Duke Energy and the Disappearing Waters of Peru

By Kristina Aiello

The battle over the waters of Lake Parón, in the Northern Andes of Peru, came to a head during the late afternoon hours of July 29, 2008, when over 100 farmers from Huaylas province of the Department of Ancash took over the hydraulic operations of the Cañón del Pato Hydroelectic Center. The farmers were protesting the nearly 50% drop in Lake Parón's water levels following the center's release of the lake's water in order to enhance its power production capabilities. Cañón del Pato is operated by Egenor Duke Energy, a large, private energy corporation owned by Duke Energy International, a subsidiary of Duke Energy headquartered in Charlotte, North Carolina. Egenor administers two hydroelectric plants and several thermal-electric plants in northern Peru.

Located at 4,185 meters above sea level, Lake Parón is the largest glacial lake in the Huascaran National Park. It serves as a vital water and irrigation source for the residents of Huaylas province's capital city Caraz and its surrounding agricultural communities. It also serves as an important feeder for the Santa River that flows down through the fertile valley known as the Callejón de Huaylas, emptying into the Pacific Ocean at the coastal city of Chimbote.

Efforts to drain Lake Parón began during the 1970s as a safety measure. The lake is located in a geologically active region and is surrounded by five glacial peaks that easily fill its banks. Together, these forces combine to create the potential for disastrous mudslides, a danger all too real for local residents who remember the earthquake and subsequent mudslide of 1970 that destroyed the town of Yungay. In 1983, the government-run Electroperu completed construction of a drainage tunnel that would release the lake's waters in a controlled manner, around one meter per second (m/s), in order to diminish this threat.

The licensing of Lake Parón's waters for energy development in 1994 coincided with the enactment of structural reforms under the administration of then President Alberto Fujimori, who sought to attract foreign investment through privatization and pro-business economic policies. As part of this process, the government privatized Electroperu's operations in 1996 to form the Northern Peru Electric Generation Company (Egenor). Three years later, Duke Energy bought the company.

During its acquisition of Egenor, Duke Energy engaged in several indirect mergers that allowed it to ultimately purchase up to 90% of Egenor's assets in such a manner as to benefit from investor tax exemptions that were protected by the Fujimori government's Legal Stability Agreements (LSAs). The LSAs also granted the right to free repatriation of invested capital, profits and royalties, the right to equal treatment and non-discrimination, the right to free convertibility of foreign currency, and perhaps above all, the right to resolve disputes by international arbitration. According to Duke Energy records, the company also complied with the necessary environmental protections requirements, including the development of an Environmental Impact Study concerning Egenor's operations at that time.

Duke's investments were part of an explosion in Peru's energy development sector. Hydroelectric power constitutes 71% of Peru's energy production. This sector has grown steadily since 2001 as the country's strong economic growth resulted in a surge in energy demand that expanded an average of 8% annually and is expected to reach double-digit annual increases by 2015. Accordingly, energy producers must add nearly 350 megawatts (mw) of power each year to meet the country's growing energy consumption needs. Governmental officials assert that this will not be a problem. They estimate that Peru could produce 60,000 megawatts (mw) of electricity from hydro resources alone, or more than ten times current production levels. Egenor's operations at the Hydroelectric Center are intended to meet this growing demand.

While Duke Energy has reaped solid economic rewards for its investment in Huaylas province, the Ancash Department maintains very high poverty levels despite its vast hydro and mineral resources. In 2007, approximately 42% of the Department's population was living in conditions of poverty, with 17% living in conditions classified as extreme.

The problems with Lake Parón first began on July 13, 2007 when Egenor announced that it was going to exercise its rights under its water usage license and begin increasing the release of water from the lake beyond current 1m/s levels. This announcement spread alarm throughout the communities of Huaylas province. According to local reports, the maximum sustainable release of water from the lake is 4m/s. Local leaders feared that any significant increase beyond that figure would negatively impact the Lake's water levels and the increased flows would erode downstream irrigation systems and negatively impact municipal water quality. The lake is also a popular site for tourists and any damage to its beauty might impact an important input into the local economy.

In response to Egenor's announcement, the mayor of Caraz petitioned the Autonomous Authority of the Santa Basin to issue a resolution to suspend the company's license, a request granted on August 7, 2007.

Egenor challenged the resolution's legality and appealed the decision in Lima, and on October 19, the Lima court authorized the company's use of the lake's waters according to its water use permit. Egenor announced that it would begin the water release of October 24 with a maximum flow of 5.5m/s. The water release began shortly after that.

Dialogue between local governmental officials and the company over the water release continued into the following year. In January 2008, the municipality of Huaylas enacted a local ordinance the approved a Rational Use Water Policy in Huaylas Province, which outlined specific guidelines for usage of the province's waters during the rainy and dry seasons. The new policy had little effect, however, as by July of that year, the water levels of Lake Parón had dropped by 50%, the result of what many believe to be the release of water at rates of up to 10 m/s. Fearing the eventual loss of their primary water source, on July 29, local farmers picked up their tools and headed for Egenor's hydraulic machinery to shut down Duke's operation. They vowed to keep it shut down until the ATDR and the Regional Department of Agriculture suspended Egenor's water usage permit.

The shut down created a crisis that national government officials could no longer ignore and resulted in a series of negotiations held in Lima between local and national government officials to find a resolution to the conflict. Congressional representatives from Ancash introduced a bill to declare Lake Parón in a state of emergency and local leaders demanded a new environmental impact study concerning the release of the lake's waters. They also demanded the establishment of an administrative body comprised of various governmental and residential stakeholders to manage the lake's resources.

In order to assist the province with economic development, local leaders demanded the creation of a development fund for the province that would be financed by 30% of Egenor's profits from utilities. A similar fund already exists nationally for mining projects.

Despite these efforts, the intense negotiations that occurred that fall resulted in little progress. In fact, relations between the company and local residents deteriorated in early 2009 when Egenor urged the local prosecutor's office to file criminal charges against the farmers who remained in control of the company's hydraulic machinery. Local leaders denounced Egenor's actions and urged the company to find a resolution to the conflict through negotiations.

On April 17, governmental, provincial, and corporate stakeholders in the conflict met for further negotiations and agreed to establish a multi-sector commission to supervise the National Water Authority's development of a water use plan for Huaylas province and find a resolution to the conflict. All parties agreed to accept the decision of the National Authority.

In late august, the governmental agency tasked with overseeing all energy and mining investment, put out a bid for a consultant to evaluate the dangers to Lake Parón and the usage of its waters. If conducted in an independent and transparent manner, the study could be a positive step forward, even if it comes almost two years after Duke Energy's initial decision to increase the release of Lake Paron's waters. This study should consider the impact of climate change in the Callejón, while the region's principal water recharge sources, the glaciers of the Cordillera Blanca, continue to recede every year.

One bright spot in this cloudy situation is Peru's interest in harvesting energy from wind. Duke Energy, with no investment in wind power, has argued against this idea, claiming that the country does not have the resources for such development. For the sake of the residents of Huaylas Province, let's hope the company is wrong.

Kristina Aiello is a NACLA Research Associate

Republished from NACLA