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Cablegate: Argentina: Aes Energy Faces Challenges in Electric Sector -

VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #1324/01 3381929
ZNR UUUUU ZZH
R 041927Z DEC 09
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0148
INFO MERCOSUR COLLECTIVE
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS BUENOS AIRES 001324

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG ECON EINV PGOV AR
SUBJECT: Argentina: AES Energy Faces Challenges in Electric Sector -
As Does the GoA

REF: BUENOS AIRES 6; 08 BUENOS AIRES 1218

1. (U) This is the first in a series of cables which will examine
U.S. company operations in the energy sector in Argentina. The
series will conclude with an overview of the sector based largely
on U.S. company views.

Summary

------------

2. (SBU). AES Argentina management described their business
operations in Argentina to Ambassador, noting that low tariff rates
and delayed payments from the government are placing them in a
financial squeeze. The delayed payments are part of the
government's own financial challenges, as the GoA has been
subsidizing increasingly more expensive electricity generation and
distribution for years, in addition to keeping retail and wholesale
tariffs frozen. The GoA has also postponed both discussion of and
already agreed-upon tariff rate increases affecting AES, though AES
is optimistic that these will be addressed in early 2010. Criminal
charges against AES dating to December 2008 are not being pursued
actively, but remain pending. END SUMMARY.

Subsidies: No Longer Enough to Go Around

--------------------------------------------- -------

3. (SBU) AES Energy Argentina, the largest U.S. company in
electricity generation in the country, met with the Ambassador on
November 25 to detail their challenges and opportunities in doing
business in Argentina. Country Manager Fernando Pujals called the
sector "highly regulated," noting that tariff rates fell well short
of actual costs and that the sector was only remaining afloat
thanks to "huge" government subsidies. The bulk of these subsidies
go to GoA-owned electricity wholesaler CAMMESA, which purchases all
of the electricity CAMMESA generates. According to Pujals, tariffs
are so low that "CAMMESA collects only 25% of its costs" from
electric retailers, and the rest of its income is government
subsidies.

4. (SBU) Electricity tariff rates - both at the wholesale and
retail level - have been frozen by the GoA since the 2001/2
economic crisis, with the GoA subsidizing the differences,
primarily through payments to CAMMESA. Pujals noted that the GoA's
overall fiscal situation was essentially healthy up until 2008,
which allowed the GoA to continue to pay growing subsidies without
fiscal discomfort (see Ref B). However, he stated that subsidies
in areas such as transportation and construction, combined with
financial woes related to the current economic downturn, have
reduced that ability to subsidize the electric sector. Payments to
CAMMESA have fallen, and CAMMESA's response has been to withhold
payments due to its suppliers - including AES.

5. (SBU) According to a Resolution issued in 2008 by Planning
Minister Julio De Vido, CAMMESA will pay arrears to a company
immediately if an equivalent amount has been reinvested by the
company in projects to maintain power generation capacity. AES to
date has received approvals for disbursement of nearly USD84
million under this program, but has received only USD4 million.
This is the second-lowest rate for the ten companies which,
according to CAMMESA data, have qualified for payments under this
program, and far below the average payment of 38% of approvals;
AES' approved total is the largest of all companies. This sizeable
debt, compounded by the low rates AES has been receiving for years,
has put the company in its own financial squeeze. As Guillermo
Baistrocchi, AES Institutional Relations Manager, told the
Ambassador, "If we don't collect (on this debt) in the first half
of 2010, we're going to be in trouble."


Tariff Rates and Court Cases

----------------------------------

6. (SBU) In 2005, the GoA published a formal notification that
EDELAP's (an electricity retailer owned by AES which serves La
Plata, the capital of Buenos Aires province) concession would be
renegotiated; such negotiations would include new tariff rates that
were to take effect in February, 2006. The renegotiations and
dates for new tariffs have since been postponed several times.
According to Baistrocchi, Secretary of Energy Daniel Cameron has
told AES that a meeting to review tariff rates will take place in
January 2010. Pujals told Ambassador that "De Vido knows he needs
to increase tariffs," both at the retail and wholesale levels, but
admitted that it wouldn't be easy politically. The GoA learned
this the hard way after allowing electricity rates to rise in a
Buenos Aires suburb in November 2008, only to roll them back after

protests and judicial orders. Baistrocchi noted that, following an
investment by AES and other companies in two new power plants which
just came fully online, the GoA has yet to fulfill its own
regulation, issued in 2004, to raise the payment for electricity
from those plants from 12 pesos (about USD 3.25) to USD 10.

7. (SBU) In December 2008, GoA-owned electricity regulator ENRE
filed civil and criminal charges against AES and its directors,
publicly alleging "grave accounting irregularities" at EDELAP. AES
leadership met in January 2009 with Minister De Vido and
immediately afterward announced new investment in Argentina (see
Ref A). While the GoA has taken no further legal action against
AES, the charges remain pending. Baistrocchi expressed his hope
that the charges would soon be dismissed, but noted that there is
no court date set to address the issue. Pujals does not believe
that the EDELAP charges are the reason for AES to receive such
small payments from CAMMESA, but did not rule that out.

AES Company Background

--------------------------------

8. (SBU) AES entered Argentina in 1993 with the acquisition of an
existing power plant in north Buenos Aires province, which was
AES's first investment anywhere outside of the U.S. Since then,
AES has invested more than $1 billion in the country's power
sector, and runs a combination of gas, coal, oil and hydro power
plants and two electric utility companies. AES produces over 2,800
MW, about 13% of the country's total power generation capacity, and
employs 1,050 people in Argentina. AES's two distribution
businesses serve over 450,000 customers in the province of Buenos
Aires.

Comment

------------

9. (SBU) Challenges in power generation explain much about GoA
policy. While keeping rates low following the 2001/2 crisis helped
stabilize the socio-political situation, keeping them low proved
too tempting to ignore. However, this has required increasing
inflows of cash, which is one reason the GoA sought new revenues
from farmers in 2008, and is one reason for its current efforts to
repair relationships with international credit markets via offers
to bond holdouts and Paris Club creditors. Should those efforts
fail, the GoA may well have no choice but to let rates rise,
despite the uncertain reaction. Should the GoA indeed access new
credit lines, pressure to normalize the electric sector would fall,
and AES might still be left empty-handed - or more likely, with
just enough cash to keep them producing at current levels.
MARTINEZ

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