VZCZCXYZ0005
RR RUEHWEB

DE RUEHLP #0817/01 0822010
ZNR UUUUU ZZH
R 232010Z MAR 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC 8561
INFO RUEHAC/AMEMBASSY ASUNCION 5715
RUEHBO/AMEMBASSY BOGOTA 2987
RUEHBR/AMEMBASSY BRASILIA 6865
RUEHBU/AMEMBASSY BUENOS AIRES 4096
RUEHCV/AMEMBASSY CARACAS 1415
RUEHPE/AMEMBASSY LIMA 1348
RUEHME/AMEMBASSY MEXICO 1677
RUEHMN/AMEMBASSY MONTEVIDEO 3664
RUEHQT/AMEMBASSY QUITO 4057
RUEHSG/AMEMBASSY SANTIAGO 8583
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC

UNCLAS LA PAZ 000817 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/AND LPETRONI 
COMMERCE FOR JANGLIN 
ENERGY FOR SLADISLAW 
TREASURY FOR SGOOCH 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON PGOV BL
SUBJECT: GOB ESTABLISHES ELECTRICITY "DIGNITY TARIFF" 
 
REF: LA PAZ 600 
 
¶1. (U) Summary: The GOB established an electricity "dignity 
tariff" March 21, introducing a 25 percent reduction in rates 
for consumers who use fewer than 70 kilowatt hours of 
electricity per month.  The 16 companies comprising Bolivia's 
national electricity network agreed to accept the rates and 
to bear an estimated $4.5 million in annual costs, but only 
under heavy government pressure.  Company representatives 
told Econoffs March 22 that the Morales administration's 
decree differed slightly from a draft negotiated with 
electricity companies and worried that GOB officials would 
continue to tinker with electricity prices.  The tariff is 
further evidence of Bolivia's deteriorating investment 
climate, and many observers believe it is part of the 
government's push to buy popular support in advance of the 
Constituent Assembly.  End summary. 
 
¶2. (U) In a March 21 supreme decree, the GOB established a 
"dignity tariff" for electricity, introducing a 25 percent 
reduction in rates for low-consumption, low-income 
households.  The new rates will apply to households connected 
to Bolivia's national electricity network and consuming fewer 
than 70 kilowatt hours per month (kwh/mo) and to households 
connected to isolated, mostly rural, systems and using fewer 
than 30 kwh/mo.  According to press reports and private 
sector estimates, 40 to 50 percent of all consumers will 
benefit from the change. 
 
¶3. (SBU) The 16 generation, transmission, and distribution 
firms comprising Bolivia's national electricity network 
agreed to accept the new rates and to bear an estimated $4.5 
million in annual costs, but only under heavy government 
pressure.  In earlier conversations with Econoffs, company 
executives said GOB officials threatened to make rate changes 
with or without private sector support, suggesting firms 
could best serve their own interests by supporting the GOB's 
initiative (reftel).  Companies subsequently entered into a 
"strategic alliance" with the GOB and agreed to accept rate 
cuts in exchange for GOB commitments to respect existing 
concessions and licenses, honor established pricing 
arrangements, and solve problems with the electricity 
industry's price stabilization fund. 
 
¶4. (SBU) According to company executives, the fund was 
designed to prevent consumer price fluctuations by taking 
deposits when state-established electricity tariffs exceeded 
generation, transmission, and distribution costs and by 
covering deficits when tariffs fell below costs.  At first, 
the fund worked well, but as a result of rising costs and 
Presidents Rodriguez and Morales' unwillingness to raise 
electricity rates in the run-up to and immediate aftermath of 
the December 2005 presidential elections, companies have 
begun losing money.  They anticipate that these losses will 
continue until at least October 2006, as the March 21 decree 
prohibits consumer rate increases until that date. 
 
¶5. (SBU) Representatives of Elfec, a subsidiary of U.S.-based 
PPL Corporation and Bolivia's second-largest electricity 
distribution company, told Econoffs March 22 that the decree 
establishing the dignity tariff differed slightly from a 
draft negotiated with electricity companies.  The GOB 
extended the deadline for solving problems with the price 
stabilization fund until October, one month longer than 
expected, and expressed interest in making an off-cycle 
revision of tariffs, typically established every four years 
by the superintendent of electricity.  Elfec executives 
pointed out that the GOB had never established procedures for 
such revisions and worried that officials would further lower 
rates to unacceptable levels. 
 
¶6. (SBU) While the exact mechanism for dividing the new 
 
tariff's costs among generation, transmission, and 
distribution firms has yet to be determined, Elfec 
representatives expect the GOB's initiative to cost the 
company more than $300,000 per year.  Another firm, Empresa 
Electrica Corani, a subsidiary of U.S.-based Duke Energy 
International, expects to lose as much as $500,000 per year. 
The companies only reluctantly accepted the rate reduction, 
considering the GOB's proposal the "least bad" option and 
recognizing they had little choice but to give in to 
government pressure.  Company executives worry that GOB 
officials will continue to tinker with electricity prices, 
noting that Minister of Public Works Salvador Ric privately 
told them the dignity tariff "was only the beginning" of 
changes affecting the electricity industry. 
 
¶7. (SBU) Comment: Company fears may be well founded.  The 
scheduled election of Constituent Assembly delegates is less 
than four months away, and the government has strong 
incentives to boost popular support for its candidates.  Many 
observers see the electricity "dignity tariff" as part of the 
Morales administration's populist push to buy such support. 
End comment. 
GREENLEE