VZCZCXRO9718
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW
RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0251/01 0430238
ZNR UUUUU ZZH
O 120238Z FEB 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4585
INFO RUCNCIS/CIS COLLECTIVE 1165
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0562
RUEHKO/AMEMBASSY TOKYO 1268
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0739
RUEKJCS/SECDEF WASHDC 0655
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1192

UNCLAS SECTION 01 OF 04 ASTANA 000251 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EAID ENRG EINV KZ
SUBJECT:  KAZAKHSTAN:  REGIONAL ELECTRICITY MARKET MUST OVERCOME 
POLITICAL, TECHNICAL CHALLENGES 
 
REF: 08 ASTANA 2086 
 
ASTANA 00000251  001.2 OF 004 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On February 5, Energy Officer accompanied USAID 
Senior Energy Policy Specialist Michael Trainor to meetings with 
major players in Kazakhstan's power sector to solicit feedback on 
USAID's new Regional Energy Markets Assistance Program (REMAP-II), 
expected to begin in March (see septel.)  Kazakhstani industry 
representatives thanked USAID for assistance provided under the 
first REMAP project and expressed general support for the new 
project, but expressed skepticism about the near-term prospects for 
a regional electricity market encompassing all five Central Asia 
Republics and linking Afghanistan's newly-constructed North-East 
Power System with Central Asian high-voltage networks and 
generators.  Instead, it was suggested that early successes are more 
likely with a sub-set of these countries, including Kazakhstan, 
Kyrgyzstan, and Tajikistan in the first instance.  Several 
Kazakhstani commentators cited Uzbekistan's politics and past 
behavior, its geography and the location of critical segments of the 
region's high-voltage networks, and the nexus between 
water-resources management and hydroelectric power as major 
complicating factors.  Discussions confirmed that reconciling the 
different laws, authorities, institutions, infrastructure, and 
tariffs of the six countries involved will be arduous work. 
 
¶3. (SBU) SUMMARY CONTINUED:  Kazakhstan's own wholesale power tariff 
structure is expected to change in the near future, once a Prime 
Ministerial decree is published to implement the new Law on 
Electricity, which took effect January 1.  The decree will establish 
a seven-year price ceiling for power prices charged by generators, 
with tariffs varying according to the type of power generation.  The 
chairman of the Agency for the Regulation of Natural Monopolies 
(ARNM) said the purpose of the decree was to attract foreign 
investment by guaranteeing a stable, long-term price for power 
companies.  This is in contrast to what Energy Officer learned 
during a meeting on January 15 with AES, the largest Western 
investor in Kazakhstan's power sector.  AES said they anticipated 
that the government's fixed prices would be below market rates and 
would discourage future investment in infrastructure.  END SUMMARY. 
 
A BEAR MARKET 
 
¶4.  (SBU) Senior managers from the Kazakhstan Electricity Grid 
Operating Company (KEGOC) were skeptical of USAID's proposal to 
establish a regional electricity market encompassing Central Asia 
and Afghanistan.  KEGOC Vice President Vladimir Ossochenko said the 
physical infrastructure of the countries in the region was at vastly 
different levels of development and KEGOC would not invest its own 
resources to modernize infrastructure in Kyrgyzstan or Tajikistan. 
"If we did that," he said, "we would be left with nothing." 
Ossochenko said that KEGOC will invest funds from a World Bank loan 
to upgrade and modernize Kazakhstan's own power transmission network 
and upgrade the power grid linking northern Kazakhstan and southern 
Russia. 
 
¶5.  (SBU) Ossochenko also suggested that it would take a decade or 
more to reconcile the different, often contradictory, laws of the 
prospective participant countries to build the necessary legal 
framework for a regional power market.  He illustrated his point by 
saying that -- thanks in part to the first REMAP project -- the 
Kyrgyz National Electricity System was prepared to trade power via 
Kazakhstan's electricity market operator, KOREM, but was unable to 
do so because customs regulations in both countries do not 
accommodate exchanges brokered on the KOREM trading platform. 
(NOTE:  Power is exchanged between Kazakhstan and Kyrgyzstan, but 
under separate bi-lateral contracts negotiated outside of the KOREM 
market framework.  END NOTE) 
 
LITTLE INTEREST IN AFGHANISTAN 
 
¶6.  (SBU) When asked about Afghanistan, Ossochenko simply said, 
 
ASTANA 00000251  002.2 OF 004 
 
 
"That's your initiative.  That's in your interest, not ours."  He 
said that Afghanistan lacks basic power infrastructure and KEGOC 
lacks the means to upgrade Afghanistan's grid.  Ossochenko also 
noted that the Central Asian republics have enough difficulty 
generating and distributing sufficient power for domestic use and 
would be hard-pressed to export electricity to Afghanistan.  "If 
Uzbekistan already cuts power to Tajikistan, which it is obliged to 
deliver, how can they send electricity to Afghanistan?," he asked. 
Ossochenko did, however, support the idea of regional training and 
knowledge-sharing activities with counterparts from Afghanistan. 
 
DEBATE OVER CENTRAL AUTHORITY 
 
¶7.  (SBU) Despite doubts about the development of a regional market, 
KEGOC's Ossochenko supported USAID's proposal to upgrade the 
capacity of the Coordination Dispatch Center (CDC), headquartered in 
Tashkent and jointly-owned by the transmission system operators of 
Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan.  CDC would 
provide centralized high-voltage network monitoring and management 
services for the Central Asian electricity market.  KEGOC claims it 
needs a stronger CDC with modern equipment to ensure the rational 
development of the marketplace.  "Without it, we can do nothing on a 
regional level," Ossochenko said.  According to him, CDC's 
communications equipment was made in the 1950s and is in dire need 
of replacement.  (NOTE:  Under the three-year, $15 million REMAP-II 
project, USAID would provide a grant of up to $1 million to CDC. 
END NOTE). 
 
¶8.  (SBU) Unlike KEGOC, the operator of Kazakhstan's electricity 
market, known by its Russian acronym KOREM, does not support the 
modernization of the Coordination Dispatch Center.  KOREM's Chairman 
Suinshilik Tiyessov said it would be "incorrect" and "harmful" to 
provide funding or assistance to the CDC.  He correctly observed 
that CDC has no formal legal basis for interacting with the five 
Central Asian countries and no legal authority to issue compulsory 
instructions to national system operators, or to apply sanctions for 
non-compliance. 
 
OVERCOMING MISTRUST OF UZBEKISTAN 
 
¶9.  (SBU) Tiyessov noted that the CDC is based in Tashkent and 
called it a political instrument of Uzbekistan.  "The CDC is good 
for the Uzbeks," he said, "because they can use it to manipulate 
other countries."  Tiyessov then spent several minutes explaining 
why Uzbekistan should not be trusted to host the CDC, arguing that 
Uzbekistan would most likely manipulate data reporting and grid 
management in favor of Uzbekenergo and at the expense of other 
countries' system operators.  The only way to partner with 
Uzbekistan, he said, is to enforce contracts strictly, with 
financial penalties for any and all violations.  According to 
Tiyessov, "If you try to be nice to them and negotiate, they simply 
take it as a sign of weakness."  (NOTE:  Other senior officials, 
including Nesipkul Bertysbayev, Director of the Electricity 
Department at the Ministry of Energy and Mineral Resources, echoed 
Tiyessov's comments about Uzbekistan.  Bertysbayev, for example, 
said the CDC is "firmly under the control of the Uzbeks."  END 
NOTE.) 
 
¶10.  (SBU) Like KEGOC's Ossochenko, KOREM Chairman Tiyessov had 
doubts about the near-term prospects for a regional electricity 
market involving all the Central Asian republics.  Tiyessov 
suggested USAID first establish a regional market connecting 
Kazakhstan, Kyrgyzstan, Tajikistan, and Turkmenistan, which would 
ultimately force Uzbekistan to "play by the rules."  It was unclear, 
however, whether that would be technically feasible immediately, 
since the region's power grids do not neatly conform to its national 
borders, and key segments of the Central Asian grid traverse 
Uzbekistan's territory.  (NOTE:  Kyrgyzstan and Tajikistan have 
embarked on the construction of 500kV lines connecting the two 
countries to the Kazakhstan grid directly, bypassing Uzbekistan. 
Completion, however, is still several years away.  END NOTE.) 
 
 
ASTANA 00000251  003.2 OF 004 
 
 
GOVERNMENT PREPARED TO FIX ELECTRICITY PRICES 
 
¶11.  (SBU) As previously reported (reftel), Prime Minister Masimov 
is prepared to introduce a new decree that will set wholesale 
ceiling prices for electrical power for the next seven years.  Power 
industry representatives are strongly opposed to fixed prices set by 
the government, although Nurlan Aldabergenov, Chairman of the Agency 
for the Regulation of Natural Monopolies (ARNM), defended the 
decree, saying it would increase investment.  KOREM's Tiyessov noted 
that since the decree was first drafted in October, the global 
financial crisis has caused major power consumers to reduce demand 
for electricity, which has moved the country from a power deficit to 
a power surplus.  Tiyessov therefore expects prices to fall on their 
own accord and sees little value in a government decree setting a 
price ceiling. 
 
¶12.  (SBU) Tiyessov said the government is now discussing tariffs 
for various categories of power-generating companies, with 
consideration of such factors as location, fuel type, plant 
technology, and efficiency in determining into which category each 
plant will fall.  The ceiling price for each category will be 
established at the level of the highest recorded output price of 
power produced and sold by generators in that category in 2008. 
According to Tiyessov, the Prime Ministerial decree setting the new 
tariff schedule is expected to be published in May or June.  (NOTE: 
Tiyessov served on the parliamentary working group that drafted the 
Law on Electricty and successfully lobbied to include a provision 
allowing up to 10 percent of all electricity generated in 
Kazakhstan, or approximately four billion kilowatt hours, to be sold 
via KOREM's trading platform at a free market price, rather than the 
government's fixed price.  END NOTE.) 
 
AES SAYS FIXED PRICES POSE A PROBLEM 
 
¶13.  (SBU) On January 15, Doug Herron, Head of the Representative 
Office of AES Silk Road, Inc. in Almaty, told Energy Officer that 
the government's proposal to fix electricity tariffs would have a 
negative impact on the entire industry.  He said the final rates 
remain under discussion and added that it was unclear whether 
companies could charge different rates for different customers 
(i.e., industrial and residential).  Herron also said that coal 
prices comprise 65 percent of the price of electricity, so unless 
the government also fixes the price of coal, power companies will be 
squeezed by rising input costs and restricted retail prices.  (NOTE: 
 A government working group is now considering whether to regulate 
coal prices as well, despite the objections of the mining industry. 
END NOTE.) 
 
ANTI-MONOPOLY AGENCY UNAPOLOGETIC 
 
¶14.  (SBU) Anatoliy Shkarupa, Director of ARNM's Electricity 
Department, justified the draft decree as a means to attract 
much-needed investment into the power sector.  He said that because 
the government has not actively regulated the electricity market for 
the last ten years, there have been no new investments in power 
generation.  When reminded about the millions of dollars AES has 
invested in Kazakhstan's power sector, Shkarupa became defensive and 
said that when AES first arrived in Kazakhstan, five of the eight 
power blocks at Ekibastuz GRES-1 were in use.  "Now, ten years 
later, still only five of the eight blocks are producing 
electricity," he said.  Shkarupa claimed that AES used spare parts 
from other blocks to keep a maximum of five functional.  He said AES 
has covered operational expenses, but did not make any major capital 
investments at the power plant in Ekibastuz, or at AES's other 
plants in Ust-Kamengorosk and Shulbinsk. 
 
¶15.  (SBU) Shkarupa's deputy, Khalila Kokozova, said the new Prime 
Ministerial decree would be a "temporary measure" and that companies 
planning to make capital investments could apply to the government 
for an "individual tariff" that would be higher than that set by the 
decree.  Kokozova also said that power plants fueled by renewable 
sources of energy would constitute a distinct group of enterprises 
 
ASTANA 00000251  004.2 OF 004 
 
 
and would likely be granted higher, "feed-in" tariffs. 
 
¶16.  (SBU) ARNM Chairman Aldabergenov was unapologetic about the 
draft decree.  He denied that ARNM was trying to regulate market 
prices, saying his agency's role was to promote capital investment, 
monitor investment commitments, and ensure stable, long-term market 
development.  He confirmed, however, that ARNM would review prices 
annually to ensure compliance with the new decree and enable 
companies to petition for changes to the tariff schedule. 
Aldabergenov welcomed expert advice from USAID on the methodology 
and mechanics of power tariff regulation, and in particular 
requested assistance in developing options to provide tariff-based 
assistance to low-income households and stimulate energy 
conservation. 
 
¶17.  (SBU) Samruk-Kazyna National Welfare Fund representatives 
engaged in management of state-owned assets in the power sector 
exhibited strong interest in U.S. assistance to Kazakhstan's power 
sector.  They requested that REMAP-II provide support in assessing 
policy options that might stimulate investment in new generation. 
They also asked whether the U.S. Government, under REMAP-II or 
otherwise, could provide direct assistance in enticing U.S. 
investors to explore opportunities for new plant construction in 
Kazakhstan.  Energy Officer emphasized the importance of minimizing 
investors' perceptions of risk, to which USAID Senior Energy Policy 
Specialist offered that a sound policy and legal/regulatory 
framework is prerequisite for such.  USAID explained that REMAP-II 
will contribute in this regard, and might also be in a position to 
assist with the conceptualization, announcement, and management of 
specific generation investment projects. 
 
¶18.  (SBU) COMMENT:  Widespread, nearly universal criticism of 
Uzbekistan by key players in Kazakhstan's power sector suggests that 
a regional electricity market that includes Uzbekistan is unlikely 
to emerge in the near term.  U.S. programs and policies in support 
of a regional market will be more effective if they focus initially 
on Kazakhstan, Kyrgyzstan, and Tajikistan, which have demonstrated 
greater willingness to cooperate on electricity issues. 
Furthermore, based on conversations with our interlocutors, the 
republics of Central Asia have yet to embrace Afghanistan as an 
integral part of the region.  Afghanistan is widely viewed as an 
"American problem," not as a regional partner or potential market 
player.  Finally, the global financial and economic crisis has hit 
the region hard, forcing countries to look inward and prioritize 
domestic development over regional integration.  In Kazakhstan, for 
example, the government is focused on stemming rising unemployment, 
maintaining the stability of the tenge, securing the solvency of the 
banking sector, and meeting the basic needs of the population for 
affordable food, housing, and energy.  Kazakhstan is therefore 
unlikely to invest much time, money, or political capital in the 
near future to overcome the many obstacles to a fully integrated, 
regional electricity market.  END COMMENT. 
 
HOAGLAND