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DE RUEHDG #0043/01 0342123
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FM AMEMBASSY SANTO DOMINGO
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RHEBAAA/DEPT OF ENERGY WASHINGTON DC
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UNCLAS SANTO DOMINGO 000043 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EFIN DR
SUBJECT: DR: Electricity Sector at a Crossroads 
 
REF: A) 09 SANTO DOMINGO 515; B) 09 SANTO DOMINGO 817 
 
SUMMARY 
 
 
 
¶1. (SBU) Six months ago, President Leonel Fernandez shook up the 
dysfunctional electricity sector by appointing businessman Celso 
Marranzini - a long-time critic of the status quo - as head of the 
Dominican Corporation of State-Owned Electricity Companies (CDEEE). 
Marranzini has since embarked on a comprehensive reform agenda, 
supported by loans from the international financial institutions 
(IFIs).  Emboffs recently met with Marranzini, electricity 
generators, and distributors to obtain their assessments of the 
sector's current status and future prospects.  There is a 
possibility for a true sea-change in a sector long considered an 
albatross around the country's neck, but questions remain about 
precisely how the reforms will be accomplished.  END SUMMARY. 
 
 
 
MARRANZINI'S APPOINTMENT 
 
 
 
¶2. (SBU) Under Marranzini's predecessor, Radhames Segura, a major 
political operator in the ruling Dominican Liberation Party (PLD), 
the CDEEE was the subject of numerous allegations of political 
favoritism and rampant corruption, and was criticized for the 
absence of a strategy to address the electricity sector's 
increasing problems (Ref A and B).  The CDEEE was in debt to 
generators for approximately USD 500 million, and up to 40 percent 
of the generated power was lost or stolen.  Blackouts increased in 
 
frequency, and popular discontent with the situation resulted in 
street protests.  With the IFIs conditioning any standby agreement 
or disbursement of future loans on reform of the sector, and with 
congressional/municipal elections approaching in May 2010, 
Fernandez responded dramatically by naming  Marranzini, a respected 
businessman and harsh critic of the Government's handling of the 
electricity sector, to replace Segura. 
 
 
 
IMF STAND-BY AGREEMENT REQUIRES ELECTRICAL SECTOR REFORM 
 
 
 
¶3. (U) Meanwhile, as pressure built on Fernandez in the summer of 
2009 to take drastic steps to address the problems in the 
electricity sector, the Dominican Government (GoDR) was facing a 
crippling lack of funds as revenues plunged due to declines in 
exports, tourism and remittances brought about by the global 
economic crisis.  After first publicly disavowing another program 
with the International Monetary Fund (IMF), the Fernandez 
administration eventually shifted course and approached the Fund. 
In November 2009, it signed a USD 1.7 billion Standby Agreement 
(SBA) , which also freed up USD 450 million worth of funds that had 
been put on hold by the Inter-American Development Bank (IDB) and 
the World Bank (WB). The SBA Letter of Intent provided for six 
areas of improvement for the electricity sector: 
 
 
 
*         Implementation of a flexible tariff system that responds 
to market fuel prices; 
 
*         Elimination of the PRA (blackout reduction subsidy 
program); 
 
*         Reduction of technical losses and improved metering to 
reduce theft; 
 
*         Improved management of distribution companies; 
 
*         External audits of CDEEE and distribution companies; 
 
*         Development of a plan to invest in new generation and 
distribution capacity. 
 
 
 
MARRANZINI'S PLANS 
 
 
 
¶4. (U) Marranzini, lauded for bringing a businessman's approach to 
management, immediately began addressing core problems.  In the 
first few weeks of his tenure, he fired hundreds of Segura's 
patronage appointments, worked diligently to pay down the debt owed 
by the GoDR, and continued to focus on key problems that hinder the 
sector's long-term prospects.  In a January 6, 2010, meeting with 
Charge and Emboffs, Marranzini outlined the next steps in his 
reform program.  One of the more important goals is to eliminate, 
by June 2010, the Blackout Reduction Program (PRA), a geographic 
subsidy scheme that includes everyone within a particular 
neighborhood regardless of use of services or ability to pay. 
Program costs are borne by the GoDR (75 percent) and distribution 
companies (25 percent).  There are 474,000 PRA users nationwide, 
the equivalent of 21 percent of total electricity users, and the 
program costs USD 120 million annually.  Marranzini told Emboffs 
that he expects the PRA will be replaced with a direct cash 
transfer designed to provide 829,000 poor families with 100kw of 
electricity per month at a cost comparable to the PRA.  He will be 
helped in accomplishing this task by the IBD's Fiscal Strengthening 
Program, approved in October 2009, which includes specific 
guidelines for addressing the electricity subsidies and the PRA. 
 
 
 
¶5. (U) Resolving the PRA is not Marranzini's only IFI-mandated 
challenge.  The SBA also requires the CDEEE to pay, by the end of 
2010, any current electricity generation debt that is more than 45 
days in arrears.  Near the end of 2009, the total current debt was 
USD 280 million. Thanks to the IFI support, in December 2009, the 
GoDR paid USD 190 million of the USD 280 million owed in current 
debt, leaving a balance of USD 90 million.  Marranzini said he 
expects the balance to be paid by the end of January 2010.  (NOTE: 
As of February 2, CDEEE could not confirm the balance had in fact 
been paid.)  However, in addition to the current debt, the GoDR 
also owes USD 150 million to generators in frozen (older) debt. 
How the remaining frozen debt will be paid is unclear. 
 
 
 
¶6. (SBU) Beyond paying off the debt, Marranzini also has to find a 
way to stop its accrual.  As noted above, before his tenure, the 
electricity sector experienced losses nearing 40 percent, with 
almost 30 percent coming from theft and non-payment.  This gap 
between collection and generation was what pushed the CDEEE into 
debt in the first place, and Marranzini has attacked the problem 
with gusto.  Over the past six months, the CDEEE has reduced 
monthly losses - reportedly increasing payments from 30 percent of 
the bill to 90 percent - but continues to operate at a deficit. 
The CDEEE has increased the monthly tariff by 12 percent and 
simplified the tariff rate structure for residential customers. 
However, according to Marranzini, monthly bills from the generators 
are approximately USD 121 million while  monthly collections are 
only USD 100 million.  Marranzini acknowledged that a key component 
of the increased collections was the need to double the number of 
meters nationwide.  Estimates vary but at least one million new 
meters will be needed to accurately track usage and properly bill 
customers.  The World Bank intends to help the CDEEE improve 
metering in a future program. 
 
 
 
¶7. (U) At the meeting with Emboffs, Marranzini provided no new 
information about the prosecution of electricity theft, a key tool 
in his effort to improve collections.  In public fora, he has 
declared that he would actively seek punishment of businesses and 
residences with illegal connections.  At an American Chamber of 
Commerce (AMCHAM) lunch in November 2009, Marranzini's promise to 
prosecute electricity theft was met with hearty applause by an 
overwhelmingly Dominican audience. 
 
NEW PRESIDENTIAL DECREE PROVIDES TOOLS TO ADDRESS DISTRIBUTION 
PROBLEMS 
 
 
 
¶8. (U) The Dominican electricity sector is comprised of five 
entities: the CDEEE, the generators, and the three distributors -- 
EdeNorte, EdeSur, and EdeEste (collectively called the "Edes").  As 
noted above, when Marranzini took his position in August 2009, he 
fired hundreds of CDEEE employees - a cost-cutting measure widely 
expected of the former businessman when he arrived at an 
organization legendary for its patronage positions.  Control of the 
Edes eluded Marranzini, however, until January 5, 2010, when, by 
Presidential decree, the CDEEE head's powers were expanded to 
include management of the Edes. 
 
 
 
¶9. (SBU) At his meeting with the Charge and Emboffs, Marranzini 
referred to the Edes as "islands of power."  The Edes should not be 
entities of the state and he set forth a three-year plan to both 
centralize electricity distribution under one entity and 
reprivatize the Edes.  Marranzini described various tricks used to 
defraud the Edes of payments, including false electronic payments 
and electronic roll-backs of metered electricity use.  He has set 
June 2010 as his target date to have SAP software running at CDEEE, 
forcing the three Edes to better monitor account changes and 
payments.  Staff reductions are also expected at the Edes.  Armed 
now with the sweeping powers given to him by the Presidential 
decree, Marranzini waxed philosophical, saying a failure on his 
part now to manage the electricity sector would be a failure for 
the private sector as well.  He is clearly aware that, after 
leading the criticism for years, he now must prove that private 
sector-style management can be effective in the Dominican 
government 
 
 
 
A VIEW FROM THE PRIVATE SECTOR 
 
 
 
¶10. (SBU) On December 29, 2009, Econoffs met with a representative 
of AES Dominicana, a U.S.-based company that provides 36 percent of 
the electricity in the DR.  The representative suggested that the 
GoDR needs to establish a variable billing structure based on 
market prices, noting that such a system already exists for 
gasoline and diesel, whose prices at the pump change every Friday 
based on market prices.  (The aforementioned IDB program also seeks 
to help the CDEEE charge rates reflective of production costs.) 
His thinking - in line with the IMF's suggestions - is that this 
system would help equilibrate usage payments with generation costs. 
In a December 9, 2009, conversation with Pol/Econ Counselor, before 
Marranzini's powers were extended,  the same representative opined 
that Marranzini was on the right track, but that, unless he gained 
power over the Edes, his reforms could not be properly implemented. 
The representative considers the presidential decree and control of 
the Edes a step in the right direction.  To achieve lasting changes 
in the electricity sector, however, he believes that President 
Fernandez, the President of the National Energy Commission, the 
Edes, and the Solicitor General all have to act in unison.  With 
all of those parties participating, he predicted the entire energy 
sector could be turned around in 36 months. 
 
 
 
A VIEW FROM A DISTRIBUTOR 
 
 
 
¶11. (SBU) On January 7, 2010, Econoff met with Federico Valera, 
Manager of Energy Purchasing and Regulation, for EdeSur, one of 
three state-owned distribution companies, to obtain an assessment 
from the electricity distributors regarding the challenges they 
face.  Valera highlighted the Edes' current ignorance regarding 
exactly who is using electricity and how much each user is taking. 
Besides the inefficiency inherent in the PRA, electricity is also 
severely under-metered in the DR.  As noted above, roughly 40 
percent of all electricity generated is lost, either due to theft 
(30 percent) or technical inefficiencies (10 percent). It is 
estimated that one million unmetered users currently receive 
electricity free of charge.  Valera recommended that short- and 
mid-term investments should be focused on installing meters, rather 
than constructing new generation facilities.  Increased metering, 
in his opinion, would achieve two goals:  (1) it would increase 
revenue collection and thus reduce or eliminate the monthly 
deficits and (2) it would reduce electricity demand as users who 
previously received electricity free of charge would invariably 
lessen their consumption when faced with an actual electricity 
bill. 
 
 
 
WHAT LIES AHEAD? 
 
 
 
¶12. (SBU) The AES representative opined that the GoDR needs a 
national energy plan to help guide its investments and guarantee 
future electricity demand is met.  When asked about a national 
energy plan, Marranzini was less enthusiastic.  He is focused on 
the next three years and seems to have a clear vision for the 
immediate changes that are needed:  improved metering, increased 
revenue collection, elimination of the PRA, and control over (and 
eventual reprivitization of) the Edes are all changes that will 
improve the electricity sector. 
 
 
 
¶13. (SBU) One of the ironies of the Dominican electricity sector is 
that the generators have more than enough capacity to meet demand - 
but only when all systems are on-line.  Dominican law requires 
generators to continue providing energy as long as they have a fuel 
supply.  Since the GoDR was traditionally months in arrears in its 
payments to the generators, there was less financial incentive for 
the generators to keep all of their plants on-line.  Generator 
representatives have told Econoffs on more than one occasion that 
"system repairs" and "scheduled maintenance" are euphemisms for a 
willing reduction of the energy supply in response to delayed 
payments. 
 
 
 
¶14. (U) That said, demand is expected to outpace total energy 
availability in 2013.  According to AES, USD 2.5 billion in 
generation investments are needed over the next five years to meet 
anticipated demands for electricity .  Commitments to constructing 
new electricity generation plants continue to receive the attention 
of the press.  Almost monthly, there are announcements of new 
proposals  to build power stations - many coming from far-flung 
countries such as Libya and Korea.  Most recently, the GoDR 
announced a German-Emirati group will construct a 600mW natural gas 
plant near Manzanillo and another 800mW plant will be constructed 
in an undetermined location by a Canadian firm.  Marranzini 
confirmed the newspaper reports of the 600 and 800 mW plants and 
seemed confident that they would come on-line as planned. 
 
 
 
COMMENT 
 
 
 
¶15. (SBU) The changes made under Marranzini's tenure suggest a 
brighter future for the energy sector.  President Fernandez's 
recent decree regarding the Edes is a strong show of support for 
the CDEEE director's efforts.  If Marranzini is able to pay off 
debt and eliminate the operating deficit, he will likely win over 
the support of the generators.  However, doing so will likely 
encounter resistance from the distributors - which are controlled 
by a number of people who stand to lose from a more efficient 
sector - and from those consumers, particularly businesses, that 
have become accustomed to free power through theft or subsidy 
(particularly the PRA). Many questions remain to be answered.  How 
will one million new meters be installed and incorporated into the 
billing system?  How will electricity theft and failure to pay 
bills be addressed?  How will the distributors and consumers 
respond to the reforms?  Will any of the rumored future power 
plants actually be constructed?  So far, the GoDR and the IFIs have 
identified the "what" but they are soon going to have to confront 
the "how."  Nor should we expect the more politically unpopular 
measures to be taken until sometime after the May 2010 mid-term 
elections.  END COMMENT. 
 
 
 
¶16. (U)  MINIMIZE CONSIDERED. 
Lambert