This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 PANAMA 002457 
 
SIPDIS 
 
DEPT FOR WHA/CEN 
 
E.O. 12958: N/A 
TAGS: ECON EIND ENRG EPET ETRD PM ENIV ECONOMIC AFFAIRS
SUBJECT: PANAMA FACES UNCERTAIN ENERGY FUTURE 
 
REF: A. MEXICO 7368 
     ¶B. MEXICO 7466 
 
This is the second part in a two part series on Panama's 
energy sector. 
 
¶1. SUMMARY (SBU).  Major electricity generators estimate that 
Panama's demand for electricity will exceed supply by 2009. 
In the absence of investment in additional generating 
capacity, Panama could face energy shortages.  Only plants 
using higher cost gas-generated electricity could be brought 
on-line prior to 2009, guaranteeing a steep rise in the cost 
per kilowatt hour over the next three to five years. 
Construction of cheaper hydro or coal generated electricity 
exceed the available timeline.  Currently, no new plants of 
any type are under construction.  GOP reluctance to grant 
long term purchase contracts of more than four years in 
length has discouraged suppliers of all types from investing 
in additional capacity.  END SUMMARY 
 
--------------------------------------------- ---------- 
SHORT-TERM ELECTRICITY CONTRACTS DISCOURAGE NEW PLANTS 
--------------------------------------------- ---------- 
 
¶2.  (U) Panama's electricity market is divided into three 
parts:  Generation, transmission and distribution.  There are 
currently 9 companies engaged in generation, 1 in 
transmission and 2 in distribution.  Although the market was 
privatized in the late nineties, the GOP retained 49% 
ownership in the three largest power generators.  According 
to regulation, the GOP is supposed to contract for 100% of 
the projected demand plus a reserve amount.   However, since 
being burned by high contract prices and low spot market 
prices in the initial period following privatization, the GOP 
currently only contracts about 70% of demand and buys the 
remaining energy at hourly spot market prices.  No new power 
plants have come on-line since 2003 with one existing plant 
going off-line in 2004. 
 
¶3. (SBU)  Former Enron company Bahia Las Minas (BLM), 49% 
owned by the GOP, operates several energy generating plants 
using a variety of technologies.  One of their plants, 
however, operates on marine diesel and provides the most 
expensive energy per kilowatt hour.  This plant provides the 
last marginal energy used during the day but only at contract 
prices.  BLM will not provide additional energy on the spot 
market because their price per kilowatt hour is the highest. 
Once that price is on offer, all other providers can sell 
excess capacity on the spot market cheaper and at a 
substantial profit allowing BLM to only break even. 
 
¶4. (SBU)  BLM General Manager Max Kelly, told Econoff that 
BLM was prepared to make a $100 million investment in 
converting this plant to significantly cheaper coal 
technology if the GOP would return to 10 year contracts for 
the output. So far the GOP has declined.  BLM faced 
bankruptcy in April 2005 but negotiated $45 million in 
refinancing over the next 7 years.  Because the financing 
arrangements consist of balloon payments, Kelly estimates BLM 
can survive until 2007 under the current pricing structure 
before facing default and bankruptcy.  If BLM defaults, Kelly 
expects the GOP might seek to take over BLM's assets and 
operations. 
 
¶5. (SBU)  BLM is also involved in a long running dispute with 
the GOP regarding customs duties assessed on imported 
equipment for capital improvements.  BLM (and other 
generators) had a waiver in effect at the time.  Despite a 
favorable ruling in court, no refund ($1.5 million) has been 
forthcoming.  Instead, the Taxation and Revenue authority 
(DGI) sought to retroactively overturn these waivers and 
assess customs duties on other energy companies who imported 
capital equipment during the same time period. This month, 
the DGI indicated verbally that it would not be pursuing this 
matter further but none of the American providers have been 
formally notified. 
 
¶6.  (SBU) AES Panama is also an American Company (49% owned 
by the GOP) and produces 100% hydropower electricity. 
General Manager David Sundstrom confirmed BLM's contention 
that no additional capacity has been built in several years 
due to the absence of contractual terms of 10 years or more. 
However, in December, AES Panama secured two 9 year contracts 
for the period 2009 to 2018.  It is not yet clear if the 
contractual price is sufficient to incent AES to invest in 
new capacity or whether this contract will be serviced from 
AES's existing hydroelectricity plants. 
 
---------------------------- 
GOP SEEKS REGIONAL SOLUTIONS 
---------------------------- 
¶7.  (SBU) The sharp increase in global fuel prices has 
prompted several regional energy initiatives.  Fortunately, 
Panama appears to remain uninterested in Venezuela's 
Petrocaribe initiative nor has there been any activity 
related to the stalled Puebla to Panama Plan (PPP).  However, 
Panama has enthusiastically responded to President Fox's 
Mezoamerican Energy Initiative vying for the site of the 
proposed new refinery (Reftels).  However, Panama must await 
the outcome of the independent feasibility studies and 
confirmation of financing by the Inter-american Development 
Bank among others. 
 
-------------------------------------- 
COST EFFECTIVE SOLUTIONS ARE LONG TERM 
-------------------------------------- 
 
¶8.  Comment (SBU):  The division of Panama's energy policy 
between the Ministry of Economy and Finance (MEF), Ministry 
of Commerce and Industry (MICI) and the regulatory commission 
(ER) has fundamentally hindered the GOP's ability to develop 
long term, coherent energy strategies.  To protect consumers 
and placate voters, the GOP has sought to minimize its short 
term energy costs.  Without an acceptable profit margin, no 
new investment in this capital intensive industry has been 
undertaken by the generators.  Panama's electricity 
generators are waiting out GOP willingness to reengage in 
long term contracts.  The feasibility, cost and output from 
the MezoAmerican Energy Initiative remain to be seen. 
Regardless, none of the initiatives outlined by the GOM have 
reliable completion dates and are unlikely to come on-line 
prior to 2009. 
 
¶9.  Comment cont'd (SBU):  When the power runs out, the GOP 
could be forced to contract for additional capacity on an 
expensive spot market or to negotiate contracts for short 
term supply with companies whose only option will be to use 
expensive energy generation technology. In either case, 
Panamanian consumers will likely demonize the industry and 
pressure the GOP to pursue a cap on electricity prices.  An 
uncertain energy supply could dim Panama's increasingly 
bright economic prospects. 
ARREAGA