Danilo Medina was sworn in as the new president of the Dominican Republic in August 2012. Two months into his presidency, he is choosing to address some significant financial challenges that have plagued the Caribbean nation for years. Among them is the state of the country’s electricity system. This vital sector faces a staggering US$700 million shortfall, soaring levels of technical losses and electricity theft, as well as recurring outages. Meanwhile, paying customers suffer painfully high electricity prices.
In recent weeks, President Medina (or “Danilo” as he is referred to locally) made headlines when he announced a sweeping tax reform to help address the government’s budget woes. The electricity sector will be spared from new taxes, but Danilo is calling for an overhaul of its structure, including a controversial call to renegotiate the contract between the government (responsible for transmission and distribution) and generators ahead of the contract’s expiration. Industry professionals, on the other hand, think that addressing the persistent issues of losses and poor bill collection, and substantial investment in generating capacity, would go farther to right the ship.
In truth, a combination of these factors contributes to the debt that the Dominican Corporation of State Electricity Companies (CDEEE) now faces. After a recent visit to the island nation, representatives with the International Monetary Fund (IMF) concluded that the country’s electricity sector should focus on investing in the electricity grid to reduce technical losses and address the high levels of electricity theft nationwide, both of which result in more than 40 percent system loss. Equally important is the fact that distributors currently collect less than 60 percent of what customers owe them.
At a recent energy forum hosted by the Dominican Association of Industry and Energy (ADIE), Ruben Bichara, Executive Vice-President of CDEEE, along with ADIE leadership, spoke about the need to address these very important factors. Bichara noted that the Dominican Republic has about 2.3 million contracted clients, of which 1.7 million actually pay their bills. Furthermore, about 80 percent of collected revenue comes from only 13 percent of all clients (about 300,000 in total). ADIE Executive Vice-President Milton Morrison said that 25 percent of the cost to produce electricity comes from covering electricity theft alone. According to Tito Sanjuro, Managing Director of EGE Haina, a local electricity generator, theft and poor collection rates comprise 61 percent of the sector’s financial deficit.
The remaining 39 percent is composed of electricity subsidies that result from the gap between the actual tariff charged for electricity (which has been fixed for the last few years) and a technical tariff that is linked to the actual cost of fuel, which obviously fluctuates. Along with blaming organizations like the IMF for always targeting system losses and coverage rates, President Danilo believes the tariff formula is at the root of the problem and that the contract between the government and electricity generators to which the tariff applies should be revised now, three years ahead of its scheduled expiration.
There is some agreement with President Danilo’s view. At the ADIE energy forum, Bichara stressed that given current conditions, the sector will not survive long and that a review of how tariffs are indexed should be done soon. But some in the electricity sector think that such actions will send the wrong signal. The current electricity law states that electricity prices must be set according to a specific formula. Altering the tariff structure would be a failure by the government to adhere to its own laws and could erode the government’s credibility. That is why some, like Mr. Sanjuro, propose that if the government were to invest around US$700 million in upgrades to the electricity grid, losses would come down by about 12 percent, thereby reducing a large portion of the money that comprises the government’s subsidy.
In addition, electricity sector professionals think the government would be in a better position to negotiate with electricity generators if it first addressed the US$700 million debt it owes them. They argue that approaching a renegotiation from a weak financial position might result in no contract between the government (which has a responsibility to deliver electricity) and power producers, leaving consumers with no electricity at all. Such a scenario could lead to businesses reconsidering continued investment in the country.
Having been in office for only two months, President Danilo deserves credit for not shying away from pressing problems. The question is, with regard to the electricity sector, should the focus be on its structure or its operations? Or perhaps a combination of the two? Either way, the urgency of the matter only heightens the severity of it all.
Danilo’s campaign slogan was: “Continuar lo que esta bien. Corregir lo que esta mal. Hacer lo que nuca se hizo.” (Continue what is working. Fix what is not working. Do what has never been done before.) If he can successfully address the electricity sector’s challenges—especially in a way that leads to a more economically, socially, and environmentally sustainable future—he will at least accomplish that last part.
The Worldwatch Institute’s ongoing Sustainable Energy Roadmap work in the Dominican Republic is helping the country establish a way forward by highlighting the dangers of a continued reliance on costly fossil fuels, showing the true socioeconomic costs of the current electricity matrix, and recommending policy changes that promote the presence of more sustainable solutions.
Mark Konold is a Project Manager for Worldwatch’s Climate & Energy Program.