VZCZCXYZ0000
OO RUEHWEB

DE RUEHBU #2594/01 3241925
ZNR UUUUU ZZH
O 201925Z NOV 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6534
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UNCLAS BUENOS AIRES 002594 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
WHA FOR WHA/BSC AND WHA/EPSC 
E FOR THOMAS PIERCE, 
PASS NSC FOR JOSE CARDENAS 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
EX-IM BANK FOR MICHELE WILKINS 
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI 
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN 
TREASURY FOR ALICE FAIBISHENKO 
USDOC FOR ALEXANDER PEACHER AND JOHN ANDERSEN 
USCINCSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET AR
SUBJECT: DUKE ENERGY BETS ON GROWING ARGENTINE ELECTRICITY 
DEMAND, EVENTUAL REGULATORY NORMALIZATION 
 
 
This cable contains U.S. company-specific commercially 
sensitive information. 
 
------- 
Summary 
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¶1. (SBU) Duke Energy plans to upgrade and expand its two 
hydro and gas-fired electricity generating plants in Neuquen 
province and possibly make new generating capacity 
acquisitions in the domestic market.  In a call on Ambassador 
Wayne, Duke executives explained that they see the Argentine 
electricity market as a promising long term play, with growth 
potential superior to that of Duke's mature U.S. domestic 
electricity market.  Duke takes this position in the face of 
an interventionalist Argentine regulatory regime in which the 
availability of natural gas to fire its combined cycle plant 
is not assured and in which the GoA-controlled energy 
wholesaler has shortchanged the company over $25 million on 
hydro and gas electricity generation payments.  Further, the 
GoA has forced Duke and other generators to convert this GoA 
debt into equity in a new GoA generating facility fiduciary 
fund.  The GoA has promised to normalize its electricity 
market regulation beginning in 2008.  End Summary 
 
¶2.  (U) Duke Energy Southern Cone COO Laine Powell and 
Argentina Country Manager Guillermo Fiad met with Ambassador 
November 15 to review Duke's operations in Argentina and to 
discuss Duke,s electricity generation investment strategy in 
Argentina, including its forced investment in GoA generation 
fiduciary funds, its plans to upgrade and expand existing 
Neuquen province hydro and gas-fired plants, and possible new 
generating sector acquisitions in the domestic market. 
 
------------------------ 
Duke Energy in Argentina 
------------------------ 
 
¶3. (U) Duke Energy Argentina, a subsidiary of Duke Energy 
International, owns two power generating assets in Neuquen 
province:  The Planicie Banderita hydroelectric power station 
produces 476 MW and the Alto Valle gas-fired thermal station 
produces 80 MW.  Duke also began conducting licensed trading 
and marketing in the wholesale electric and natural gas 
markets in late 2000. 
 
¶4. (SBU) Powell noted that, to meet the company's global 
energy generation growth targets of 4-6% a year, Duke is 
looking to expand its presence in Argentina, Central America, 
Peru and Brazil.  As a result, in recent discussions with 
Planning Minister De Vido, Duke committed to upgrade its Alto 
Valle gas-fired plant to bring 17 MW of unused capacity on 
line.  In return, Duke asked De Vido to commit to lock-in 
scarce natural gas supplies for this plant.  Duke has also 
submitted to Energy Secretary Cameron plans to invest roughly 
$60 million to add 37MW of new generating turbines to its 
Neuquen hydro plant if an appropriate package of federal and 
provincial tax incentives can be negotiated.  Powell noted 
that, given his company's positive view on long term local 
market development prospects, Duke is exploring new 
generation acquisitions in Argentina.  The company's strategy 
is to purchase existing single cycle gas-fired generation 
plants and upgrade them to combined cycle operations (where 
significant efficiency gains are realized by capturing waste 
heat). 
 
--------------------------------------------- 
Duke's Strategy: A Non-Confrontational Stance 
--------------------------------------------- 
 
¶5. (SBU) Unlike a number of other U.S. energy sector players 
here, including CMS Energy, Duke did not file an ICSID claim 
seeking compensation for the (1) pre-emergency law de-linking 
of power tariffs from the U.S. producer price index; and (2) 
post-emergency law pesification of generation capacity cost 
and variable cost payments by regulated electricity 
wholesaler CAMMESA.  (Note:  Pre-crisis capacity payments to 
generators were roughly US$10/MW while current payments total 
roughly $4/MW).  Country Manger Fiad called this the right 
decision for a company that sees long term growth 
opportunities in the Argentine energy market. 
 
-------------------------------- 
Forced Fiduciary Fund Investment 
-------------------------------- 
 
¶6. (U) With voluntary private investment in new electricity 
generating capacity limited by GoA price controls and 
investor concerns over rapid GoA shifts in sector regulation, 
the GoA created a fiduciary fund, FONINVENMEM (Fondo de 
Inversiones en Mercado Electrico Mayorista - Fund for 
Investment in the Wholesale Electricity Market) to force new 
investment by generators in two new 800 MW combined cycle 
plants in Buenos Aires and Santa Fe provinces.  The plants 
will cost USD 1.2 billion, of which USD 450 million is being 
funded by the forced swap of outstanding CAMMESA debt to 
generators into FONIMVENMEM equity.  This debt results from 
longstanding shortfalls in required marginal cost CAMMESSA 
payments to generators.  The GoA has stated that the 
remaining $750 million would be funded via a 3-4% surcharge 
on medium and large electricity users over the next 5 years, 
via private pension fund financing and via new investors. 
 
¶7. (U) Generators, share of forced FONINVENMEM investment is 
based on their share of domestic generating capacity. 
Duke,s share of the USD 450 million generators, 
"investment" is 5%. France,s Total (which just announced the 
sale of its Argentine generating assets to a local group and 
to Merrill Lynch) holds 28%, Spain,s Endessa holds 23%, AES 
holds 15% and Petrobras holds roughly 10%.  In exchange for 
this forced investment, the GoA has committed to (1) have 
energy wholesaler CAMMESA sign a power purchase agreement to 
guaranty the profitability of the two new plants; (2) secure 
dedicated gas supplies to supply the new plants; and (3) 
eventually transition to a free market in energy tariffs 
after the two new plants come on line in 2008. 
 
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Comment 
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¶8. (SBU)  While Duke executives acknowledge the many 
inefficiencies, uncertainties and electricity production 
risks inherent in the GoA's interventionalist approach to 
managing Argentina's energy sector, they continue to see the 
Argentine market as one with promising medium term prospects. 
 A legacy of major energy sector investment in the 1990s has 
left Argentina with a relatively modern electricity 
generation, transmission and distribution infrastructure. 
Populist post-2002 crisis GoA policies have kept consumer and 
industrial end-use electricity prices far below world market 
levels.  Not surprisingly, this has led to significant 
increases in electricity demand.  Argentina's national grid 
is now reaching the limit of its capacity and new generating 
facilities are desperately needed.  Despite regulatory 
uncertainty, Duke is betting this looming shortage spells 
opportunity.  End Comment 
WAYNE