09ASTANA837, KAZAKHSTAN: TRIALS, TRIBULATIONS, AND TRIUMPHS OF THE

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Reference ID Created Released Classification Origin
09ASTANA837 2009-05-14 09:00 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO4117
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW
RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0837/01 1340900
ZNR UUUUU ZZH
O 140900Z MAY 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5417
INFO RUCNCIS/CIS COLLECTIVE 1589
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0966
RUEHKO/AMEMBASSY TOKYO 1669
RUEHUL/AMEMBASSY SEOUL 0649
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1151
RUEKJCS/SECDEF WASHDC 1067
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1521

UNCLAS SECTION 01 OF 04 ASTANA 000837 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON ENRG EINV KZ
SUBJECT:  KAZAKHSTAN:  TRIALS, TRIBULATIONS, AND TRIUMPHS OF THE 
POWER BUSINESS 
 
REF:  (A) ASTANA 0251 (B) ASTANA 0419 (C) ASTANA 0555 
 
ASTANA 00000837  001.2 OF 004 
 
 
1. (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  On May 6, AES Vice President Mike Jonagan 
(protect throughout) met with Energy Officer and a visiting 
delegation from the Department of Energy's Office of Russian and 
Eurasian Affairs to discuss the state of Kazakhstan's power sector 
and AES's future plans in the region.  Jonagan said the way to 
increase energy efficiency and attract infrastructure investment is 
to establish market-based tariffs, rather than implement the fixed 
tariff schedule proposed by the government.  He also commented on 
the recent power outages in Almaty, the performance of the 
Kazakhstan Electricity Grid Operating Company (KEGOC), alternative 
energy options, and theft and corruption in the power sector. 
Despite the difficulties of doing business in Kazakhstan, Jonagan 
said AES has been successful and is pleased with the performance of 
the companies it manages.  On a personal note, Jonagan said that 
local authorities opened a new civil lawsuit against him and he 
confided that he will move to London in September to oversee AES's 
operations in Ukraine and Kazakhstan.  END SUMMARY. 
 
PUTTING A PRICE ON POWER 
 
3.  (SBU) According to AES Vice President Mike Jonagan, raising 
tariffs for electrical power would attract much-needed investment, 
with little negative social impact.  "The government has this 
irrational fear that if tariffs are increased, there would be riots 
in the streets.  I just don't see that happening," he said.  He 
acknowledged that increasing the price of electricity during a 
recession would not be an easy, or popular, decision.  But Jonagan 
said profit margins in Kazakhstan's power sector are thin and he 
made a convincing argument that capping tariffs, as the government 
proposes, would further constrain investment in network 
infrastructure. 
 
"THE NETWORK IS FALLING APART" 
 
4.  (SBU) Jonagan said the power grid is in desperate need of repair 
and rehabilitation.  "The network is falling apart in front of us," 
he said, adding that only an increase in tariffs could convince 
companies to invest in the power grid.  "If we were at five or six 
cents a kilowatt hour, life would be so good," he said.  (NOTE: 
Tariffs in East Kazakhstan oblast are now approximately five tenge 
(approximately 3 cents) per kilowatt hour.  END NOTE).  Jonagan said 
that Kazakhstan's power network is in bad shape, but "it will not 
suddenly collapse all at once."  He said that if companies started 
investing in infrastructure now, then within five years, the grid 
would be fully functional and reliable.  "The only solution to 
improve the distribution network is to raise tariffs.  Higher 
tariffs will mean greater conservation, fewer technical losses, and 
increased investment in the grid." 
 
ALMATY BLACKOUTS 
 
5.  (U) This year alone, there have been four major power outages in 
Almaty, including two blackouts in May and one on April 15 that left 
70 percent of the city's residents without power.  The cause of the 
blackouts has been attributed to ageing infrastructure, including 
faulty 110 kV power transmission lines.  On May 6, following the 
most recent power outage in Almaty, the region's deputy governor, 
Yerbol Shormanov, publicly demanded that  the Samruk-Kazyna National 
Welfare Fund take immediate action to ensure a safe and stable power 
supply to the former capital.  Samruk-Kazyna owns the power 
distribution company Alatau Zharik Kompanias, which is responsible 
for supplying electricity to Almaty.  "They have to hold the 
electric company accountable," the deputy governor said.  On May 8, 
Samruk-Kazyna announced that it had fired Serik Ospanov, head of 
Alatau Zharik Kompanias, and appointed his deputy to run the company 
in the interim. 
 
 
ASTANA 00000837  002.2 OF 004 
 
 
6.  (SBU) According to AES's Mike Jonagan, "the power situation in 
Almaty is a disaster."  He said the problem is a collective failure 
to maintain and upgrade the network, which is made more difficult by 
the fact that power is always in demand in Almaty; there is no down 
time.  "The summer peak is the same as the winter peak," Jonagan 
said, "and they cannot switch the load to a partially utilized &#x0
00A;transformer.  They simply don't have that luxury.  There is not 
enough power supply to meet consumer demand in the south and the 
delivery infrastructure is simultaneously used to generate heat, 
further taxing the system."  (NOTE:  According to Mariyash 
Zhakupova, former senior technical advisor to USAID's first Regional 
Electricity Market Assistance Program (REMAP), "the Almaty blackouts 
show that the Central Dispatch Center is not working effectively and 
the balancing market is not functioning.  If it were, that would aid 
in scheduling off- and on-peak generation."  END NOTE.) 
 
ENERGY EFFICIENCY 
 
7.  (SBU) Jonagan said that there are important and immediate gains 
to be made in improving energy efficiency in Kazakhstan.  For 
example, he said that AES offered to install high efficiency 
transformers and replace incandescent light bulbs with compact 
fluorescent lamps, which he claimed would reduce energy consumption 
by 30 percent.  Unfortunately, according to Jonagan, the former 
governor of East Kazakhstan oblast, Zhanybek Karibyanov, was not 
interested in this demonstration of corporate social responsibility. 
 "He said he would rather we built him a park," Jonagan said. 
 
RENEWABLE ENERGY 
 
8.  (SBU) Kazakhstan has great potential for harnessing wind and 
solar power, according to Jonagan.  He said that wind power would be 
particularly attractive at a 100 MW increment for localized markets 
like Almaty, which could serve to reduce the demand for baseload 
power.  However, Jonagan was not optimistic about the development of 
renewable energy sources in Kazakhstan, mainly due to the country's 
abundance of cheap hydrocarbon resources.  To jump start the 
renewable energy industry in Kazakhstan, he said, the government 
would need to introduce a "green tariff, and there is no appetite 
for that, not in a down market."  He added that Kazakhstan's power 
plants would rather burn oil and mazut than invest in wind power, 
since wind power would cost 14 cents/KWH compared to current much 
lower thermal and hydro-power rates.  "Right now, wind is not an 
attractive alternative," according to Jonagan.  "AES has a lot of 
wind turbines and we offered to bring our expertise and our 
equipment to Kazakhstan, but when we spoke to Samruk-Kazyna, they 
just were not interested." 
 
STEALING ELECTRICITY 
 
9.  (SBU) According to Jonagan, theft is a pervasive problem 
throughout the power sector.  Surprisingly, he said some of the 
worst offenders have been among their most affluent customers, 
including prosecutors, parliamentary deputies, and energy officials, 
who feel they are entitled to special treatment.  Jonagan said it is 
also common practice for household consumers to tamper with 
electricity meters, where they exist.  Alternatively, if the meter 
is located inside, consumers sometimes lie to the electric company 
about usage volumes.  Jonagan said that existing meters are 
extremely old, are not being replaced, and are slowing down, making 
it more difficult to establish market prices for power.  Sometimes, 
stealing electricity is simply done for expedience, as Jonagan 
discovered to his chagrin.  "I was stealing electricity myself and 
didn't know it," he confessed.  "The construction company that built 
my apartment tapped into an adjacent power line illegally and wired 
the entire building.  When I found out what they had done, I had to 
move to a new apartment.  That would not have looked good in the 
newspapers." 
 
NO METER, NO BILL 
 
 
ASTANA 00000837  003.2 OF 004 
 
 
10.  (SBU) In 2007, according to Jonagan, KEGOC began to introduce 
real-time metering at the grid connection points on the 
Kazakhstani-Russian border, but the distribution companies resisted 
this because they understood that it would expose their price 
manipulation practices.  As Jonagan explained, "If there is no 
meter, you can't send a bill."  He said that at the moment, 
Kazakhstan's wholesale customers are not compelled to submit an 
accurate schedule of their power consumption.  They are allowed 
simply to add up the total volume of electricity used per day and 
prorate it according to an average daily cost per kilowatt hour, 
rather than paying higher prices for use during peak times, as one 
would expect. 
 
KUDOS FOR KEGOC 
 
11.  (SBU) Jonagan said that KEGOC is doing a first class job 
managing the network.  He said the larger power transmission lines, 
from 220-500 kV, look very good.  It is clear to Jonagan that KEGOC 
has invested in these lines and he said they provide "close to 
Western quality transmission."  The economic crisis, however, is 
likely to affect KEGOC's continued ability to maintain and upgrade 
the power grid.  (NOTE:  On May 7, KEGOC adjusted its 2009 revenue 
projections down by 14 percent, or 6 billion tenge (approximately 
$40 million), due to an 18 percent drop in power transmission 
services.  END NOTE.) 
 
AES WOULD LIKE TO REMAIN IN KAZAKHSTAN 
 
12.  (SBU) AES owns two combined heat and power plants and has 
concessions on two hydropower plants through 2017, in addition to 
the management contracts for power distribution networks in East 
Kazakhstan.  Jonagan said he was pleased with the recent performance 
of AES assets, despite the economic downturn.  For example, he said 
that the company's collection rates are improving as customers pay 
off old debts.  "For the past several months, we have averaged 
greater than 100 percent collections," Jonagan said.  He also 
reported that Berdybek Saparbayev, newly appointed governor (akim) 
of East Kazakhstan oblast, recently reviewed AES's performance and 
decided to extend its contract for another five years, through 
February 2014, at a fixed fee of $100,000 per year.  Jonagan said 
proudly, "The new akim understood that we would operate the company 
in a transparent, commercially sound manner.  That showed real 
leadership.  Those guys usually come in and they bankrupt the oblast 
power companies by charging four or five times the cost of producing 
electricity and padding the subcontracts.  This guy is different." 
 
WHO WILL GET THE HYDROS? 
 
13.  (SBU) Toward the end of the meeting, Jonagan disclosed that 
local authorities in Almaty recently opened a new civil lawsuit 
against him.  He said the local government is still pursuing back 
taxes from a trading company, long-defunct, that AES established 
years ago.  Jonagan was named in the suit because he is still listed 
as the responsible corporate officer for the company, which he 
explained was the only way to secure his work permit when he first 
arrived in Kazakhstan.  Jonagan said he is not overly concerned by 
the legal action, but he confided that he will move to London in 
September to oversee AES's operations in Ukraine and Kazakhstan.  He 
also said AES may soon be forced to part with its prized assets, two 
hydropower plants in East Kazakhstan that are now comfortably 
profitable.  "When we took on the concession for these assets," 
Jonagan
said, "they needed a lot of work.  Now, hydropower is very 
attractive and all the guys are fighting over the pretty girl."  He 
then struck an ominous note:  "Certain elements have made it clear 
that they are going to get the hydros from us.  I almost don't care 
anymore.  They're not exactly strategic assets.  If we get a fair 
offer, we'll sell them.  But we would at least like to recoup our 
initial investment."  When asked whether AES will continue to do 
business in Kazakhstan, Jonagan replied, "We'll stay here as long as 
we don't get run off." 
 
 
ASTANA 00000837  004.2 OF 004 
 
 
MILAS

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