Cablegate: Minister States Goe Will Pay $38 Million in Arrears To


DE RUEHQT #0322/01 0981414
P 071414Z APR 08




E.O. 12958: N/A
SUBJECT: Minister States GOE Will Pay $38 Million in Arrears to
Machala Power

Ref. a) Quito 314, b) 06 Quito 2218

1. (SBU) Summary. The Minister of Electricity publicly announced
that the GOE would pay $38 million of the arrears due to U.S.
electricity company Machala Power. Machala Power reports that the
GOE has said it intends pay all of the $70 million in arrears, but
needs to develop a legal mechanism to pay the balance. The
Minister's remarks followed an arbitration panel's ruling that it
will proceed with an arbitration case filed by Machala Power. If
the government clears the arrears, Machala Power and other
electricity companies will switch some of Ecuador's thermal electric
plants from imported diesel to inexpensive locally produced natural
gas. End summary.

2. (U) On March 28, Minister for Electricity and Renewable Energy
Alexi Mosquera announced in the media that the Government of Ecuador
would pay $38 million, a substantial portion of the arrears that the
state-owned electricity distributors owe to U.S.-owned electricity
company Machala Power. He added that there is an agreement with the
Ministry of Finance to make the payment.

3. (SBU) On April 2, Machala Power president John Tomich told
EconCouns that he had yet to talk to Mosquera about the statement.
He said that he had had a meeting with senior GOE officials on April
1, but the senior energy officials, including Mosquera, were called
away by the President and could not make the meeting. Tomich said
the remaining officials gave positive signals but could not address
the specifics of the government's plans.

4. (SBU) Tomich said that the total arrears to Machala Power are
about $70 million, and that the government acknowledges that it
needs to clear all the arrears. He said that the $38 million
mentioned by Mosquera corresponds to the arrears due to Machala
Power up through 2005. A 2006 law established a legal mechanism for
the GOE to pay electricity generators for arrears incurred by
electricity distributors between 1999 and 2005 (reftel b). Tomich
added that previously Mosquera had said that the government intends
to also pay the roughly $32 million in arrears from 2006 onwards,
but the government needs to find a mechanism to do so.

Arbitration Case Moves Forward

5. (SBU) On March 5, an ICSID arbitration panel ruled that it has
jurisdiction over an arbitration request filed by Machala Power.
Machala Power has asked for $370 million in arrears and other
losses, although Tomich has repeatedly stressed that his company
would prefer to reach a settlement than continue with arbitration.
Mosquera's public comments about paying part of the arrears followed
the March 21st public announcement of the panel's decision. Tomich
opined that losing the jurisdictional argument may spur the GOE to
settle the arrears.

A Potential Win-Win for the GOE and Machala Power
--------------------------------------------- ----

6. (SBU) Machala Power is owned by Noble Energy. Noble also owns a
parallel company in Ecuador, EDC, which produces natural gas that is
consumed by Machala Power to generate electricity. The gas is
produced in the Gulf of Guayaquil and piped to the electricity plant
located in Machala, the capital of El Oro province. In an earlier
meeting with the Ambassador, Tomich described an ambitious plan that
Noble Energy would implement if the arrears are paid.

7. (SBU) Machala Power is planning to merge its electricity
operations with those of another U.S. company, Duke Energy. Duke
would bring its generating equipment, currently in Guayaquil and
running on subsidized diesel and fuel oil, to Machala, where it
would use natural gas produced by EDC. Duke would also manage the
electricity operations for Noble/Machala Power. A third company,
which has a barge that uses diesel to generate electricity, might
also move to Machala and use natural gas. Noble/EDC would focus on
natural gas production, which would require more investment to
generate the additional gas that would be used the converted
generating units.

8. (SBU) Tomich said that the GOE would save over $100 million
annually from this program, since the locally produced natural gas
is significantly cheaper than the diesel and fuel oil that Ecuador
imports and the GOE subsidizes. For this to happen, the GOE would
have to clear its arrears and install additional electricity
transmission lines from Machala to the national grid.

9. (SBU) Tomich said that Electricity Minister explained this
program to President Correa. Correa reportedly ordered his economic
team to come up with a plan to clear the arrears with Machala Power
and address other requirements for the program to go forward.

According to Tomich, Correa has expressed frustration that Machala
Power's problems have not been resolved.

10. (SBU) Comment: Tomich said that he is cautiously optimistic
that the government will settle Machala Power's arrears, given the
benefits this would bring Ecuador. He did caution that Machala
Power had received hopeful indications from previous governments
that were never fulfilled. One difference this time around is that
the Correa administration is flush with cash and might be anxious to
avoid arbitration with Machala Power after paying at least $100
million to settle an arbitration award in favor of Occidental
Petroleum (reftel a).


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