VZCZCXYZ0003
RR RUEHWEB

DE RUEHSN #1140/01 2702215
ZNR UUUAA ZZH
R 262215Z SEP 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 0137
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SAN SALVADOR 001140 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EPET ENRG EINV ES
SUBJECT: ELECTRICITY SECTOR LIQUIDITY CRISIS DRAGS ON 
 
REF: A. 07 SAN SALVADOR 2383 
     ¶B. 08 SAN SALVADOR 0905 
 
¶1. (SBU) SUMMARY: Electricity companies are continuing to 
warn of potential blackouts if the GOES fails to find a 
durable solution to address liquidity problems caused by 
unpaid energy subsidies.  U.S.-owned electricity distributor 
AES asked the GOES to pay $12.3 million by September 22 and 
$19 million in October to allow AES to cover its monthly 
energy bills.  Faced with similar problems in July and 
August, the GOES extended the payment deadline and negotiated 
a last-minute payment to avert a crisis (Ref B).  Although 
monthly subsidy costs are falling, power companies are 
concerned that the GOES and state-owned generation company 
still have not identified funds to resolve the short-term 
cash-flow problems.  Companies are also negotiating for 
long-term solutions to reduce subsidies and establish more 
frequent payments.  END SUMMARY. 
 
SHORT-TERM PAYMENTS NEEDED 
-------------------------- 
 
¶2. (U) After electricity subsidies rose from $4 million per 
month in 2007 to over $30 million per month by June 2008, 
power companies began to press the government to make early 
subsidy payments.  Under a temporary scheme established in 
2006, energy companies have been forced to carry debts 
between biannual "tariff resets" in April and October, when 
the GOES negotiates subsidy payments to keep electricity 
rates frozen.  (Ref A)  As oil prices declined and production 
of cheaper hydroelectricity increased in August, the subsidy 
burden has declined but industry sources expect the subsidy 
debt to reach $180 million by October. 
 
¶3. (SBU) As the outstanding debt for unpaid subsidies 
approached 50% of its annual revenues in July, AES told the 
GOES it simply does not have enough working capital to carry 
this debt and still pay its energy bills.  With AES warning 
of potential blackouts in July and August, the GOES twice 
extended the deadlines and negotiated payments to avert a 
crisis.  In both cases, the government leaned on the 
state-owned generator, CEL, to use credits against future 
power purchases to cover part of the subsidy.  In August, AES 
and one generator, Cenergica, also reportedly came up with 
funds to cover part of the shortfall.  With CEL,s resources 
exhausted, some industry sources report the GOES may issue 
short-term bonds to finance part of the subsidy. 
 
¶4. (SBU) AES requested early subsidy payments of $12.3 
million by September 22 and $19 million in October, so that 
AES can pay its monthly energy bills.  The company warns that 
without this payment, the government will be forced to call 
in a bank bond to cover AES, energy bills.  In theory, this 
would require the government to disconnect AES from the 
electricity grid, effectively cutting off 80% of El 
Salvador,s electricity consumers.  Though the GOES can waive 
this requirement, the use of AES, bank bond would 
reverberate through El Salvador,s energy sector as banks 
would reassess risks and generators would require advance 
payments from AES for power purchases.  After a September 19 
meeting with the government, AES reported that the GOES 
promised a partial payment by September 22 and will grant a 
one-week extension to pay the remaining $9 million.  There 
have been a series of meetings between the GOES and the 
companies, but thus far the GOES has merely extended the 
September 22 payment date for a week, assuring the companies 
that they would work something out before the new deadline. 
 
TOWARDS A LONG-TERM SOLUTION 
---------------------------- 
 
¶5. (U) To bring an end to these monthly crises, the GOES has 
taken steps to reduce industrial subsidies and shift to more 
frequent subsidy payments.  Beginning on August 12, the 
energy regulator reduced industrial electricity subsidies by 
40%.  Under a three-step phase out plan, the remaining 
subsidy will be phased out in April and October 2009.  This 
phase-out will not affect residential customers who consume 
nearly half of El Salvador,s electricity. 
 
¶6. (SBU) The Ministry of Economy is considering a proposal to 
amend electricity regulations to start making quarterly 
subsidy payments.  Power companies initially pressed for 
monthly payments but industry sources say they can live with 
quarterly payments if the amendments also establish a trigger 
for extra subsidy payments when the difference between real 
and subsidized energy payments gets too high.  AES reports 
that the GOES is working to approve and implement these 
amendments by October 12, when the tariff reset process sets 
a payment schedule through April 2009. 
 
COMMENT: 
-------- 
 
¶7. (SBU) These monthly crises send a negative signal to 
investors, which is particularly ill-timed as AES receives a 
visit next month from potential investors in its 250 MW 
coal-fired generation plant.  Initial steps to phase out 
industrial subsidies are positive but leave most of the 
subsidy intact through the 2009 elections.  In the 
medium-term, lower oil prices and higher hydroelectricity 
production should also help reduce subsidies, but the GOES 
still has a $180 million debt to cover. 
 
¶8. (SBU) Even if it works out a plan to pay off this debt, 
the current administration is likely to leave a weakened 
energy sector and increased short-term debt for the next 
administration to resolve. The new Salvadoran President 
should look to increasing electricity prices for domestic 
users, who have not seen a price increase since June 2006. 
Still, the new president will likely be reluctant to force 
that bitter pill on the public early in his administration. 
President Saca may be able to claim when he leaves office 
next year that he mostly kept his promise over the last three 
years of his administration to not increase electricity 
prices.  However, his successor and the Salvadoran public 
will learn shortly thereafter that there is no such thing as 
a free lunch. 
GLAZER