VZCZCXYZ0011
PP RUEHWEB

DE RUEHSN #1403/01 3582233
ZNR UUUAA ZZH
P 232233Z DEC 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC PRIORITY 0503
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

UNCLAS SAN SALVADOR 001403 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CEN 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET EINV ES
SUBJECT: ELECTRICITY SUBSIDIES EXTENDED FOR ONE MONTH 
 
REF: A. SAN SALVADOR 1364 
     ¶B. SAN SALVADOR 1257 
     ¶C. SAN SALVADOR 1392 
 
¶1.  (SBU) SUMMARY. The GOES agreed on December 18 to pay 
electric companies $15.7 million (covering one month of 
electricity subsidies) in order to maintain subsidized 
electricity rates through January 11, 2009.   Again, 
state-owned generation company (CEL) had to pay the subsidy. 
Energy and subsidy costs continued to rise in November 
despite falling oil prices.  CEL raised its prices and 
production to compensate for the subsidy and other generators 
are still using expensive fuel purchased in July. 
Distribution companies have also run into problems securing 
the bonds required by government.  END SUMMARY. 
 
¶2.  (U) On December 18, distribution companies signed an 
agreement with the GOES and CEL to keep subsidized 
electricity rates from December 12, 2008 to January 11, 2009. 
 In exchange, CEL will issue $15.7 million in credits for 
December energy bills to cover a one-month subsidy payment. 
This follows a two-month agreement in November where CEL 
agreed to pay $31 million to maintain subsidized rates from 
October 12 ) December 11. 
 
¶3.  (U) Together, the two agreements cover only half of the 
$94 million in subsidies accumulated from April 12 ) October 
11, 2008.  In the current system, designed to stabilize 
electricity rates, the energy regulator conducts biannual 
electricity rate "resets" in April and October, when the GOES 
must either adjust electricity rates to reflect real energy 
costs from the preceding 6-month period or commit to a 
schedule of subsidy payments to maintain subsidized energy 
rates.  Facing serious short-term liquidity problems (ref A), 
the GOES has steadfastly refused to adjust rates to reflect 
real energy costs as it struggles to arrange payments for 
two-month and one-month periods. (Note. Electric companies 
and the think tank FUSADES have said that roughly 80% of 
subsidy benefits go to 20% of the largest industrial and 
residential consumers. End Note.)  The GOES still must pay 
$47 million to maintain subsidized electricity rates until 
April 12, 2009, when the next "reset" will be held. 
 
¶4.  (SBU) GOES officials have repeatedly claimed that the 
Central American Bank for Economic Integration (CABEI) would 
provide a $60 million loan to cover the outstanding subsidy 
debt.  However, a CABEI representative recently told Econoff 
that loan discussions had not been concluded and no loan 
would be approved before January (ref A).  Thus, the GOES has 
continued to press CEL to make subsidy payments despite CEL's 
repeated public statements that it does not have the funds to 
pay the subsidy.  Industry sources report that CEL,s joint 
venture geothermal company LaGeo provided the most recent 
payment. 
 
ENERGY COSTS STILL RISING AS OIL PRICES FALL 
-------------------------------------------- 
 
¶5.  (U) During a December 4 meeting of AmCham,s Energy 
Committee, industry sources cited two main factors that 
caused average wholesale energy prices and subsidies to rise 
to their peak in November, even as oil prices declined. 
First, CEL has increased its wholesale energy costs and 
production levels in order to pay the subsidy.  CEL,s 
wholesale costs rose 70% from $71 per megawatt hour (MWH) in 
November 2007 to $120/MWH a year later.  Second, the two main 
thermal generators purchased 400,000 barrels of fuel oil for 
$110 per barrel in late July and they still need to recover 
costs for 120,000 remaining barrels. 
 
¶6.  (SBU) Company managers told Econoff they would begin 
reducing energy prices in December, before this expensive 
fuel is exhausted in January.  They nevertheless projected 
the subsidy will rise from $94.6 million (April-October 2008) 
to $98.2 million during this six month period (October 2008 
) April 2009), due in part to increased, and more expensive, 
thermal generation during the current dry season. 
 
REGULATOR TRIES TO LOCK IN SUBSIDIZED RATES 
------------------------------------------- 
 
¶7.  (SBU) Energy industry contacts reported that during a 
December 5 meeting, the energy regulator (SIGET) presented 
its annual adjustment of distribution charges that included 
language to lock in subsidized rates beginning on January, 
¶2009.  Those rates would have applied regardless of whether 
the GOES committed to pay the subsidies.  However, the 
companies discovered the rather obvious ploy and objected to 
it at the meeting.  SIGET acknowledged the "mistake" and 
later removed the rate freeze.  Sources told Econoff that the 
companies were prepared to contest the decision in court, if 
SIGET followed through. 
 
COMPANIES RENEGOTIATE BOND REQUIREMENT 
-------------------------------------- 
 
¶8.  (SBU) Distribution companies are negotiating with banks 
and the market operator (UT) to modify financial guarantee 
requirements for monthly power purchases after local banks 
raised fees and placed limits on bonds they will provide. 
The two main distribution companies, Del Sur and AES reported 
that annual bank fees for bond guarantees have risen from 
0.125 to 2 percent for Del Sur and from 0.1 to 3 percent for 
AES. AES,s monthly bond requirements (based on average 
energy costs over the preceding six-month period) reportedly 
doubled in 2008 and they now exceed transaction limits for 
Salvadoran banks.  The banks were also influenced by their 
increased liquidity needs in light of the uncertainty of the 
upcoming elections in January and March as well as rising 
concerns about the government's ability to make subsidy 
payments.  While other distributors have been able to renew 
their bonds, U.S.-owned AES's bond requests have been refused 
by four banks and the company has not yet resolved the 
problem. 
 
COMMENT 
------- 
 
¶9.  (SBU) The GOES has bought itself another month, but will 
be challenged to schedule remaining payments of $47 million 
needed to maintain subsidized rates through the March 2009 
elections.  A recently approved $500 million IDB loan (ref C) 
may temporarily alleviate GOES liquidity problems, but the 
challenge of financing subsidies will continue as the 
elections approach. Even if the GOES can maintain President 
Saca,s commitment to maintain the electricity subsidy until 
he leaves office, it will leave a financially strained 
electricity sector and unsustainable subsidy policies for a 
new president to address.  Saca claims the subsidy is for the 
people, but 80% of it ends up going to (presumably) the 
wealthiest consumers, the largest industrial and residential 
users. Ironically, the subsidy may increase El Salvador,s 
energy costs relative to regional competitors, as CEL will 
need to charge higher hydro-electric energy rates for some 
time to pay the subsidy bill. 
GLAZER