VZCZCXRO1685
OO RUEHIK
DE RUEHTA #0049/01 0190949
ZNR UUUUU ZZH
O 190949Z JAN 10
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7220
INFO RUCNCIS/CIS COLLECTIVE 2367
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1729
RUEHKO/AMEMBASSY TOKYO 2435
RUEHUL/AMEMBASSY SEOUL 1345
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1925
RUEKJCS/SECDEF WASHDC 1775
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/AMCONSUL ALMATY 2198

UNCLAS SECTION 01 OF 03 ASTANA 000049 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC, S/EEE, S/CIEA 
STATE PLEASE PASS TO USTDA 
 
E.O. 12958: N/A 
TAGS: PGOV PREL PINR ECON EINV ENRG SOCI KZ
SUBJECT:  KAZAKHSTAN:  AES CONSIDERS ALTERNATIVES TO ARBITRATION 
 
REF: (A) 09 ASTANA 837 
     (B) 09 ASTANA 555 
 
ASTANA 00000049  001.3 OF 003 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On January 15, a senior executive from U.S. 
power company AES told the Ambassador that the company has worked 
with Kazakhstan's Ambassador to the United States to prepare a 
settlement letter to the government to resolve a long-standing 
dispute over alleged antimonopoly behavior.  The Ministry of Finance 
currently is reviewing the matter with regional officials from East 
Kazakhstan Oblast, where AES owns two combined heat and power 
plants, has concessions on two hydropower plants, and manages 
contracts for power distribution networks.  Separately, the region's 
governor blasted AES in the local press, accusing the company of 
breaking the law by unilaterally raising electricity tariffs without 
regulatory approval.  On July 31, 2009, AES filed a Notice of 
Dispute with an international arbitration court and has until 
February 11 to decide whether or not to file a formal request for 
arbitration.  The AES executive expressed optimism about the 
possibility of a settlement if Prime Minister Masimov became 
personally engaged.  END SUMMARY. 
 
AES ASSETS IN EAST KAZAKHSTAN 
 
¶3.  (SBU) In Kazakhstan, AES owns two combined heat and power plants 
(the Ust-Kamengorsk CHP and the Sogrinsk CHP in Novaya Sogra), holds 
concessions on two hydropower plants (in Ust-Kamenogorsk and in 
Shulbinsk), and has management contracts for power distribution 
networks in East Kazakhstan.  Shortly after taking office, the 
governor (Akim) of East Kazakhstan, Berdybek Saparbayev, extended 
AES's contract for five years, through February 2014, at a fixed fee 
of $100,000 per year. 
 
THE CASE AGAINST AES 
 
¶4.  (SBU) In 2007, the government of Kazakhstan assessed AES a $200 
million fine for alleged antimonopoly activities.  AES has paid $29 
million of the fine and has had another $6.5 million in assets 
frozen.  Because negotiations to resolve the dispute have not been 
successful, AES sent the Prime Minister a letter on July 31, 2009 to 
inform the government that AES will take the case to international 
arbitration.  According to Regional Vice President Mike Jonagan, 
Samruk Energo subsequently pressured AES to sell its prized 
hydropower plants (ref A). 
 
¶5.  (SBU) During the Ambassador's visit to East Kazakhstan Oblast, 
Jonagan and Saparbayev expressed their optimism on August 20, 2009, 
that the dispute could be resolved amicably.  Jonagan, however, 
privately alleged that other forces were at play, including the 
personal interest that President Nazarbayev's son-in-law Timur 
Kulibayev has shown in the AES-managed hydropower plants.  He said 
that AES simultaneously filed for international arbitration and a 
London-court injunction to prevent a Kazakhstani joint-stock company 
from obtaining confidential information about the ownership and 
registration of shares in the AES-managed two hydropower plants. 
Jonagan claimed that this joint-stock company, which he suspects 
Timur Kulibayev owns or controls, has "made a strong push" for the 
hydropower plants.  "Two or three years ago," he asserted, "someone 
-- most likely Kulibayev -- gave the order to start these court 
cases against us.  Kulibayev has a personal interest in buying 
shares in these hydropower companies.  He's now back in the game," 
as Deputy Chairman of Samruk-Kazyna, which owns Samruk Energo, which 
is the beneficial owner of the hydropower plants.  "He got these 
legal issues started, and now it's taken on a life of its own." 
 
¶6.  (SBU) In response to AES's decision to seek international 
arbitration, Jonagan said the government has engaged an 
international law firm to represent their interests, the same firm 
that represented them during litigation with K-Mobile.  Jonagan 
expressed his hope for an out-of-court settlement of the dispute and 
noted AES's willingness to amend the hydropower contracts in the 
 
ASTANA 00000049  002.3 OF 003 
 
 
government's favor in order to "normalize relations and move forward 
with a clean slate." 
 
¶7.  (SBU) The Agency for the Regulation of Natural Monopolies (AREM) 
also has criticized AES for behaving like a short-term speculator, 
not a long-term strategic investor.  AREM claims that more than 10 
years after AES's initial investment, the company still has not made 
any major capital investments at the power plants it owns and 
operates.  On a related note, the Almaty regional government 
continues to pursue back taxes from a trading company, long-defunct, 
that AES established when it first entered Kazakhstan. 
 
AES PREPARED TO GO TO INTERNATIONAL ARBITRATION 
 
¶8.  (SBU) On January 15, Jonagan told the Ambassador that he met 
earlier that day with Vice Minister of Finance Ruslan Dalenov to 
discuss the charges against AES.  According to Jonagan, Dalenov was 
defensive when told that local tax authorities had acted improperly, 
and he primarily was concerned about the financial cost of 
international arbitration.  "I understand his position," Jonagan 
said.  "He's under orders to delay, stall, delay, stall."  Jonagan 
told Dalenov that AES has retained an expensive U.S. law firm to 
advise the company on the case and is fully prepared to file the 
necessary papers to formally request arbitration on February 11, 
when the Notice of Dispute expires.  According to Jonagan, Dalenov 
asked if the government should hire its own law firm in response. 
"Considering that we have made zero progress despite six months of 
talks, I would say yes," Jonagan reportedly told Dalenov. 
 
"NO SANITY IN THIS PROCESS" 
 
¶9.  (SBU) Jonagan indicated that its new power-tariff structure lies 
at the heart of the dispute, and could offer a way out of the 
impasse.  "Currently," he complained, "there is no sanity in the 
(tariff-setting) process.  Wholesale electricity prices and 
transmission costs have just increased by 25%.  Every other retail 
power company in Kazakhstan received a tariff increase -- every one, 
except us."  Jonagan said he told Dalenov that AES's inability to 
charge market rates for power in East Kazakhstan is driving the 
company inexorably to international arbitration.  He suggested to 
the Ambassador that the government's agreement to a sufficient 
tariff increase (at least 25%) might convince AES to drop its 
arbitration claim.  "But that's going to be a tough pill for the 
Akim (governor) to swallow," Jonagan asserted. 
 
EAST KAZAKHSTAN AKIM OUTRAGED 
 
¶10.  (SBU) On January 14, East Kazakhstan's Akim Saparbayev lashed 
out at regional power-distribution company Shygysenergotrade, which 
is owned by AES.  According to local press reports, Saparbayev was 
"seriously disturbed" by the company's decision to increase 
electricity tariffs on January 1 without the consent of the 
regulator and to terminate power supply contracts with local 
enterprises.  "As the head of the region, I will not tolerate 
violations of existing legislation in East Kazakhstan, and will not 
allow this company to agitate the population," Saparbayev was quoted 
as saying.  Saparbayev reportedly also criticized AES for not 
meeting its social obligations. 
 
¶11.  (SBU) Jonagan told the Ambassador on January 15 that AES 
applied several months ago for an increase in the tariff, but the 
regional regulator returned the application and refused to forward 
it to AREM in Astana, because the company allegedly did not properly 
fill out the paperwork.  Jonagan said that Shygysenergotrade then 
published a notice in regional newspapers in East Kazakhstan, 
announcing its intention to increase electricity tariffs effective 
January 1, "provided the company receives the necessary regulatory 
approvals."  Jonagan noted that news reports, which republished the 
Shygysenergotrade announcement, omitted this critical disclaimer. 
In fact, Jonagan underlined, the company has not acted unilaterally 
to impose new rates, as Saparbayev was led to believe. 
 
 
ASTANA 00000049  003.3 OF 003 
 
 
¶12.  (SBU) Jonagan said he had a tough, tense discussion with 
Saparbayev on January 14 during which Saparbayev agreed to "do 
everything in his power" to enact a new tariff by January 26. 
Jonagan speculated that Saparbayev would push for a 10%, rather than 
the 25% or greater, increase that AES needs to remain competitive in 
the retail power market in Kazakhstan. 
 
STAND OFF WITH KEGOC 
 
¶13.  (SBU) Local press also reported on January 15 that 
Shygysenergotrade received a telegram from national power-grid 
operator KEGOC demanding that it return 15 million kilowatt hours of 
power to the grid.  KEGOC reportedly informed local authorities that 
Shygysenergotrade is violating Article 13 of the Law on Electricity 
and the March 19, 2008, Order of the Ministry of Energy and Mineral 
Resources, which determine the daily schedules for electricity 
generation and consumption.  Jonagan told the Ambassador that the 
company cannot purchase the required amount of electricity and sell 
it at the low rate set for the company in 2010.  "We are already $13 
million in debt," he said.  "We can't continue to sell electricity 
at a loss."  Jonagan said AES has applied to AREM to negotiate a 25% 
rise in the tariff.  He claimed that even an increase of that amount 
would enable the company to "just skate by.  Anything less than that 
would be a disaster." 
 
A MEETING WITH THE PRIME MINISTER 
 
¶14.  Jonagan told the Ambassador that AES senior executives 
contacted Kazakhstan's Ambassador to the United States, Yerlan 
Idrissov, who reviewed a draft settlement letter and recommended the 
company discuss the matter directly with Prime Minister Masimov. 
According to Jonagan, AES tentatively arranged to meet Masimov in 
Davos, Switzerland, during the World Economic Forum on January 23, 
but Post subsequently learned that Masimov cancelled his travel 
plans.  Jonagan suggested that a meeting with Masimov -- preferably 
on the margins of another event outside Kazakhstan -- would help to 
resolve this dispute before it goes to international arbitration. 
 
¶15.  (SBU) COMMENT:  The manner in which this dispute is managed 
will test the government's commitment to creating a favorable 
investment climate and honoring contract stability, as powerful 
interests in the East Kazakhstan region and at the center attempt to 
influence the outcome.  We are encouraged by the continued 
commitment of AES and the government to dialogue and negotiation, 
and will help facilitate a meeting between the U.S. company and the 
Prime Minister.  END COMMENT. 
 
HOAGLAND