VZCZCXYZ0000
PP RUEHWEB

DE RUEHDG #3386/01 3031402
ZNR UUUUU ZZH
P 301402Z OCT 06
FM AMEMBASSY SANTO DOMINGO
TO RUEHC/SECSTATE WASHDC PRIORITY 6538
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHPU/AMEMBASSY PORT AU PRINCE PRIORITY 4382
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RHEFDIA/DIA WASHDC PRIORITY
RUMISTA/CDR USSOUTHCOM MIAMI FL PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SANTO DOMINGO 003386 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR WHA/CAR, EB, EB/OFD/OIA, INR/IAA; TREASURY FOR J 
LEVINE; SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON ENRG PREL EFIN DR
SUBJECT: DOMINICAN ELECTRICITY SERIES #2: INSISTING ON 
CONTRACT RENEGOTIATION 
 
REF: A. 06 SANTO DOMINGO 3285 
     ¶B. USAID STUDY: ANALYSIS OF THE SUSTAINABILITY OF 
        THE ELECTRICAL POWER SECTOR 
 
(SBU) 1.  This is the second cable of a series on the 
politics surrounding the electricity sector and why politics 
and not economics is the cause of the electricity crisis in 
the Dominican Republic. 
 
- - - - - - - - - - - - - - - - - - 
INSISTING ON CONTRACT RENEGOTIATION 
- - - - - - - - - - - - - - - - - - 
 
(SBU) On October 18, President Fernandez along with vice 
chair  of the parastatal electricity company CDEEE Radhames 
Segura formally asked private generators to renegotiate their 
financial contracts with the government.  Fernandez came 
across as the good cop and Segura as the bad cop.  The 
generators' reaction, expressed to econoff in private, ranged 
from indifference to outrage. 
 
(U) Fernandez spoke eloquently to the CEOs of the private 
generators of the need for the government and the private 
sector to work together in an effort to reduce electricity 
prices.  Segura, in contrast, started off his remarks by 
asserting that the contracts were not sustainable.  He 
pressed the CEOs and other private sector representatives to 
renegotiate but offered companies no incentives to do so. 
Segura ended the meeting with a request for private 
generators to formulate a proposal to start the renegotiation 
process.  He advised them that the government would do 
everything in its legal power to renegotiate the contracts 
with the generating companies.  A week later Segura requested 
the generators to turn in their proposals to the parastatal 
Dominican Corporation of Electricity Companies (CDEEE) by 
November 8. 
 
- - - - - - 
BACKGROUND 
- - - - - - 
 
(U) In the mid-1990's in an effort to attract foreign 
investment in the electricity sector, the first Fernandez 
administration negotiated a power purchasing agreement (PPA) 
with private generating company Smith-Enron (now Ashmore) 
that included a "take or pay" provision for installed 
capacity.  This means that the government pays the generators 
monthly installments just for being there, ready to generate 
electricity when needed.  Later, after the destructive 
passage in 1998 of Hurricane George, the government 
negotiated a similar PPA with Cogentrix, another private 
generating company.   The CDEEE's view is that the government 
agreed to onerous terms because of the imperative to maintain 
the additional level of installed capacity. 
 
(U) In 1999 the Fernandez administration embarked on a 
privatization ("capitalization") program for the electricity 
sector.  It sold to private firms 50 percent of the shares of 
each of the three regional electricity distribution 
companies, as well as 50 percent of the two regional 
generation companies. 
 
THE MADRID ACCORDS 
 
(SBU) Two years later, in an effort to lower the contract 
prices for electricity, the Mejia administration and most 
large private generators, except Smith-Enron and Cogentrix, 
met in Madrid and negotiated a deal whereby electricity 
tariff rates would be reduced in return for an extension of 
the time period of the contracts.  These Madrid Accords 
 
extended contracts to 2016.  The Accords specify a pricing 
mechanism benchmarked to the price of fuel. The subsequent 
rise in the price of fuel brought a commensurate rise in 
electricity tariffs, a fact that has caused much 
consternation among CDEEE's hardliners. CDEEE staff delivered 
a lengthy analysis in early 2006 arguing that certain of the 
formula's variables should not have been tied to fuel prices. 
 
(U) It is only fair to note that the private generators have 
not simply sat back on their leather couches.  Since 1999 the 
private sector has invested more than USD 1.5 billion in the 
electricity sector, (Of this, the commitment of AES is close 
 
to a billion dollars.) 
 
(SBU) Last year in an evident initiative to increase pressure 
on generators, the government announced the awarding of 
contracts to a Chinese-Dominican firm and an Arab-Dominican 
firm to build four 150 MW coal-fired generating plants. It 
appears that to date these dubious consortia have been unable 
to secure the necessary financing. 
 
(SBU) Private generators remain suspicious of Segura's call 
to renegotiate the contracts.  They take scant comfort in the 
fact that contracts provide the right to invoke international 
arbitrage in case of breach of their terms.  Both Cogentrix 
and Smith-Enron sat out the Madrid Accords, and as of October 
26 their representatives confirmed to econoff they have no 
plans to renegotiate. Cogentrix is busy trying to sell to 
Basic Energy the shares currently owned by Goldman Sachs, 
while Smith Enron is busily updating its new owners, Ashmore, 
on its activities.  AES and EGE Haina plan to talk strategy 
with their respective headquarters.  Managers at other 
generation plants is preparing positions. 
 
WORLD BANK SECTORAL PROGRAM -- UNDISBURSED 
 
(SBU) In 2002 the Mejia administration asked USAID to perform 
a study on the reform process of the Dominican electricity 
sector.  U.S. firm Advanced Engineering Associates 
International, completed the study in early 2003, (reftel B). 
 The World Bank referred to this study in drawing up a USD 
150 million loan for the electricity sector.  The loan 
included among disbursement conditions specific goals for 
improved percentages of collections and the cost-recovery 
index (CRI) by the distributors, improved management at the 
distribution centers, and legislation to criminalize the act 
of stealing electricity.  In 2004-2005 the CDEEE complied 
with certain World Bank requirements by hiring two foreign 
experts to manage the two government distribution companies; 
neither has managed to turn a company around.  Although the 
legislative process to criminalize the act of stealing 
electricity is moving forward (reftel A), the levels of 
collection and the CRI are not.  To date the Bank has not 
disbursed any funds. 
 
(SBU)  Ahead of Fernandez's October 25 call on President 
Bush, Dominican presidential staff had communicated the 
President's desire to get the USG to persuade the Bank and 
other financial institutions to "be more flexible" on 
conditionality for lending to the country.  Press reports 
indicate that Fernandez made the same pitch to the World Bank 
president. 
 
- - - - - - - - - - - 
A SUCKING CHEST WOUND 
- - - - - - - - - - 
 
(SBU) In 2000, 2002 and 2005 the World Bank ranked the ten 
countries with the highest electricity losses. Deteriorating 
Dominican results moved the country from 9th, to 7th, to 4th 
worst in the world.  As of June, 2006, figures suggest that 
the system's overall distribution losses due to theft and 
technical inefficiencies were 38 percent. 
 
(SBU) At no time over the last 30 years has the Dominican 
Republic been able to supply a stable flow of electricity. 
This has been due mainly to mismanagement, corruption and 
theft.   Studies by USAID and, more recently, by the Adam 
Smith Institute confirm this analysis. 
 
(U) The government controls the transmission lines, the 
hydroelectric plants, and, since President Mejia's buy-out in 
late 2003 of Spain's Union Fenosa, two of the three 
distribution companies and 49 percent of the third. 
Distributors are responsible for collecting payments for 
electricity consumed by the government, by businesses, and by 
households. 
(SBU) The 1999 capitalization effort conceived by Technical 
Secretary to the President Temistocles Montas was never 
 
SIPDIS 
completed.  Montas, holding the same position in the current 
administration, opposes the current renegotiation strategy as 
well as Segura's attempt to gain more control of the sector. 
Sources both in the private sector and in the government say 
that political actors believe the sector is too important to 
 
privatize.  U.S. firm AES comments that the 
government-controlled portions of the electricity sector 
produce a cash flow equivalent to a billion U.S. dollars a 
year. 
 
(SBU) One reality is that electricity supply is used as an 
electoral campaign tool.  Just before elections, voters can 
expect to be treated to electricity 24/7.  Political 
appointees of the administration are positioned throughout 
the government-controlled portions of the electricity sector. 
 The administration is pledged to provide subsidies that 
constitute roughly 21 percent of the cost of a kilowatt hour 
(KWH), according to private sector sources. 
 
(SBU) Studies from the private sector assert that if the 
government could stop the subsidy program and reinvest 
instead in their distribution infrastructure, the price of a 
KWH could decrease from 29 cents to 17 cents. There is no 
prospect of this.  President Fernandez has pledged to 
continue the subsidy program. 
 
- - - - - - - - - - - - - - - - - - - - 
RENEGOTIATION AS JUST ANOTHER BAND-AID 
- - - - - - - - - - - - - - - - - - 
 
(SBU) The methods of the Fernandez administration during its 
two years in office have proven to be little more than 
promises of band-aids to a patient with a sucking chest 
wound.  Renegotiation, forced or otherwise, could send a very 
bad message to potential foreign investors. 
 
(SBU) Technical Secretary Montas predicts that subsidies 
required for the sector may rise as high as USD 900 million 
next year - - but neither the political authorities nor the 
distribution companies have shown the will to enforce the 
law, which would be the first, necessary step toward health 
for the sector.  And the inevitable PRD opponent to Fernandez 
for the 2008 presidential election, Miguel Vargas Maldonado, 
has been promising that he can fix the sector, by gradually 
reducing subsidies.   But then, talk is cheap when one has no 
responsibility for the mess. 
 
¶2. (U) Drafted by Chris Davy. 
 
¶3. (U) This report and extensive other material can be 
consulted on our SIPIRNET site, 
http://www.state.sgov.gov/p/wha/santodomingo/ . 
 
HERTELL