07ASTANA984, KAZAKHSTAN: AES UPDATES AMBASSADOR ON BUSINESS

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Reference ID Created Released Classification Origin
07ASTANA984 2007-04-18 02:29 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO8721
PP RUEHDBU
DE RUEHTA #0984/01 1080229
ZNY CCCCC ZZH
P 180229Z APR 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 9106
INFO RUCNCIS/CIS COLLECTIVE 0129
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000984 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
 
E.O. 12958: DECL: 04/16/2015 
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: AES UPDATES AMBASSADOR ON BUSINESS 
INTERESTS, LEGAL ISSUES 
 
REF: A. ASTANA 908 
 
     B. 06 ALMATY 2054 
     C. ASTANA 580 
 
Classified By: Ambassador John Ordway; reasons 1.5 (b) and (d). 
 
1. (C) Summary:  AES's Dale Perry told the Ambassador on 
April 12 that "business is great" in Kazakhstan, despite 
ongoing legal disputes initiated by regional and local 
officials, and a general disagreement with regulators over 
the proper definition of monopoly power.  Perry noted that a 
draft Government of Kazakhstan (GOK) plan for the development 
of the electricity sector, which confirmed the GOK's intent 
to fully liberalize electricity prices, was so good "that AES 
could have written it."  Perry confirmed that AES was still 
pursuing an arrangement to provide 1000 MW to a proposed SUAL 
(now RUSAL) aluminum smelter in East Kazakhstan;  the Chinese 
appeared to have scuttled a project to build a 7200 MW 
coal-fired plant in the same region upon being informed by 
the GOK that they would have to build the plant according to 
high environmental standards.  Perry told the Ambassador that 
AES's enthusiasm for regional electricity projects had 
diminished, due to a "lack of evident solutions in 
Afghanistan," and reduced corporate tolerance for risk.  End 
summary. 
 
AES: Kudos for GOK's Electricity Policy.. 
----------------------------------------- 
 
2. (C) In an April 12 meeting with the Ambassador, Dale 
Perry, AES's Regional Director for Eastern Europe and the 
CIS, raved about the GOK's new (draft) plan for the 
development of the electricity sector, describing the plan as 
so encouraging that "you would have said AES wrote it."  Vice 
Energy Minister Satkaliyev had underscored the GOK's 
commitment to price liberalization earlier that day, telling 
Perry that "we're headed for a free (electricity) market." 
(Prime Minister Masimov recently told Ambassador that the GOK 
hoped to achieve full liberalization of the electricity 
market in 2008.  Ref A.)  Country Manager Mike Jonagan added 
that even AES's dealings with its industrial customers were 
much improved.  "They want real, Western-style contracts," he 
said, adding that the company had not had to take a wholesale 
customer to court in over two years.  In broad terms, Perry 
concluded, business "was great" in Kazakhstan. 
 
...While Fighting Corruption at the Regional and Local Level 
--------------------------------------------- --------------- 
 
3. (C) The most important remaining area of reform, Perry 
said, lay in the legal definition of a "monopoly" electricity 
provider, a concept with important legal implications for the 
GOK's right to regulate tariffs.  AES's most troublesome 
ongoing legal dispute, Perry explained, arose out of 
different interpretations of this law, with the GOK's 
Competition Protection Committee (CPC) arguing that AES had 
earned illegal monopoly profits in East Kazakhstan as a 
result of the company's near-dominant position in the oblast. 
 AES, in turn, believes that a company's market share should 
be assessed from a national, rather than an oblast, 
perspective. 
 
4. (C)  Perry told the Ambassador that the newly-appointed 
akim of East Kazakhstan Oblast, Zhanybek Karibzhanov, had 
encouraged the CPC to open a criminal investigation of AES's 
"monopoly profits" in order to pressure AES into lowering 
electricity tariffs for his new constituents.  AES had 
finally cut a deal with the akim, Perry explained, agreeing 
to lower tariffs to oblast retail customers by roughly 1 cent 
per kWh.  In return, the authorities agreed to drop the 
threatened criminal investigation into alleged monopolistic 
practices by AES employees, including AmCit Jim Doak.  The 
rate cut would cost AES $6 million, Jonagan estimated, but 
the company had little choice but to settle, as the company 
could scarcely function if its employees were subject to 
criminal charges. 
 
5. (C) AES was still vulnerable to more than $40 million in 
civil penalties in the case, Perry noted.  Perhaps more 
disturbingly, the same logic that had been applied to 
defining a monopoly in East Kazakhstan could be applied in 
Pavlodar oblast as well, where AES's Ekibastuz GRES I plant 
represented a far larger investment.  AES was pushing the GOK 
to clarify the monopoly laws, Perry concluded, warning the 
authorities that, while AES was preparing itself to invest 
$750 million in the upgrade of its Ekibastuz GRES I plant 
 
ASTANA 00000984  002 OF 002 
 
 
(Ref B), it would not undertake the investment until the 
monopoly laws were clarified. 
 
6. (C) Jonagan updated the Ambassador on another legal 
irritant -- a $3 million assessment against AES for improper 
storage of overburden at the company's Maikuben mine (Ref C). 
 AES had lost the case in court and on appeal, he explained. 
However, the company had recently convinced both Finance 
Minister Korzhova and Environmental Protection Minister 
Iskakov to listen to a taped conversation of
 a local 
environmental official threatening the legal action on the 
overburden issue if AES didn't pay him a $150,000 bribe. Upon 
hearing the tape, Jonagan said, both Ministers readily agreed 
to help facilitate the submission of evidence to the Supreme 
Court demonstrating that AES had, in fact, followed industry 
standards in disposing of the overburden.  AES was now 
hopeful, Jonagan concluded, that the Supreme Court would rule 
in its favor. 
 
Update on AES Business Ventures 
------------------------------- 
 
7. (C) Perry told the Ambassador that AES was still pursuing 
a deal to sell 1000 MW of electricity to SUAL (Siberian Ural 
Aluminum Company, now a part of the merged "United Company 
RUSAL") to power a planned aluminum smelter near Ekibastuz. 
Since the same company, Access Industries, owned both AES's 
largest coal supplier, Bogatyr Access Komir, and 30% of SUAL, 
Perry explained, AES's sale of electricity to the smelter 
would constitute a "tolling" arrangement, with United Company 
RUSAL essentially "renting" two of AES's Gres I 500 MW 
generating blocks to transform its own coal into electricity. 
However, Perry noted, there was talk of including Bogatyr 
Access Komir in the "United Company RUSAL" deal.  If that 
happened, Perry said, the GOK might exercise its "preemptive 
rights" to buy some or all of Bogatyr Access Komir, rendering 
the "tolling" agreement more complex. 
 
8. (C) Asked for news on the Chinese initiative to build a 
7200 MW coal-fired plant in NE Kazakhstan (Refs B,C), Perry 
told Ambassador Ordway that the project appeared to be 
"dead."  The GOK insisted that the Chinese build the new 
plant to modern, high environmental standards, Perry said. 
The Chinese objected, arguing that they shouldn't be held to 
a higher standard than the existing, "dirty" coal plants in 
the region (including AES's GRES I).  However, Perry 
concluded, the GOK hadn't backed down, and the deal appeared 
to be dead. (In an April 10 conversation with Ambassador 
Ordway, Presidential Advisor Vladimir Shkolnik confirmed that 
the Chinese initiative had lost momentum.) 
 
9. (C) Perry voiced skepticism about AES's involvement in 
efforts to deliver Central Asian power to Afghanistan and 
Pakistan.  AES might be interested in investing in CHP 
(combined heat/power) plants in Kyrgystan, he said, but "we 
see no solutions in Afghanistan," and thus had dwindling 
interest in Tajikistan.  AES's (forced) sale of Electricidad 
de Caracas in Venezuela, he explained, had significantly 
lowered the company's tolerance for risk elsewhere. "Maybe we 
would still look at a project bringing electricity north to 
Almaty," he concluded. 
ORDWAY

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