Fitch Ratings has published a special report this week on the Dominican Republic electricity sector.

Rolling blackouts and electricity shortages have become a way of life for people in the Dominican Republic. Extremely high electricity losses, the vast majority from theft, and low collections from end users have plagued the sector and resulted in perpetual electricity shortages. Although the country has more than sufficient generation capacity to meet total demand, the government's decision to cap electricity prices, tolerate theft by end users and give free electricity has resulted in insufficient funds for state-owned electric distribution companies to cover their operating costs and pay private sector generators for contracted capacity.

With the sector teetering on the brink of financial distress, investors are again asking if the recently re-elected Fernandez administration now has the political will and conviction to fix the system. The stand-by agreement with the International Monetary Fund (IMF), which provided a framework for the sector to reach financial self-sustainability while providing a more efficient, reliable and cost-conscious electric service, expired January 2008 and has yet to be renewed. Unfortunately, little was achieved during the period the agreement was in place. So far, the re-elected government seems to be taking an approach that is likely to perpetuate the sector's instability, rather than to eliminate market distortions and enforce the new electricity law.

Furthermore, soaring oil prices have translated into extremely high electricity prices, as the Dominican Republic is heavily reliant on oil to generate electricity.

While subsidies have allowed state-owned distribution companies to honor their contracts with private sector generators, the situation is not sustainable over the longer term, as the government will continue to face pressure to prioritize investment in health and education at the expense of the electric sector. A reduction or elimination of subsidies would only lead to increasing electricity shortages, unless the government also raises prices (i.e., passes the variable cost of energy to end users) and enforces the new electricity law (i.e., punishes end users for electricity theft and follows the regulatory framework).