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TO RUEHC/SECSTATE WASHDC IMMEDIATE 7543
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C O N F I D E N T I A L ASUNCION 000042 
 
SIPDIS 
 
STATE FOR WHA/BSC MDRUCKER, BFRIEDMAN AND MDASCHBACH, 
WHA/EPSC FCORNEILE 
 
E.O. 12958: DECL: 01/05/2029 
TAGS: ECON PREL EAGR EPSC PA
SUBJECT: PARAGUAY'S ITAIPU NEGOTIATIONS: RESULTS AND OUTLOOK 
 
Classified By: CDA, a.i., Michael J. Fitzpatrick; reasons 1.4 (b) and ( 
d). 
 
1.(C) SUMMARY: Paraguay's lead negotiator for talks on 
Brazil-Paraguay's Itaipu dam -- the world's largest 
hydro-electric generation plant generating over 90 million 
megawatts-hour a year -- Ricardo Canese shared January 6 a 
cautiously optimistic outlook for Paraguay. Canese found 
Brazil surprisingly open to Paraguay's demand for a "just" 
price for the electricity ceded to Brazil, and indicated that 
a preliminary agreement on price is likely by March. If 
Brazil concedes on the minimum price asked by Paraguay, 
Paraguay could benefit from roughly 640 million USD of 
additional resources to boost public spending. Canese 
admitted Paraguay's limited leverage to influence Brazil's 
opposition to Paraguay's selling electricity to third 
countries, but hoped that President Lula's apparent affinity 
for President Lugo will help ease this discussion. Brazil 
agreed to have Paraguay's Controller audit Itaipu's debt, and 
Paraguay is planning to restructure its share of Itaipu's 
debt once the audit is completed. Brazil is facing a 
Paraguayan team that is clearly intent on making right the 
"wrongs" of the past. END SUMMARY. 
 
--------------------------------------------- --- 
THE FIGURES: PARAGUAY-BRAZIL ITAIPU RELATIONSHIP 
--------------------------------------------- --- 
 
2.(U) The highly political, often emotional, issue of "fixing 
the wrongs of the past" by re-negotiating Itaipu was one of 
President Lugo's top campaign promises. The 14 megawatts (MW) 
binational dam Itaipu generates over 90 million 
megawatts-hour (MWh) of electricity a year, equally divided 
between Paraguay and Brazil. Paraguay, however, consumes just 
8 million MWh a year and cedes at below market price the 
remainder of its share (roughly 37 million MWh) to Brazil, 
which ends up using 82 million MWh of the total electricity 
generated. Excluding payments for ceded electricity, 
compensation is equally distributed between the two 
countries, with each country getting about 212 million USD in 
royalties, 32 million USD in administrative expenses, and 21 
million USD in capitalized earnings for a total of over 250 
million USD. 
 
3.(U) Including ceded electricity, Paraguay's total annual 
compensation for Itaipu is 354 million USD. Paraguay earns 
104 million USD a year for the 37 million MWh ceded to Brazil 
at a price of 2.8 USD per MWh. Itaipu's total expenses, the 
largest being debt service payments (interest and principal), 
are also equally divided between Paraguay and Brazil. Itaipu 
holds over 18 billion USD in debt maturing in 2023 that 
carries roughly 2 billion USD a year in financing charges. 
 
-------------------------------------- 
THE NEGOTIATION: RESULTS AND PROSPECTS 
-------------------------------------- 
 
4.(C) Paraguay's Itaipu negotiation team-leader Ricardo 
Canese told Econoff January 6 that Brazil's willingness to 
discuss a Paraguay-led agenda is a positive sign.  Six weeks 
after assuming office in August 2008, President Lugo and his 
negotiation team presented Paraguay's requests on Itaipu to 
President Lula in Brazil. These points are: A) A "fair" price 
for the electricity ceded to Brazil; B) Flexibility to sell 
to other countries; C) Revision of Itaipu's debt; D) Joint 
financial management; E) Shared controller's functions; and 
F) Completion of pending infrastructure projects. Canese 
opined that in the past Paraguay lacked the credibility for 
Brazil to take Paraguay's demands seriously. However, now for 
the first time Brazil and Paraguay are discussing Itaipu as 
equals. Canese attributed Paraguay's gained credibility to 
President Lugo's political image and "budding" personal 
relationship with President Lula. 
 
5.(C) Canese said the minimum price sought by Paraguay for 
the electricity ceded to Brazil is 20 USD per MWh. The market 
rates of Itaipu's electricity in Brazil, Canese remarked, are 
190 USD per MWh for residential and 120 USD per MWh for 
industrial use. (NOTE: These rates are consistent with what 
Brazil's state-owned electricity distribution company 
ELECTROBRAS reports as of January 2009. END NOTE.) Canese 
stated that Argentina currently pays Paraguay about 22 USD 
MWh for the electricity supplied by the binational 
Argentina-Paraguay hydro-plant Yacyreta. 
 
6.(C) Canese noted that Brazil is surprisingly open to 
Paraguay's fair-price claims, citing an apparent affinity 
between Presidents Lula and Lugo. Canese hoped that by the 
end of March, Paraguay could have a preliminary agreement 
about price with Brazil. (NOTE: Assuming Paraguay's minimum 
asking price of 20 USD per MWh is granted, Paraguay is 
looking at over 640 million USD of additional revenues in 
¶2009. END NOTE.) 
 
7.(C) Canese emphasized that Paraguay is also pursuing the 
option to directly sell its excess electricity in the 
Brazilian market using the distribution lines of Brazil's 
ELECTROBRAS. He explained that Paraguay is negotiating with 
Chile and Argentina in a similar modality. Chile would get 
the electricity from a northern-Argentina transmission line, 
and Paraguay would supply the electricity to Chile via 
Argentina from a southern-Argentina connection at Yacyreta. 
Canese said Paraguay plans to sell Chile 200 MW of power from 
its solely-owned Acaray hydro-plant at a net price of 67 USD 
per MWh. 
 
8.(SBU) Canese was enthusiastic about the progress on the 
debt revision issue. Brazil agreed in late-December 2008 to 
have Paraguay's Controller office audit Itaipu's debt. Canese 
expressed his surprise at Brazil's concession, considering 
that even Brazil's Controller has never audited Itaipu. 
(NOTE: Itaipu is independently audited each year by a private 
accounting firm which submits the report to the Brazilian 
Financial Director. END NOTE.) The financial burden is 
equally shared, but Canese said that over 4 billion USD of 
the total debt was wrongfully assumed by Paraguay in the 
administration of Paraguay's President Gonzalez Macchi 
(1999-2003). Canese stated the audit would help define the 
correct figure, and once the amount is agreed, Paraguay would 
seek options to restructure the debt and lower debt service 
payments. 
 
9.(C) Canese indicated that Paraguay's demand to sell to 
third countries its share of Itaipu's electricity is by far 
the most contentious and politically charged point on the 
negotiation agenda. Brazil's internal political discussions 
on this issue, according to Canese, center on fears of 
putting at risk Brazil's currently secured supply to meet 19 
percent of its electricity demand, if Paraguay is allowed to 
sell to other countries. Canese reasoned that Paraguay alone 
has limited leverage to change Brazil's position on this 
issue, and can only hope to steer international opinion in 
favor of Paraguay. Canese confided that an acceptable outcome 
in the short-term is if Brazil pays a price comparable to 
what Paraguay could get if it sells to other countries. He 
said Paraguay will remain firm in its sovereign claim to 
commercialize its share of Itaipu's electricity, and will 
continue to press Brazil on this point. He noted Paraguay 
plans to launch a campaign to enlist influential academic 
figures and recognized experts in Brazil to build support for 
Paraguay's demands. 
 
-------------------------------- 
DUARTE'S PARTING "GIFT" ON ITAIPU 
-------------------------------- 
 
10.(C) Canese expressed frustration with what he 
characterized as an emblematic example of corruption and 
clear attempt of the Duarte administration to "sabotage" 
Lugo's negotiations even before they began. A month before 
the April 2008 election, Duarte's government agreed to 
Brazil's proposal to change the administrative authorization 
for the use of Itaipu's strategic water reserves from an 
Executive Board to a Director of Operations mandate. (NOTE: 
The water reserves are maintained at 220 meters above 
sea-level, but during drought seasons it can drop 3 to 5 
meters, equivalent to millions of MWh. The suspicion is that 
with this deal the Colorado Party's elite profited under the 
table. END NOTE). The agreement gives Brazil control to 
dispose of Itaipu's water reserves without the need for 
Paraguay's authorization, even though Paraguay owns half. The 
comparable opportunity cost of the water reserves is worth 
billions of USD. The issue of using and managing the reserves 
is an unexpected element of an already complex negotiation. 
 
11.(C) COMMENT: Despite Brazil's long-standing unwillingness 
to "open-up" negotiations with Paraguay on Itaipu, Canese 
maintains a cautiously optimistic attitude about 2009 
prospects. Lugo could have a significant amount of additional 
resources to boost social spending and public investments, if 
Canese's expectations come to fruition this year. While there 
are some bright spots on the horizon, the negotiations have 
just begun, and for some items like the freedom to 
commercialize, there is a long road ahead. Brazil has the 
capacity to successfully apply a carrot and stick negotiation 
strategy to influence Paraguay. Beyond a "budding" personal 
bond between Lugo and Lula, Paraguay ultimately lacks 
sufficient leverage to effect a change of policy from 
regional-superpower Brazil. We are likely to see more from 
Brazil's efforts to influence the outcome of the 
negotiations. One thing seems certain, however: Brazil is 
facing a Paraguayan team clearly intent on making right the 
"wrongs" of Itaipu. END COMMENT. 
 
Please visit us at     http://www.state.sgov.gov/p/wha/asuncion 
 
FITZPATRICK