Viewing cable 08SANSALVADOR1257
Title: ELECTRICITY COMPANIES WORRY ABOUT POLITICAL

IdentifierCreatedReleasedClassificationOrigin
08SANSALVADOR12572008-11-05 20:34:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy San Salvador
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RR RUEHWEB

DE RUEHSN #1257/01 3102034
ZNY CCCAA ZZH
R 052034Z NOV 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 0278
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L SAN SALVADOR 001257 
 
SIPDIS 
 
E.O. 12958: DECL: 11/05/2013 
TAGS: ECON ENRG EPET EINV ES
SUBJECT: ELECTRICITY COMPANIES WORRY ABOUT POLITICAL 
FALLOUT FROM SUBSIDY DISPUTE 
 
REF: A. SAN SALVADOR 1140 
     ¶B. SAN SALVADOR 1241 
 
Classified By: Ambassador Charles L. Glazer for reasons 1.4 (b), (d) 
 
¶1.  (C) SUMMARY:  Managers of El Salvador's four private 
electricity companies are contesting a GOES decree forcing 
distribution companies to restore subsidized rates without 
any GOES commitment to pay subsidies to the companies.  They 
believe they are following the law by applying unsubsidized 
rates, but they fear government and public backlash and 
reported that some customers are already withholding payments 
until the conflict is resolved.  Companies warn that by 
freezing rates without paying subsidies, the GOES is risking 
a financial crisis that may disrupt power supplies during an 
election year.  The DCM assured the companies that the 
Embassy will continue to privately support efforts to resolve 
of this issue but will refrain from raising it publicly.  END 
SUMMARY. 
 
GOES CANNOT PAY SUBSIDIES BUT WON,T RAISE RATES 
--------------------------------------------- -- 
 
¶2.  (SBU) In meetings on October 31 and November 3, managers 
of AES, Duke Energy, Del Sur and Cenergica updated DCM, 
FCSoffs, and Econoffs on a dispute over subsidy payments and 
electricity tariffs.  To avoid a rate increase, the GOES 
needed agree by October 12 to repay $93.7 million in 
electricity subsidies accumulated from April-October 2008. 
The Finance Ministry insists that state-owned generation 
company, CEL, is responsible for the entire subsidy even 
though average monthly subsidies have exceeded CEL's average 
monthly revenue.  CEL reportedly offered to pay $28 million 
and is soliciting a $66 million loan from the Central 
American Integration Bank (BCIE) to cover the remainder. 
 
¶3.  (C) Electricity companies want a signed GOES commitment 
to monthly payments of $15.6 million to pay off the current 
subsidy debt by April 2009, when a new payment schedule will 
need to be negotiated for the October-April subsidies.  One 
company manager noted the GOES has routinely provided such 
commitments in the past, but commented that "this time, the 
hand is shaking" because the GOES does not have funds to 
fulfill this commitment.  The GOES proposed to make partial 
subsidy payments until December, when the GOES would hope to 
confirm funding for the remainder.  Electricity firms 
rejected this offer, but proposed that, if the government 
cannot make full payments, they could use partial payments to 
maintain the subsidy for low income consumers, while allowing 
other customers and industry to pay unsubsidized rates. 
Company managers were also skeptical that the GOES could 
obtain loans from "a development bank" to cover subsidy 
shortfalls. 
 
¶4.  (SBU) Lacking a GOES commitment to pay the subsidy, 
electricity companies published new rates on October 12, as 
required by law, and started to apply them on October 13. 
The GOES later issued decrees postponing the deadline for 15 
days until October 27 and an additional month until November 
¶27.  Electricity companies believe these decrees are invalid 
since the first decree was not published until after the 
original deadline.  On October 31, the electricity regulator, 
SIGET, issued a resolution ordering companies to restore 
subsidized rates and reimburse customers for past charges 
exceeding these rates. 
 
FOLLOWING THE DOMINICAN REPUBLIC'S EXAMPLE 
------------------------------------------- 
 
¶5.  (SBU) Distribution companies plan to appeal SIGET's order 
to the SIGET board, which they expect will be rejected, and 
then to the Supreme Court, but do not expect a quick 
resolution.  The firms warned that the sector may face a 
financial crisis with resulting blackouts like those in the 
Dominican Republic if the GOES does not continue full subsidy 
payments or allow rates to rise.  The distributors need the 
next subsidy payment by November 20 in order to pay their 
monthly energy bills and allow generators to continue 
ordering fuel. 
 
¶6.  (C) Company managers expressed concern that the GOES has 
publicly promised subsidized electricity rates even after 
distribution companies started applying unsubsidized rates on 
October 13.  AES manager Fernando Pujals commented that the 
conflict is likely to confuse customers, who are already 
starting to withhold payments to await the resolution of the 
dispute (NOTE: electricity companies cannot cut off a 
customer until after 60 days of non-payment.  END NOTE).  The 
companies plan to issue public statements, to meet with 
business associations, customers and influential Salvadorans 
 
to explain the situation, and, at the advice of the 
Salvadoran Embassy in Washington, to write letters to 
President Saca.  U.S.-based AES, the country's largest 
distributor, is also considering an investor rights complaint 
under CAFTA-DR.  The companies are confident that they can 
legally increase rates, but worry that more publicity during 
an election will serve no one's interest. 
 
¶7.  (C) DCM informed the company representatives that the 
Embassy had and would continue to raise the issue privately 
with senior GOES officials but not publicly criticize the 
GOES.  DCM also cautioned that the representatives needed to 
make certain all their actions complied with existing 
Salvadoran laws. 
 
¶8. (C) DCM advised the company representatives that he'd also 
discussed their situation with ARENA Vice-Presidential 
Candidate Arturo Zablah on November 3 (septel).  Zablah 
responded that the GOES must abide by its contracts and 
stated that, together with Presidential candidate Rodrigo 
Avila, he would raise the issue with President Saca.  The 
company representatives said that they, too, met with Zablah 
on November 3 and received similar assurances.  They added 
that Zablah had also called Minister of Finance Handal, but 
Handal had responded that this subsidy was CEL's problem. 
 
¶9.  (C) COMMENT:  Unless CEL secures a loan to cover the 
subsidy, the GOES faces an unappealing choice between 
backtracking on its political commitment to maintain 
electricity rates, or risk a financial crisis that may 
seriously disrupt power supplies during an election year. 
Even if CEL is able to obtain outside financing and defuse 
the current crisis, the GOES will owe the electricity 
companies at least another $42 million in subsidies in April 
¶2009.  In the long run, focused subsidies would be more 
sustainable and could alleviate some of the GOES's short-term 
liquidity problems (ref B).  In the short term, GOES edicts 
are forcing power companies to lose money, an experience that 
will hurt El Salvador's image as a business friendly country. 
GLAZER