VZCZCXYZ0002
RR RUEHWEB

DE RUEHMU #2051/01 2612143
ZNR UUUUU ZZH (CCY ADX25FAEC MSI7778 640A)
R 182143Z SEP 06
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 7601
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS MANAGUA 002051 
 
SIPDIS 
 
C O R R E C T E D COPY (CLASS MISMATCH) 
 
SENSITIVE 
SIPDIS 
 
COMMERCE FOR ITA/MSIEGELMAN 
 
 
 
 
 
 
 
 
 
 
 
 
DEPT PLEASE PASS TO WHA/CEN/GSCHIFFER, EB/ESC 
DEPT PLEASE PASS TO USTDA/KMALONEY 
 
E.O. 12958: N/A 
TAGS: ENRG ECON PGOV NU
SUBJECT: NICARAGUA: THE OTHER POWER CRISIS 
 
REF: A. 05 MANAGUA 2551 
 
     ¶B. 06 MANAGUA 1079 
 
¶1. (U) Summary: For the past four weeks the power sector in 
Nicaragua has been locked in crisis.  At the center of the 
maelstrom is the electricity distributor,s inability to pay 
its power producers.  With national elections only months 
away, resultant blackouts have taken on an important 
political dimension.  As a short term solution to keep the 
system afloat, President Bolanos sought the injection of $9 
million by paying the distributor for the low-end user 
subsidies set out in last year,s emergency energy 
legislation.  This solution was thwarted, however, when the 
Liberal Constitutional Party (PLC) and the Sandinista Front 
(FSLN) refused to deliver the quorum required to consider the 
budget adjustment in the National Assembly.  Everyone has a 
theory as to the root of the crisis, but the scapegoat of 
convenience has been Spanish owned electricity distributor 
Union Fenosa.  However, the problems of the nation,s power 
sector go much deeper.  The Instituto Nacional de Energia 
(INE), the regulatory agency, requires assistance in 
developing a more workable pricing formula and a realistic 
vision for meeting the nation,s growing demand.  End Comment 
and Summary. 
 
Power Sector in Crisis 
---------------------- 
 
¶2. (U) For the past four weeks, the power sector in Nicaragua 
has been locked in crisis.  Rolling blackouts have affected 
virtually the entire country; in some sections of Managua, 
blackouts have totaled seven hours or more per day. 
Disgruntled consumers have marched on Union Fenosa, the 
nation,s primary electricity distributor. Demonstrations 
have been staged in Managua and Leon, leading to tire 
burnings and short-lived invasions of Union Fenosa,s 
offices.  Power producers have threatened to close down 
operations because of non-payment.  In August, INE Chief 
Regulator (for energy) David Castillo cried foul, accusing 
power producers of pushing the system to the brink in an 
effort to force INE to revise its pricing policies.  Shortly 
thereafter, Castillo launched public attacks on Union Fenosa 
for violating the terms of its contract.  On its own 
initiative, the Comptroller General reviewed Union Fenosa,s 
contract, declaring it null and void.  (Note: It is not clear 
that the Comptroller General has the authority to cancel 
INE,s contract with Union Fenosa.) 
 
Election Year Politics 
---------------------- 
 
¶3. (SBU) It did not take long for the matter to take on a 
political dimension, with Sandinista observers declaring that 
the blackouts represented yet another example of the failure 
of market economics to deliver needed services to the poor, 
and clamoring for the return of the power sector to state 
ownership.  FSLN presidential candidate Daniel Ortega 
continued to trumpet President Hugo Chavez, long standing 
offer to supply Nicaragua with cheap oil, criticizing the 
government for not allowing a company hastily composed of 
FSLN mayors to import fuel.  (Comment: Ostensibly, the mayors 
would sell the oil to power producers or to the local 
refinery to produce gasoline or fuel oil at a reduced price, 
but how the savings would be passed along to the man in the 
street is unclear.  What is clear is that the scheme would 
deliver cash to FSLN mayors, who could then spend it on what 
they liked, including turning out the FSLN vote on November 
5.)  Presidential candidate Eduardo Montealegre trumpeted 
conservation as a possible short-term solution, taking out a 
full-page newspaper ad to propose that long life light bulbs 
be given to anyone with a lamp, saving up to an estimated 
30MW.  The Spanish Chamber of Commerce, seeking to protect 
one of its leading members (i.e., Union Fenosa), called on 
PLC presidential candidate Jose Rizo to mediate.  Rizo said 
he would talk to PLC member and INE Chief Castillo and 
others, but was otherwise non-committal.  Edmundo Jarquin 
also spoke out, decrying what he termed the &politicization 
of INE.8 
 
$9 Million Price Tag 
-------------------- 
 
¶4. (SBU) To keep the system afloat, President Enrique Bolanos 
proposed early on that the government inject $9 million into 
Union Fenosa under the terms of last fall,s emergency energy 
legislation.  However, when the day came on September 6 in 
the National Assembly to consider his proposal, the PLC and 
 
FSLN refused to deliver the quorum required to consider the 
adjustment to the budget.  The government will try again the 
week of September 18.  Empresa Nacional de Electricidad 
President Frank Kelly informed Emboff that the government was 
also working on a special loan from Banco CentroAmericano de 
Integracion Economica (BCIE), in the belief that the $9 
million budget supplement would not be passed. 
 
¶5. (U) The logic of the $9 million payment stems from INE,s 
mandate that all customers consuming fewer than 150 kwh per 
month receive electricity free of charge ) and two out of 
every three customers fit into this category.  This 
requirement places an even greater burden on the nation,s 
paying customers should the government fail to subsidize 
Union Fenosa for providing free services.  In August, Union 
Fenosa estimated that the government owed the company $18 
million, though it agreed to an injection of $9 million to 
hold the power sector together at least until national 
elections could be held on November 5.  However, the 
situation for the power sector in mid September has become 
measurably worse.  (Note: The government has injected cash 
into Union Fenosa before.  In 2005, for example, it injected 
more than $5 million rather than accede to Union Fenosa,s 
request to raise electricity rates.) 
 
The Root of the Crisis 
---------------------- 
 
¶6. (U) At this point, everyone has floated a theory as to the 
root of the crisis, but the scapegoat of choice has been 
Spanish owned electricity distributor Union Fenosa, the 
government,s contracted electricity distributor since 
privatization in 2000.  Former PLC legislator and INE Chief 
David Castillo has repeatedly criticized Union Fenosa in the 
press for violating the terms of its contract, calling for 
arbitration and naming the firebrand leader of a local 
consumer organization as one of three arbiters to hear the 
case.  Union Fenosa has not formally agreed to arbitration, 
although its contract does allow for it and the company has 
reportedly refused INE,s choice for an arbiter. 
 
¶7. (U) While the problems of the nation,s power sector may 
converge on Union Fenosa, they go much deeper.  The sector as 
a whole is extremely fragile, limiting the options that Union 
Fenosa has when parts of the system fail.  The vast majority 
of the power, almost 80%, is generated from heavy oil or 
diesel.  Ever-rising oil prices coupled with rising local 
demand and legal restraints have scarcely given the sector a 
chance to breathe since being privatized in 2001-02. 
Compounding the problem this year has been low rainfall along 
the river basin that fills Lake Apanas, the reservoir behind 
the country,s largest hydroelectric plant.  Upon entry, 
Union Fenosa invested in improving collections and preventing 
theft, but was unable to meet its targets.  In addition, the 
company has been unable to make headway on the 28% loss of 
power in the distribution system (as opposed to 14% in the 
countries like the United States).  The rate of loss is due 
to theft, inefficiencies, and the fact that the company is 
prevented by law from upgrading its power lines to higher 
voltages, where greater efficiencies lie.  These voltages are 
reserved for the state owned transmission company, ENTRESA. 
 
¶8. (U) Recently, both the American Chamber of Commerce and 
the business federation COSEP publicly identified the root of 
the crisis as the failure of INE,s pricing formula to 
generate the cash flow needed to keep the system going.  The 
formula is simply not responsive enough to constant price 
hikes, and there is no compensation fund available to smooth 
out oil price movements.  Between December 2005 and June 
2006, the average cost of generating a megawatt hour 
increased from $92.15 to $112.70.  Prices to the consumer 
have also risen, but not enough to compensate for the rise in 
oil prices and with a lag time of about 45 days.  The result 
has been that Union Fenosa has had increasing difficulty in 
paying power producers for the electricity they generate. 
Compounding matters is the emergency requirement introduced 
by INE in May 2005 that has limited power producer profit 
margins to 10% -- at once withdrawing the incentive producers 
needed to invest in more power at a time that demand was 
rapidly approaching supply and raising the risk of investing 
in Nicaragua.  Additionally, INE has fined Union Fenosa 
millions of dollars for power cuts to consumers over the past 
six months. 
 
¶9. (U) The inability of Union Fenosa to pay on time has 
created tremendous cash flow difficulties for power 
producers.  Diminishing working capital has made it difficult 
for them to afford next month,s fuel bill and pay for 
maintenance.  Many plants are 20 years old or more and need 
constant attention.  Technical failures at three plants 
triggered the crisis when they shut down, removing as much as 
100 MW from the grid. 
 
How Bad Is It? 
--------------- 
 
¶10. (SBU) Econoff learned from a major power producer that 
Union Fenosa,s top management in Spain is willing to walk 
away from the whole mess in Nicaragua if things get any 
worse.  Clearly, the working environment for the company in 
Nicaragua has reached a new low.  Union Fenosa reports that 
collection rates have dropped precipitously, as customers 
refuse to pay for service they are not receiving.  A recent 
poll indicated that 82% of the population supported returning 
the sector to state control. 
 
¶11. (SBU) This same power producer met with Union Fenosa to 
discuss the prospect of exercising a clause in its power 
supply contract that allowed it to hand over its plant should 
Union Fenosa fail to pay.  The contract stipulated a 
pre-determined value until September 1, 2006; afterward, the 
power plant would have to be reappraised.  The producer 
believed that after September 1, the value would be much 
lower, given the risk of not getting paid.  In the end, Union 
Fenosa paid the company two-thirds of its arrears for June 
and the company stayed past September 1, in hopes that the 
government would inject $9 million cash into the system on 
September 6.  When this did not happen, the company slipped 
effectively into the red.  Managers told Econoff that they 
are now looking to shut down the plant at the earliest 
opportunity &to stop the bleeding.8 
 
Crisis Management 
----------------- 
 
¶12. (U) At the height of the crisis, Union Fenosa had a tough 
time soliciting electricity imports from its neighbors to 
stabilize the situation.  For one, other Central American 
countries have also been trying to meet increased demand in a 
world with CAFTA.  For another, Union Fenosa had to convince 
them that it could pay.  Union Fenosa finally arranged for 
30MW or more additional supply from El Salvador and Guatemala 
-- and reportedly with Costa Rica -- on the spot market. 
This has brought some stability to Nicaragua,s power sector 
as long as good neighborliness holds.  For a while Union 
Fenosa was able to manage power outages in Managua by rolling 
four hours of down time a day through different sections of 
the city.  When the Geosa power plant dropped its output from 
113 MW to 25 MW on September 8, Union Fenosa increased 
rolling blackouts in Managua to 7-8 hours a day.  Around the 
country, individuals and businesses who can afford it have 
been buying generators and fuel oil to produce their own 
electricity to keep their operations going. 
 
COMMENT: What Needs to Be Done? 
------------------------------- 
 
¶13. (SBU) Nicaragua,s power sector needs life support to 
keep the sector operating and out of the political fray 
during this election year.  This can only come in the form of 
a sizeable cash injection into the system, such as the one 
proposed by President Bolanos.  Cash would allow Union Fenosa 
to pay power producers and keep the lights on in Managua.  If 
Bolanos fails to get the money from the National Assembly or 
Central American Bank for Economic Integration, the 
Nicaragua,s power sector could collapse, forcing the 
government at great expense to pick up the pieces, much as in 
the Dominican Republic when Union Fenosa walked from that 
market. 
 
¶14. (SBU) Once life support is set in motion, INE needs to 
check itself in for long-term rehabilitation.  Government 
needs to rethink legal changes in 2004 that transferred INE 
from the executive to the legislative branch, thus 
politicizing the agency.  Regulators need to better 
understand the sector, employ a pricing system that is 
responsive to rising fuel prices, and pursue a workable 
vision for meeting growing demand and fueling development. 
Laws governing the power sector should be modified to allow 
for greater flexibility on the part of the distributor 
vis-a-vis the role of the transmission company.  We are 
expecting the visit of an AID energy expert to review options 
with the government and INE in the near future. 
 
¶15. (SBU) The InterAmerican Development Bank informed us that 
the INE recently requested advisory assistance.  We should 
strongly support granting INE assistance from any credible 
source that can counsel INE on best practices, help INE 
develop a more workable pricing formula, and encourage INE to 
pursue a realistic vision for meeting the nation,s growing 
demand. 
TRIVELLI