VZCZCXYZ0007
PP RUEHWEB

DE RUEHDG #1652/01 1382231
ZNR UUUUU ZZH
P 182231Z MAY 06
FM AMEMBASSY SANTO DOMINGO
TO SECSTATE WASHDC PRIORITY 4788

UNCLAS SANTO DOMINGO 001652 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
WHA/CAR, EB/ESC/IEC/EPC 
 
E.O. 12958: N/A 
TAGS: DR ENRG ECON EINV EFIN
SUBJECT: DOMINICAN GOVERNMENT SAYS IT WANTS TO RENEGOTIATE 
ENGERY CONTRACTS 
 
 
¶1.  (U) In late April the Dominican Commission for the 
Renegotiation of Contracts in the Electric Sector  publicized 
its formal decision to seek renegotiation of contracts signed 
by the government and electricity generators, alleging that 
technical flaws in the formulas are resulting in excessive 
payments. The Commission questions the Madrid Agreement of 
2002 between the government and generators, never 
implemented, which set revised rates to be implemented in 
exchange for World-Bank-financed payments of USD 150 million. 
 The Commission is approaching individual generators, none of 
whom accept its rationale.  While some of the Commission 
hardliners probably believe in the "force majeure" argument 
-- that the government is not obliged to comply with 
impossible terms -- this undertaking was probably aimed in 
the short term at winning votes in the May 16 congressional 
elections. 
 
-------------------------- 
The Renegotiation Document 
-------------------------- 
 
¶2.  (U) Shortly after its April 18 publication in newspapers 
of a press statement, the Commission sent a 16-page strategy 
document to all generation companies. The text asserts that 
the formulas used in the generation contracts and in the 
Madrid Agreement of 2002 are faulty, in part because they 
used inappropriate reference prices and in greater part 
because the agreed tariffs are not based on an arithmetic 
formula including fuel costs (adjustable to market 
conditions), return on capital (referring to initial 
investment) and operating expenses (relating to actual 
costs). The analysis says that the Madrid Agreement is flawed 
because the calculated values are based on the average costs 
of generation of the sector as a whole. The document cites 
the fact that the generators Haina and Itabo, facing the 
defined values, brought on-line their least-cost generation 
units and then chose to buy from the spot market to meet 
their production requirements. The Commission asserts that 
this management decision undercuts the basis of the agreement 
and renders it invalid. The document also declares that 
Cogentrix needs to reduce its prices by 15-20 percent and 
Smith-Enron by 30-40 percent. 
 
¶3.  (U) The Commission for Renegotiation forecasts that the 
government will save between USD 423 and USD 507 million a 
year once the contracts are renegotiated to its standards. 
The document asserts that after this renegotiation the 
government will be able to remove subsidies and the consumer 
will spend less for better quality. 
 
--------------------------------- 
The Response from the Generators 
--------------------------------- 
 
¶4. (SBU) Smith- Enron representative Otto Gonzalez told 
EconOff that he believes this desire to change the contract 
is "mainly a political tactic" to show the public that the 
government is working on the energy sector problems. Gonzalez 
said, "It is difficult to see what possible gain generators 
would have in renegotiating their contracts." Gonzalez 
defended Smith-Enron's own deal, emphasizing that it is a 
financial contract. His investors accepted a payment scheme 
based on "take or pay" provisions for installed capacity 
rather than for consumption. The Dominican government 
subsequently changed its own strategy. Now the government 
purchases energy in a hierarchy with the cheapest sources of 
energy consumed first. In this equation, more expensive 
energy is never brought. Gonzalez asked, "Why would someone 
with a contract based on installed capacity switch to a 
payment for consumption contract, especially if coal-fired 
generation comes into play?" 
 
¶5.  (SBU) Roberto Herrera, Deputy General Manager of La 
Compania de Electricidad de San Pedro de Macoris told EconOff 
that he was sure his lenders would not be willing to 
renegotiate. 
 
¶6.  (SBU) Herrera stated, "This is not the first time the 
government has tried to renegotiate the deal and 
unfortunately will not be the last time." Herrera administers 
a contract that is good until 2021 and unless his lenders get 
a better offer, Herrera states, "There's no deal." 
 
¶7.  (SBU) When asked if his company would renegotiate, Marcos 
Cochon, General Manager of Compania de Electricidad de Puerto 
Plata (formally of the El Paso Corporation) told the 
Dominican authorities he was unsure and first he would have 
to know the terms of the renegotiation. 
 
-------------------------- 
 
The Carrot and the Stick 
-------------------------- 
 
¶8.  (U) The Dominican government has not offered the outlines 
of any approach to renegotiation. It is rumored that the 
government will offer to pay all old debt in return for 
renegotiating the contracts. The repayment may be in bonds or 
cash. 
 
¶9. (SBU) Negotiating the contracts in return for receiving 
repayment for past debt may work for some companies. In fact, 
the Smith-Enron representative told EconOff that since the 
government owes the company a large sum of money the lenders 
might be persuaded to accept renegotiation of their contract 
for payment of all their old debt. Other companies such as 
Haina are owed debt from the distributor EdeEste, which is 50 
percent owned by Trust Company West (TCW), an American 
company. Therefore, it may not benefit Haina to exchange 
payment of debt from the Dominican government for lower 
generating prices, especially if EdeEste does not agree to 
the government's plan. 
 
¶10.  (U) For the "stick" the government has several options. 
In its April press message, the Commission stated that the 
generators are receiving an unfair benefit that is negatively 
affecting the Dominican people. This type of media pressure 
could increase and may rise to the level of personal media 
attacks. Dominican authorities, theoretically, could take 
this matter to arbitration. 
 
-------------------------------------- 
Renegotiation Could Trigger Bankruptcy 
-------------------------------------- 
 
¶11.  (SBU) If the government does decide to use repayment of 
old debt as a bargaining chip to encourage renegotiation of 
energy contracts, this could prove difficult for EdeEste. 
Generation companies that work with EdeSur and EdeNorte would 
receive payment from all of their old debt and generation 
companies that work with EdeEste may demand the same. 
EdeEste is in debt to several generators; they owe Haina USD 
50 million, Itabo USD 50 million, and AES Andres USD 80 
million.  The total cross-sector debt is more than USD 400 
million. 
 
¶12.  (SBU) Haina has been threatening to sue EdeEste for 
their USD 50 million.  The renegotiation agreement could give 
Haina the power necessary to demand their owed debt from 
EdeEste.  According to EdeEste, if Haina sues EdeEste, Itabo 
and AES Andres will also demand their money.  This chain 
reaction of lawsuits, will force EdeEste into bankruptcy. 
Dominican law dictates that EdeEste, once bankrupt, will have 
to have new managers.  EdeEste managers have long felt that 
the Dominican government has been interested in expropriating 
EdeEste. 
 
¶13.  (SBU) Corrigan said they will not stay where they are 
not wanted and in a "worst case scenario" AES would be 
willing to sell their managerial control.  Their contract 
with TCW allows them to manage for 10 years and they are paid 
2.5 percent of the revenue.  AES would need at least USD 45 
million  to reach a settlement. 
 
¶14.  (U) Several senior executives of EdeEste and TCW will 
meet with the Deputy Chief of Mission, Econ, and USAID on May 
24 to discuss the issue. 
 
-------------------- 
Think Tank Disagrees 
-------------------- 
 
¶15.  (U) The government hired London economic think tank Adam 
Smith Institute (ASI) to do an independent study of the 
energy sector.  ASI stated that talk of renegotiation is 
indicative of the way the Dominican market is moving to a 
single buyer model.  ASI also warned, "Unilateral breaking of 
contracts by distributors or CDEEE would be seen as 
increasing country and sector risk, offsetting gains from 
lower prices."  ASI thought the more urgent matter was 
corruption:  ASI states there is political support for those 
stealing electricity and that the energy sector is used for 
political patronage.  ASI states there must be a consistent 
message in a concerted campaign about how theft is the 
primary cause of the problems in the sector. Just normal 
press coverage will not be enough. 
 
¶16.  (SBU) President Fernandez received the ASI 
representatives in a closed meeting. According to one of the 
participants, ASI representatives told Fernandez that he must 
act on corruption in the sector.  Energy contacts state that 
 
the largest Dominican grocery chain, Supermercado Nacional, 
was recently found to have not paid significant percentages 
of its electric bill and representatives from the National 
Program to Eliminate Electric Fraud (PAEF) approached them. 
After a few phone calls by the supermarket executives, the 
matter was "cleared up."  The ASI representatives also told 
Fernandez about this situation in their closed meeting. 
 
¶17. (U) Additionally, in their report ASI warns against any 
"unilateral breaking of contracts" by the distributors or the 
Dominican government because this action would increase 
country and sector risk and offset any gains for lower 
prices. 
 
----------------------------- 
Looming on the Horizon 
------------------------------ 
 
¶18.  (U) If the government pressures the generators to 
renegotiate the contracts this is likely to have a direct 
negative effect on the business climate, just as the country 
is moving toward implementing the CAFTA-DR free trade 
agreement. But more to the point, a renegotiation under 
duress would do little to solve the energy problem. That 
would require the government to remove politics from energy 
by aggressively campaigning and fining entities that abuse 
the system. 
 
¶19.   Drafted by Jehan Jones. 
 
HERTELL