VZCZCXYZ0013
PP RUEHWEB

DE RUEHQT #0322/01 0981414
ZNR UUUUU ZZH
P 071414Z APR 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC PRIORITY 8708
INFO RUEHBO/AMEMBASSY BOGOTA 7492
RUEHCV/AMEMBASSY CARACAS 2972
RUEHLP/AMEMBASSY LA PAZ APR LIMA 2538
RUEHGL/AMCONSUL GUAYAQUIL 3479

UNCLAS QUITO 000322 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ENRG EPET EC
SUBJECT:  Minister States GOE Will Pay $38 Million in Arrears to 
Machala Power 
 
Ref.  a) Quito 314, b) 06 Quito 2218 
 
¶1.  (SBU) Summary.  The Minister of Electricity publicly announced 
that the GOE would pay $38 million of the arrears due to U.S. 
electricity company Machala Power.  Machala Power reports that the 
GOE has said it intends pay all of the $70 million in arrears, but 
needs to develop a legal mechanism to pay the balance.  The 
Minister's remarks followed an arbitration panel's ruling that it 
will proceed with an arbitration case filed by Machala Power.  If 
the government clears the arrears, Machala Power and other 
electricity companies will switch some of Ecuador's thermal electric 
plants from imported diesel to inexpensive locally produced natural 
gas.  End summary. 
 
¶2.  (U) On March 28, Minister for Electricity and Renewable Energy 
Alexi Mosquera announced in the media that the Government of Ecuador 
would pay $38 million, a substantial portion of the arrears that the 
state-owned electricity distributors owe to U.S.-owned electricity 
company Machala Power.  He added that there is an agreement with the 
Ministry of Finance to make the payment. 
 
¶3.  (SBU) On April 2, Machala Power president John Tomich told 
EconCouns that he had yet to talk to Mosquera about the statement. 
He said that he had had a meeting with senior GOE officials on April 
1, but the senior energy officials, including Mosquera, were called 
away by the President and could not make the meeting.  Tomich said 
the remaining officials gave positive signals but could not address 
the specifics of the government's plans. 
 
¶4.  (SBU) Tomich said that the total arrears to Machala Power are 
about $70 million, and that the government acknowledges that it 
needs to clear all the arrears.  He said that the $38 million 
mentioned by Mosquera corresponds to the arrears due to Machala 
Power up through 2005.  A 2006 law established a legal mechanism for 
the GOE to pay electricity generators for arrears incurred by 
electricity distributors between 1999 and 2005 (reftel b).  Tomich 
added that previously Mosquera had said that the government intends 
to also pay the roughly $32 million in arrears from 2006 onwards, 
but the government needs to find a mechanism to do so. 
 
Arbitration Case Moves Forward 
------------------------------ 
 
¶5.  (SBU) On March 5, an ICSID arbitration panel ruled that it has 
jurisdiction over an arbitration request filed by Machala Power. 
Machala Power has asked for $370 million in arrears and other 
losses, although Tomich has repeatedly stressed that his company 
would prefer to reach a settlement than continue with arbitration. 
Mosquera's public comments about paying part of the arrears followed 
the March 21st public announcement of the panel's decision.  Tomich 
opined that losing the jurisdictional argument may spur the GOE to 
settle the arrears. 
 
A Potential Win-Win for the GOE and Machala Power 
--------------------------------------------- ---- 
 
¶6.  (SBU) Machala Power is owned by Noble Energy.  Noble also owns a 
parallel company in Ecuador, EDC, which produces natural gas that is 
consumed by Machala Power to generate electricity.  The gas is 
produced in the Gulf of Guayaquil and piped to the electricity plant 
located in Machala, the capital of El Oro province.  In an earlier 
meeting with the Ambassador, Tomich described an ambitious plan that 
Noble Energy would implement if the arrears are paid. 
 
¶7.  (SBU) Machala Power is planning to merge its electricity 
operations with those of another U.S. company, Duke Energy.  Duke 
would bring its generating equipment, currently in Guayaquil and 
running on subsidized diesel and fuel oil, to Machala, where it 
would use natural gas produced by EDC.  Duke would also manage the 
electricity operations for Noble/Machala Power.  A third company, 
which has a barge that uses diesel to generate electricity, might 
also move to Machala and use natural gas.  Noble/EDC would focus on 
natural gas production, which would require more investment to 
generate the additional gas that would be used the converted 
generating units. 
 
¶8.  (SBU) Tomich said that the GOE would save over $100 million 
annually from this program, since the locally produced natural gas 
is significantly cheaper than the diesel and fuel oil that Ecuador 
imports and the GOE subsidizes.  For this to happen, the GOE would 
have to clear its arrears and install additional electricity 
transmission lines from Machala to the national grid. 
 
¶9.  (SBU) Tomich said that Electricity Minister explained this 
program to President Correa.  Correa reportedly ordered his economic 
team to come up with a plan to clear the arrears with Machala Power 
and address other requirements for the program to go forward. 
 
According to Tomich, Correa has expressed frustration that Machala 
Power's problems have not been resolved. 
 
¶10.  (SBU) Comment:  Tomich said that he is cautiously optimistic 
that the government will settle Machala Power's arrears, given the 
benefits this would bring Ecuador.  He did caution that Machala 
Power had received hopeful indications from previous governments 
that were never fulfilled.  One difference this time around is that 
the Correa administration is flush with cash and might be anxious to 
avoid arbitration with Machala Power after paying at least $100 
million to settle an arbitration award in favor of Occidental 
Petroleum (reftel a). 
 
JEWELL