08ASTANA2086, KAZAKHSTAN: AES SUCCESS TEMPERED BY CONCERNS OVER PRICE

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Reference ID Created Released Classification Origin
08ASTANA2086 2008-10-22 04:22 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO0961
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHPOD RUEHPW RUEHROV RUEHSR RUEHVK
RUEHYG
DE RUEHTA #2086/01 2960422
ZNR UUUUU ZZH
O 220422Z OCT 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3614
INFO RUCNCIS/CIS COLLECTIVE 0704
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0105
RUEHKO/AMEMBASSY TOKYO 0815
RUEHIT/AMCONSUL ISTANBUL 0039
RUEHBS/USEU BRUSSELS
RUEHVEN/USMISSION USOSCE 1989
RUCNDT/USMISSION USUN NEW YORK 1938
RUEHNO/USMISSION USNATO 2274
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0261
RUEKJCS/SECDEF WASHDC 0183
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 02 ASTANA 002086 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
 
E.O. 12958: N/A 
TAGS: PGOV EPET EINV ENRG KG KZ
SUBJECT:  KAZAKHSTAN:  AES SUCCESS TEMPERED BY CONCERNS OVER PRICE 
REGULATION 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  On October 9, AES Country Manager Mike Jonagan 
briefed the Ambassador on the history of AES's investments in 
Kazakhstan's power sector, outlined a proposed solution to pending 
anti-monopoly charges, and expressed concern about a new draft 
decree that would impose strict price controls on retail power 
companies.  END SUMMARY. 
 
A SOLID RETURN ON EKIBASTUZ 
 
3.  (SBU) Jonagan began the meeting on an upbeat note, explaining to 
the Ambassador that AES sold its ownership in Ekibastuz, a 4,000 MW 
thermal coal-fired power station in northeastern Kazakhstan, for 
$1.3 billion to Kazakhmys in May 2008, a significant return on their 
$3.5 million investment in 1997.  (NOTE:  Kazakhmys is a 
UK-registered copper mining company majority-owned by Kazakhstani 
billionaire Vladimir Kim.  END NOTE).  Jonagan characterized the 
transaction as straightforward, with relatively few complications: 
"We never asked them for anything else and they never asked us for 
anything."  He described how AES's investments over the years helped 
to modernize the plant's infrastructure, expand its generating 
capacity, and pay off all debt.  Jonagan also noted the importance 
of a 15-year contract to provide 300 MW of electricity to Russia off 
the Russian grid and described how AES and its customers and 
suppliers -- including the railroad, water canal, and coal mine -- 
made the transition from a barter system to cash payments. 
 
4.  (SBU) Jonagan told the Ambassador that, over time, "we got the 
message" that the Government of Kazakhstan wanted Ekibastuz in 
Kazakhstani hands.  He also confided that AES had reached a 
crossroads with Ekibastuz earlier this year:  they had to decide 
whether to invest an additional $1 billion to bring the plant up to 
full capacity, which would make the business worth approximately $3 
billion, or sell the company and realize a significant return on 
their initial investment.  AES does not typically disclose the 
relative value of individual assets, but Jonagan told the Ambassador 
that at $3 billion, Ekibastuz would have represented approximately 
25% of the company's total equity, which some company insiders felt 
would create an imbalance in their portfolio.  Jonagan said AES had 
no regrets about its decision to sell Ekibastuz and proudly noted 
that the Government retained AES to operate the plant under a 
management agreement until December 2010.  "They know that we can 
add value in terms of safety, environmental protection, 
transparency, and procurement," he said. 
 
5.  (SBU) Simultaneously, AES has developed what Jonagan called a 
"world-class power distribution business" in eastern Kazakhstan. 
During the past four years, AES has improved collection rates even 
as tariffs have risen and has steadily paid down the company's 
debts.  The biggest challenge with that business, according to 
Jonagan, is overcoming the old Soviet mentality and culture that 
encouraged customers to treat electric power as an entitlement. 
Jonagan recounted how an elderly woman, a veteran of World War II, 
scolded him for trying to collect money from her.  "I fought the 
fascists," she said.  "Stalin promised me free electricity and I'll 
never pay." 
 
ANTI-MONOPOLY ALLEGATIONS 
 
6.  (SBU) Turning to the ongoing dispute over a $200 million fine 
for alleged antimonopoly activities, Jonagan expressed optimism that 
a settlement was within reach.  (NOTE:  AES has already paid $29 
million of the fine and has had another $6.5 million in assets 
frozen.  END NOTE).  According to Jonagan, on September 5, the 
Ministry of Finance presented AES with 12 items that it said needed 
to be resolved or changed in its current contractual arrangement. 
AES has no objections to any of the items in principle, but each one 
has a commercial value that must be calculated and incorporated into 
 
ASTANA 00002086  002 OF 002 
 
 
a new "term sheet" (i.e., a new contract.)  Jonagan speculated that 
one way out of the impasse would be for a Ministry of Finance-led 
working group to develop a new term sheet that would address the 12 
items raised by the Government of Kazakhstan, followed by a Supreme 
Court decision that all previous lower court decisions against AES &
#x000A;are invalid due to "technical deficiencies," at which point the 
lower court would drop the case against AES.  Jonagan seemed 
confident this would work and said the head of the Supreme Court 
told him, "We've got to figure out how to get out of this 
situation." 
 
"NOW WE'RE REALLY STUMPED" 
 
7.  (SBU) On September 17, AES and other power companies were 
invited to a meeting chaired by Minister of Energy and Mineral 
Resources Sauat Mynbayev to discuss electricity tariff policy to 
2015.  At the meeting, Mynbayev distributed a draft decree from 
Prime Minister Masimov "to enhance the investment attractiveness of 
the electric power industry and ensure the development of power 
assets" in Kazakhstan.  The decree, which has not yet come into 
effect, calls upon the Ministry of Energy and Mineral Resources 
(MEMR), the Ministry of Economy, and the Agency for the Regulation 
of Natural Monopolies to set tariff ceilings by December 1, 2008 for 
electric, thermal, hydroelectric, and gas-turbine power generation 
up to 2015. 
 
8.  (SBU) The decree would fix hydroelectric power increases at 107% 
of current tariffs for the next seven years.  As Jonagan put it, 
"our assigned price is ridiculous."  Jonagan also confided that MEMR 
suggested the possibility of charging one set of clients a higher 
price than other clients (with poorer residential customers 
presumably getting the lower rates).  He called this a violation of 
the terms of the contract and asked rhetorically, "How do I decide 
who gets the cheap electricity?"  He informed the Ambassador that 
AES has retained legal counsel and is looking into the possibility 
of international arbitration to settle the matter.  Jonagan lamented 
the fact that, just as AES seemed about to resolve its anti-monopoly 
allegations, another new problem had appeared.  "Now we're really 
stumped," he said. 
 
AES INTERESTED IN KYRGYZ ASSETS 
 
9.  (SBU) Jonagan told the Ambassador that AES had previously been 
encouraged by the Government of Kyrgyzstan to submit a proposal to 
acquire state-owned power companies, but was told very recently by 
Kyrgyz officials that Russian President Medvedev has put pressure on 
the Government of Kyrgyzstan to sell its power assets to a Russian 
company, Inter RAO.  Jonagan said that AES would be willing to allow 
Inter RAO to buy the hydroelectric plants, but AES is keenly 
interested in Kyrgyzstan's combined heat and power assets.  The 
Ambassador urged Jonagan to provide this information to the Embassy 
in Bishkek and the U.S. Foreign Commercial Service. 
 
HOAGLAND

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