How can the beleaguered Dominican power sector be fixed? Four experts share their insights.
BY LATIN AMERICA ADVISOR
Fitch Ratings released a special report earlier this month suggesting that the Dominican Republic's electricity sector is "on the brink of financial distress," and stating that it will be up to the government of President Leonel Fernandez, recently re-elected in a landslide, to "fix the system." What economic and political pressures are driving the DR's electricity problems? How can the DR's power sector be fixed? How much are rolling blackouts and electricity shortages hurting the nation's economic prospects and social stability?
Freddy E. Nuñez, Electricity Manager for the Dominican Republic’s National Energy Commission: Following the capitalization process in 1999, the electric sector received a large boost in generation, which added some 1000 MW to the system, creating more guarantees and stability in the electric system.However, the problem of distribution remained, worsened by the Madrid agreement [that established contracts for the sale and purchase of electricity] signed by the last PRD government [under President Mejia], which raised the price of energy purchased from generating companies and prolonged the length of contracts. Together with deficiencies in management, high operation costs, and heavy losses, this has caused a significant crisis in distribution, despite a considerable level of recovery on the part of the distributors (mostly under state control) in terms of the energy billed versus the amount collected. If we add to this the growth of electricity subsidies from the central government due to an increase in the price of fossil fuels, the electric sector faces both a financial deficit and a deficit in energy availability. The first [way to fix the system] is to decrease technical and nontechnical losses, by eliminating the low power levels in the distribution system, and investing in the improvement of distribution lines. Secondly, we need to change the generation matrix by introducing cheaper and more environmentally friendly fuels, and increasing the installed capacity by 100 MW in the next five years. Third, we must eliminate electricity fraud and non-technical losses. This can be achieved by protecting the transmission lines so people without contracts cannot access them, focusing subsidies only on those who actually need them, and liberalizing consumer electric rates to better reflect the real costs of energy. Fourth, we must improve management of the distribution companies to offer more efficient service. Finally, we must promote the use of renewable and alternative sources of energy. [Blackouts and scarcity of electricity] cause significant annoyances to citizens and generate considerable costs to citizens and businesses due to investment in alternative systems (small electric plants, power inverters, etc.). They can also set off public protests, which usually lead to disorder and ungovernability.
Elena Viyella de Paliza, President of Monte Rio Power Corp.: Power outages, blackouts and collection problems have troubled the Dominican Republic since the early 1970s. The initial capitalization reform process started in 1999 by President Fernandez was successful in attracting new significant investments into the sector, especially in power generation, but the same cannot be said in regards to the results of electricity transmission and distribution, where investments have been recurrently delayed and postponed. Nevertheless, it has been proven that when the quality and reliability of the service improves, collections increase; but as tariffs go higher and more blackouts occur, the opposite is true. The major issue with this sector is that about 50 percent of the energy served is either not invoiced, not collected, or lost due to technical losses. The 2003 financial crisis, the interruption on the system's cash flows and record oil prices have had a negative impact on the investments and the ability of the distribution companies to increase their collections. As a result, the government has not increased the tariffs to reflect to the consumers the rising cost of energy, but has been increasing the subsidized amounts, money which could have been directed to better education and health systems, and to create better safety nets to protect those in greater need when external shocks and higher food prices affect them, like now. This week, President Fernandez held a five hour meeting with all the power producers, distribution companies and governmental agencies involved in the sector, trying to find ways to reduce subsidies and make greater improvements in the sector and attract further investments. If oil prices continue to decline, we may see significant improvements in the sector, and as the market matures and signals higher prices in the spot market, more confidence should further attract and improve the power sector. It is important that the sector continues to see improvement in collections, applies the technical tariff and eliminates the cross-subsidies, and creates the necessary confidence in its regulatory environment to attract further investments to break the vicious cycle.
Bernardo Vega, President of Fundación Cultural Dominicana and a former Dominican Ambassador to the US: In the mid-1990s there was progress. Generation and distribution were privatized and 40 percent of generation started to come from natural gas and coal, while in the past it had come predominantly from expensive fuel oil. Capacity exceeded demand. But in 2001 the government purchased two out of the three distribution companies and little by little decision making in the whole industry has passed to the hands of the public sector. No new plants have been started in at least four years. A government public tender for two new carbon plants was a fiasco, no serious companies competed and the little known winners never started their investment. A recent law has criminalized the theft of electricity, but it has never been put into effect. Present day subsidies are unsustainable. The sales price of electricity has not been increased for over a year and this requires even more subsidies, which are financed with the credit given by Venezuela when petroleum is purchased from that origin. The immediate solutions are to increase tariffs, reduce subsidies and apply the law against stealing electricity. The medium-term solution is moving back to privatization but the public enterprises, with excess employees, are now used for political patronage.
The financial distress of the system stems from the very low collections and high power theft experienced by the electric distribution companies. The problem is not one of generation capacity, which is sufficient to meet the demand in the country. The distribution companies do not collect enough from their customers in order to pay the bill from the generators. The generators, in turn, stop delivering power until accumulated debts are paid. This explains the blackouts, and is a situation that has been in existence in the DR for well over ten years. The majority of the electric generation capacity in the country is owned by the private sector, which expects to operate profitably and realize a market-based return on investment. Except for some hydro, since the DR lacks fossil resources the fuel for these plants is all imported (LNG, coal, diesel) at international market prices. On the other end of the power line is the consumer, who simply does not have the economic wherewithal to pay for electricity at current levels of consumption at the resulting market rates. That gap should be covered by a mixture of conservation, which is aided greatly when people are required to pay for what they consume; government subsidies; and carefully calibrated tariff increases. All this is occurring in many other countries, but in the case of the DR the subsidies have been erratic and insufficient and the caps on rates too low. All this is aggravated by the government being totally lax about rampant theft of power, which amounts to a grant of free electricity. The fix won't be easy. It will require the government taking decidedly unpopular measures in order to increase revenues from the resale of electricity to consumers.
Jose Valera, Partner at King & Spalding LLP:
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.