Closure of the Crisis?

No one bats an eye in Santo Domingo when the lights go out, as they occasionally do in a normal business day. The Dominican Republic has been living with a power deficit for years, even after the government decided to privatize the electricity industry in 1999. As the economy has grown, demand for energy has increased at an annual average rate of 8.4% over the last nine years. The country generates about 1,200 megawatts of power, far short of average demand of 1,600 megawatts. In September President Hipólito Mejía described the electricity crisis as “the most serious problem that affects us all,” and laid out a plan that seeks to resolve the crisis.

The problem is that the distribution companies and independent power producers inherited a flawed system, similar to the botched privatization of Brazil’s energy sector. Because of a government imposed price cap, private power companies are unable to pass through the impact of rising costs to consumers. The government promised to absorb the extra costs and pay private providers the difference but failed to do so. Power companies have had to deal both with low collection rates in the poorer neighborhoods, below 10% in some cases, and with the government’s own poor payment record. The problems escalated in August when Spanish distribution company Unión Fenosa stopped paying its supplier, the generation company Itabo, and curtailed service to poorer neighborhoods.

Mejía has now ordered the renegotiation of contracts between independent power producers and the state transmission company, Compañía Dominicana de Electricidad (CDE), and reimbursement of the IPPs for losses totaling $51 million. Tariffs will increase by an average 36%, although the poorest neighborhoods will still receive subsidies through a guaranteed service of 18 hours per day until payment is regularized. The government will combat theft of electricity and weak collections by creating a fraud squad. It also plans to fine distributors for failing to supply paying consumers with service.

Local companies welcomed the government’s response. Kevin Manning, general manager of Itabo, a generation company owned by CDE and private energy companies AES Gener and El Paso Energy International, says, “The President’s solution corrects some decisions made and should put the sector into a solvent position.” But the country will have to pay a hefty price for resolving the crisis. The unpaid bills amount to some $100 million, which the government hopes to finance either with a sovereign bond or with loans from multilateral development agencies. Upgrading the inefficient transmission system will cost another $100 million.

Multilateral lenders will probably want to see the CDE relinquish its control of the transmission system and allow private sector companies to run it instead. Local companies are confident Mejía will deliver the goods. Manning says, “I know it will be difficult to meet those financial commitments but this president is determined to do things and has taken a very valiant stance. He has said he wants this to be a final solution and he is prepared to keep addressing the problem until he has solved the problem with the distribution companies.”