VZCZCXRO2155
PP RUEHDBU
DE RUEHKB #0669 1231031
ZNY CCCCC ZZH
P 031031Z MAY 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 0273
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 1594
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L BAKU 000669 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 05/03/2016 
TAGS: EPET ENRG EAID PREL AJ AM TX KZ
SUBJECT: CONSULTANT FORSEES SERIOUS PROBLEMS FOR 
AZERBAIJAN'S ELECTRICAL GRID 
 
 
Classified By: Acting DCM Joan Polaschik, reasons 1.4 (b), (d) and (e). 
 
¶1. (C) SUMMARY.  A consultant working on a USAID contract 
predicted serious difficulties for Azerbaijan's power sector 
in the coming years.  The Barmek crisis has scared away 
private sector investment, and the GOAJ will be forced to 
rely on loans from IFIs.  The consultant recommends that any 
such loans be conditioned on serious changes, including 
privatization, reorganization, and the creation of an 
independent regulator.  The GOAJ has recently refused IFIs 
loans due to their conditionality.  END SUMMARY. 
 
¶2. (C) Energy officer met with a consultant from a USAID 
implementing partner working on domestic power regulation 
issues.  The contractor had put together a plan and draft 
legislation for Azerbaijan to create an independent energy 
regulator, which the GOAJ ultimately declined to do.  For 
this reason the project is being shut down this summer.  The 
consultant predicts the problems plaguing the electrical grid 
here -- government and public corporations not paying their 
bills, absurd rates, and ancient equipment that is neither 
maintained nor upgraded -- will continue to mount. 
 
¶3. (C) The entry of a private company into the electric 
distribution business would help the situation, said the 
consultant.  However, the extremely negative experience of 
Turkish distribution company Barmek (facing a tax 
investigation and criminal charges, which many observers 
believe stem from the company's ties to jailed ex-Minister 
Farhad Aliyev) will scare most investors away.  The only 
companies willing to enter the market, the consultant 
speculated, will be Russian ones.  The consultant said that 
Russian companies will most likely behave the way he sees 
them as having behaved in the Georgian energy market:  they 
will "keep things going" but will not perform maintenance or 
upgrades, and will in the end abandon the market. 
 
¶4. (C) The end result of the above, says the consultant, is 
that Baku will begin to face power outages in the next year 
or two and the countryside will suffer more severe and 
prolonged shortages.  Eventually, he believes, the GOAJ will 
come to the IFIs for loans for a solution.  Energy officer 
asked why the GOAJ would seek undoubtedly condition-laden 
loans from international institutions when it has billions in 
energy revenue in the State Oil Fund.  The consultant 
responded that investing in domestic electric power 
generation is "not on the radar screen" of the State Oil 
Fund, and the State Oil Fund may already have obligated its 
monies to other projects when this crisis strikes (COMMENT: 
The GOAJ has made a distinct move away from IFIs' conditional 
lending in the last year; it is hard to envision a scenario, 
even one this serious, where it would turn again to the IFIs 
and their conditions). 
 
¶5. (C)  The consultant believes that when the above situation 
comes to pass, the IFIs should grant loans only if the GOAJ 
agrees to meet the following six conditions: 
 
--the leadership of Azerbaijan's power sector must be changed 
(the consultant specifically named AzerEnergy chief Etibar 
Pirverdiyev), 
--power distribution must be privatized, 
--a truly independent energy regulator must be created, 
--BakuGaz must be privatized, 
--AzerEnergy should be reorganized, with its transmission 
department being separated the its power-generation 
department, and; 
--Azerbaijan's grid should reintegrate with Armenia's. 
 
¶6. (C) Energy officer observed that the sixth condition is 
highly unlikely to be met.  The consultant agreed, and 
explained that he suggested it for two reasons.  First, the 
power distribution system in the south Caucasus was designed 
by the Soviets to function as a single unit, and that really 
is the most efficient way for it to operate.  More 
importantly, the sixth condition is a negotiating tactic. 
The GOAJ will never agree to integration with Armenia, said 
the consultant, and will be so focused on removing that 
condition from the package that they will end up accepting 
the other five points.  Only that kind of extreme tactic, in 
the consultant's view, will get GOAJ to agree to do what it 
has refused to do so far, and make the necessary reforms in 
the domestic power sector -- even when conditions get as bad 
as he predicts in the coming years. 
HYLAND