VZCZCXYZ0002
RR RUEHWEB

DE RUEHDG #1611/01 2912039
ZNR UUUUU ZZH
R 172039Z OCT 08
FM AMEMBASSY SANTO DOMINGO
TO RUEHC/SECSTATE WASHDC 1590
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 0937
RUEHPU/AMEMBASSY PORT AU PRINCE 4867
RUEHSP/AMEMBASSY PORT OF SPAIN 1933

UNCLAS SANTO DOMINGO 001611 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EINV DR
SUBJECT: ELECTRICITY GENERATORS PREDICT A DARK DECEMBER IN 
THE DR 
 
REF: A. SANTO DOMINGO 1133 
     ¶B. SANTO DOMINGO 1184 
 
¶1. (SBU) SUMMARY. A fiscal crisis in the government is 
causing the GoDR to withhold payments to power generators who 
are cutting generation capacity as a result of not being able 
to pay for fuel shipments.  As the mostly government-owned 
electricity distributors fall into further arrears with 
privately-owned power generators, two generating companies 
advised EmbOffs that they are unable to purchase fuel to meet 
contracted production levels.  Compania de Electricidad de 
San Pedro de Macoris (CESPM) has already ceased production in 
response to non-payment and its parent company, U.S.-owned 
BasicRD, intends to file a claim to activate a sovereign 
guarantee.  AES, the country,s largest provider, has 
cancelled one of two remaining natural gas orders for the 
rest of the year and advised the Dominican Corporation of 
State-Owned Electricity Companies (CDEEE) that it will cut 
back production by 20 to 30 percent.  AES President Marco de 
la Rosa also told the DCM that the GoDR has approached him 
with plans to use the company,s natural gas facility to 
import gas from Venezuela under the Petrocaribe agreement. 
END SUMMARY. 
 
--------------------- 
No payments, no power 
--------------------- 
 
¶2. (U) The government subsidizes the consumption of 
electricity through disbursements to the three main 
distributors (the state-owned EDE Sur and EDE Norte as well 
as ESE Este, of which the Trust Company of the West owns 50 
percent plus 1 and the government owns the rest).  At the 
beginning of the year, the GoDR had budgeted USD 600 million 
for the subsidy for 2008.  However, this amount was 
inadequate to meet the needs of the system in the face of 
rising oil prices.  Estimates for the subsidy for the year 
quickly rose to close to USD 1.2 billion, with the government 
saying in July that it would not be able to cover that amount 
and the sector would have to make up the shortfall. 
 
¶3. (U) As of October, the electrical distribution companies 
have failed to pay the generators for July invoices, 
prompting concern among the generators that the government,s 
ability to fund the subsidy to the sector has run dry. 
According to EDE Este General Manager Jose Marinas Fernandez 
, since January, the government has provided only the amount 
they originally budgeted to subsidize the sector, despite the 
fact that the amount the distributors owe to the generators 
has vastly increased.  Marinas told Econoff that while rising 
fuel prices caused electricity generation rates to skyrocket, 
the price to the consumer remained unchanged, per government 
mandate.  (Although National Energy Commission officials told 
EconOff in August that the government was considering a 15 
percent rate hike, the price has yet to rise.)  Marinas said 
that EDE Este has only been able to pay about USD 12 million 
to the generators from its monthly cash revenue of around USD 
25 million, while the total bills are much higher, peaking at 
over USD 50 million in August. 
 
¶4. (SBU) Marinas noted that while the summer fuel price surge 
is to blame for the size of the 2008 debts, the problem 
started with a government request to increase generation 
during the election period.  He said that EDE Este is 
normally expected to satisfy 85 percent of demand, using 
scheduled blackouts in some areas to limit consumption.  Yet 
in the two months running up to the May 16 election, the GoDR 
pushed market players to satisfy 100 percent of demand. 
Despite the higher costs that this push implied, the 
government did not provide additional funds and instead let 
debt accrue with the generators.  Even after the election, 
when programmed blackouts returned, the high fuel costs meant 
that prices stayed high and the distributors fell even 
farther behind.  As a result, the distributors now owe USD 
340 million to the private generators for this year.  Marinas 
added that the government had assured the generators that it 
would offer a plan by August to repay USD 864 million in debt 
from previous years, of which USD 214 is owed to the private 
generators, but as of yet they have not offered any proposals. 
 
¶5. (SBU) Given the lack of payment by the distributors, the 
generators lack the liquidity to purchase the fuel they need 
to supply the grid.  BasicRD shut down operations at its two 
plants on September 12, citing nonpayment of past invoices. 
A government payment in early October to the generator 
stipulated that it restart its EGE Haina plant, but EGE Haina 
is operating only at a low capacity due to limited cash to 
buy fuel; its CESPM plant remains off-line.  BasicRD CEO 
 
Roberto Herrera told Econoff that CESPM is panning to file a 
claim to invoke a sovereign guarantee in its contract with 
the distributors.  If the government goes into default of 
this guarantee, he said that the company,s primary lender, 
Citibank, would likely ask BasicRD to cancel the contract, 
which could have drastic consequences for the Dominican 
Republic,s credit rating. 
 
¶6. (SBU) Meanwhile, AES, the nation,s largest provider, 
cancelled its December gas shipment, which represents 20 
percent of the total fuel purchase for 2008 at the 
304-MegaWatt AES Andres plant.  AES President Marco de la 
Rosa told the DCM that AES Andres has already reduced 
generation by 20 to 30 percent in light of the adjusted 
fueling schedule.  Reducing output will require breaking the 
company,s contract with the distributors, and De la Rosa 
said his company was ready to take that step, citing 
defaulted invoices.  He also noted that the AES home office 
had instructed him to cease all new investments in the 
country, which will mean cancelling a natural gas pipeline 
that would have enabled BasicRD to convert the CESPM plant to 
convert from diesel to natural gas. 
 
--------------------------------------------- ---- 
Government responds with offer of partial payment 
--------------------------------------------- ---- 
 
¶7. (U) On October 15, CDEEE Executive Vice President Radhames 
Segura announced that the government would provide USD 100 
million in payments to the generators on October 25, while 
the distributors would provide an additional USD 16 million. 
However, Marinas told Econoff that Segura had not consulted 
his company regarding this latter sum and that EDE Este would 
not be able to contribute any funds to the October 25 
payment. De la Rosa noted that this sum was a small amount 
that would be shared among all of the generators, while the 
debt owed to AES (USD 150 million for 2008 invoices and USD 
80 million of the frozen debt) is more than double the total. 
 
------------------------------- 
Light at the end of the tunnel? 
------------------------------- 
 
¶8. (SBU) Herrera told Econoff that he believes the 
consequences of further non-payment would be devastating for 
all involved, especially Dominican electricity consumers.  He 
therefore  expects that the government will ultimately find 
the cash to pay the generators, as it has in past months.  He 
noted that the CDEEE paid USD 5 million of CESPM,s USD 
26.7-million July invoice and has yet to make a dent in the 
USD 30-million August bill.  Herrera added that the bright 
side to the company,s recent generation cutbacks is that the 
September invoice from CESPM is just USD 10 million.  He said 
he expected to normalize the running debt by November. 
 
¶9. (SBU) De la Rosa did not share the same level of optimism, 
noting that this was the gravest situation he had faced since 
taking the reigns at AES Dominicana last year, calling it 
&critical8.  He said that with the cutbacks in generation, 
most homes in the Dominican Republic would be without power 
for at least 8 hours every day through the end of the year. 
 
---------------------------------- 
TCW arbitration case moves forward 
---------------------------------- 
 
¶10. (SBU) Marinas told Econoff that he does not believe that 
CDEEE has treated EDE Este differently than the fully 
state-owned distributors in terms of receiving its share of 
the subsidy., TCW, the company that owns 50 percent plus 1 of 
EDE Este, and its parent company, Societe Generale, have 
filed arbitration claims against the government under both 
the France-Dominican Republic Bilateral Investment Treaty and 
CAFTA-DR alleging that the GoDR,s treatment of its 
investment has greatly diminished the value of EDE ESTE.  The 
claim seeks USD680 million in damages.  Marinas told EconOff 
that he believes Segura, the head of CDEEE, who has not hid 
his disdain for TCW in recent press interviews, is attempting 
to turn public sentiment against TCW while strangling the 
company,s finances in the hopes that it will give up on its 
investment and leave the country.  He added that while the 
other distributors could withstand nonpayment from the 
government because their debt is public debt, a private 
company could not afford to operate without accounting for 
its broad loss margin. 
 
¶11. (SBU) Marinas complained to Econoff of government 
harassment coming from many fronts and said that while a few 
 
key figures in the Fernandez administration, including 
Economy, Planning and Development Minister Temistocles 
Montas, disagree with Segura,s approach, no one has proved 
willing to cross the CDEEE official.  Marinas accused even 
the judiciary of being prejudiced against TCW, recounting how 
when the company sued a disgruntled customer for literally 
breaking down its door, the judge sided with the customer and 
called CDE Este &a bunch of crooks8.  It was this 
prejudiced judiciary and the administration,s influence over 
judges, he said, that led TCW to file for international 
arbitration.  On September 19, an arbitration tribunal in New 
York overruled the GoDR,s jurisdictional objections to the 
proceedings, setting the stage for arbitration to proceed to 
a final hearing in 2009. 
 
 
--------------------------------------------- ---- 
GoDR seeking to expand Petrocaribe to natural gas 
--------------------------------------------- ---- 
 
¶12. (SBU) AES President De la Rosa also told the DCM that a 
group of 10 officials from Petroleos de Venezuela (PDVSA) 
recently visited the company,s natural gas import facilities 
east of Santo Domingo as they explore the possibility of 
selling natural gas to the Dominican Republic under the 
Petrocaribe agreement.  Such a possibility is likely linked 
to talk of a Venezuelan-funded gas pipeline from the 
Dominican Republic into neighboring Haiti.  De la Rosa said 
AES is concerned about the proposal, noting that Venezuelan 
President Hugo Chavez has been explicit in stating that 
Petrocaribe purchases cannot go through private companies. 
Referring to rumors that the GoDR,s recent decision to 
acquire full ownership of the country,s sole oil refinery 
was motivated by a desire to increase purchases under 
Petrocaribe, he said AES is worried that involving the AES 
port in Petrocaribe could disrupt the company,s work.  He 
noted that the GoDR has promised that any Petrocaribe 
activity at the AES port would prove beneficial to the 
company, although he did not seem convinced by the pledge. 
 
------- 
COMMENT 
------- 
 
¶14. (SBU) Crises in the electricity sector are relatively 
frequent in the Dominican Republic, where government 
involvement in the sector has exacerbated problems and 
created an inefficient market.  But it appears that with 
defaults on July invoices, the generators have reached a 
breaking point and  will now turn off the lights.  This may 
prompt the government to pay its debts, but it remains to be 
seen whether the power rationing or the TCW arbitration case 
will lead to any substantive long-term improvements in the 
dysfunctional sector.  Despite the mounting debts and growing 
blackouts, Segura appears to retain the unwavering support of 
the President.  Neither Segura nor anyone else in the 
Fernandez administration have given much more than lip 
service to long-term solutions to the sector,s shortcomings. 
 The passage of a law criminalizing electricity theft was an 
important achievement, but it remains unenforced.  A proposed 
15 percent increase in electricity rates paid by consumers 
could make a small dent in the disparity between costs and 
earnings for distributors, but it must overcome popular 
opposition in order to go into effect.  END COMMENT. 
FANNIN