VZCZCXYZ0455
RR RUEHWEB

DE RUEHSN #1184/01 3481655
ZNR UUUUU ZZH
R 141654Z DEC 09
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 0125
INFO WHA CENTRAL AMERICAN COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SAN SALVADOR 001184 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EINV ECON ES
SUBJECT: ELECTRICITY SECTOR REFORMS THREATEN PRIVATE SECTOR 
PROFITABILITY 
 
REF: 08SANSALVADOR905 
 
¶1.      SUMMARY. Proposed regulatory reforms in the electricity 
sector will introduce a cost-based pricing system with publicly bid 
long-term contracts, designed to promote transparency in energy 
costs, reduce price volatility, and foster healthy competition in 
the sector.  While both private sector energy generator and 
distribution companies support the transition to a cost-based 
model, the generators have criticized several key elements of the 
reform which they believe, if not properly modified, could damage 
profitability and prompt companies to leave the Salvadoran market. 
END SUMMARY. 
 
 
 
¶2. (SBU) The GOES plans to implement new electricity regulations in 
June 2010 that introduce a framework for long-term publicly bid 
contracts between electricity generators and distributors and 
establish pricing formulas for wholesale electricity.  The proposed 
reforms will transition the sector from a marginal cost "spot 
market" methodology to a cost-based pricing system.  Currently, 
electricity is sold on the spot market in marginal cost increments, 
where the highest price per unit purchased each hour determines the 
rate that all generators receive, regardless of the true cost of 
energy produced.  The current price regime creates volatility in 
electricity prices and led the GOES to intervene for political 
reasons in the market several times to freeze electricity prices 
(see reftel). 
 
 
 
¶3.  (SBU) The proposed cost-based model will have two price 
components: a capacity payment for fixed costs and a variable 
payment for variable costs such as fuel.  Generators will be 
required to calculate their capacity payment using a gas turbine 
model, which represents the lowest capacity cost in the industry at 
$6.75 per Mega-Watt Hour (MWH), but has high variable costs.  The 
reform also calls for 50 percent of the total energy generated by 
private sector companies to be sold through publically bid 
long-term fixed contracts by 2012, with the remainder sold on the 
spot market and through private bilateral contracts. 
 
 
 
¶4.  (SBU) Private sector electricity generators and distributors 
are in general agreement that the transition to a cost-based model 
is a positive step and will bring El Salvador in-line with modern 
industry standards already in place in the majority of Central 
America.  However, generators assert the proposal fails to capture 
the true costs of generation.  According to Alberto Triulzi, 
President of Cenergica, and Carlos Polanco, Director of Commercial 
Development at Duke Energy, executives from the two largest private 
generators in the country, the primary flaw in the GOES model is 
that none of the generators in El Salvador utilize gas turbine 
technology.  Triulzi said their motors cost three-times as much as 
a gas turbine, although their variable costs are much lower.  He 
said the Salvadoran Electricity Regulator (SIGET) has argued that 
generators can compensate for the difference by increasing their 
variable costs.  Their variable costs will be audited, however, and 
they are therefore unable to artificially inflate these costs to 
compensate for such a large difference.  Triulzi and Polanco stated 
the use of the gas turbine model for capital costs is a thinly 
veiled attempt to keep energy costs low at the generators' expense. 
 
 
 
 
¶5.  (SBU) Triulzi and Polanco also criticized the approach to 
long-term contracting.  They argue that contracting out only 50 
percent of the demand does not provide the stability needed in 
order to guarantee existing investments or attract new investment. 
In their view, the GOES should follow the example of Guatemala and 
Panama where 100 percent of demand is contracted.  Polanco said 
this factor recently led Duke Energy to decide upon building a 
coal-fired plant in Guatemala instead of El Salvador because banks 
are more willing to provide credit based on the added stability of 
long-term contracts.  Additionally, both complained that the 
state-owned CEL and La Geo, which supply 60 percent of the 
country's electricity, are not required to participate in long-term 
contracts. 
 
 
 
¶6.  (SBU) Private sector groups and U.S. owned generation and 
distribution companies have been lobbying the Salvadoran 
 
 
Superintendent of Electricity Regulation (SIGET) to modify the 
proposal.  However, generators and distributors have significant 
differences in opinion over the provision on long-term contracts. 
According to Ingrid Mendoza, Commercial Planning Manager of the 
distributor Delsur, long-term contracts for 100 of demand represent 
a huge financial risk.  Mendoza said the Salvadoran law does not 
provide geographic exclusivity to distribution companies and 
permits other companies to enter into their territory and "poach" 
large profitable clients.  Under existing law, clients in their 
geographic area can enter into private contracts with secondary 
companies who offer to provide energy at a lower cost and use their 
electric grid through a fee. 
 
 
 
¶7.  (SBU) On December 7, Econoff discussed the reforms with 
Geovanny Hernandez, the Electricity Regulation Manager at SIGET. 
Hernandez said the reforms were originally developed in 2005 during 
the Saca Administration, but at the time, the former Superintendent 
did not meet with the private sector and refused to consider 
changes to the model.  Hernandez said the new Superintendent, Tomas 
Campos, has already held several meetings with the private sector. 
Hernandez said the Superintendent agrees with the argument that 
mandating only 50 percent of electricity demand in long-term 
contracts is not sufficient to guarantee new investment or to 
reduce price volatility, but he added that 100 percent may not be 
the answer.  Hernandez said they are considering supporting a 
modification to 80 or 90 percent of demand.  Hernandez also 
acknowledged that distribution companies face financial risks with 
long-term contracts and SIGET is analyzing possible solutions. 
 
 
 
¶8. (SBU) COMMENT: The transition to a cost-based model is a 
positive development for the energy sector and will provide needed 
transparency and stability to electricity prices.  The planned 
reforms will align El Salvador with regulation standards already in 
place in neighboring Central American countries, which will assist 
in harmonizing Central American Electrical Interconnection System 
(SIEPAC) regulations.  The pragmatic approach taken by SIGET in 
negotiations with the private sector demonstrates a willingness to 
find mutually acceptable solutions.  Long-term contracts will help 
attract much needed private investment in the sector.  The 
exclusion of state-owned companies from participating in long-term 
contracts shows a troubling bias affecting the end users of energy 
and limiting economic growth. 
BLAU