few in the region not owned by an outside 
company.  The depot could serve as the keystone in a proposed 
regional fuel purchasing and distribution scheme, but only if 
MEC can obtain the capital needed for startup.  The problems 
with the outer atoll solar projects are preventing any increase 
in productivity of outer atoll economic activity such as copra 
production and handicraft manufacture by limiting work to 
daylight hours. 
 
 ¶7.     Moves are finally starting to be made at the technocratic 
level to address some of these issues, especially those stemming 
from lack of sound, long term policy on energy issues.  In the 
next few months the Government of Australia will be providing an 
alternative energy policy expert to work for the RMI on a two 
year contract.  The EC is funding an energy policy expert to 
help the RMI formulate plans for their overall needs, and the 
USDA Graduate School has a team trying to spearhead an overall 
reform of GRMI finances that could free considerable resources 
and help break the GRMI off of their habit of reeling from one 
crisis to the next.  The limiting factor on all these efforts is 
the will of the national leadership.  Most of the solutions to 
the RMI's energy problems will require hard choices from the 
GRMI, such as allowing tariffs to increase and shrinking the 
size of government to free budget resources.  Sadly, it is 
probable that an outside trigger such as another price shock 
will be required to force the political leadership into taking 
action on these solutions.  Until that time the RMI will most 
likely continue to depend on the donor community to keep the 
power flowing and continue to waste resources maintaining the 
status quo. 
 
 
BISHOP