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The Mexican Electricity Sector: Economic, Legal and Political Issues

Victor G. Carreon-RodriguezCentro de Investigacion y Docencia EconomicasCentro de Investigacion y Docencia Economicas

Guillermo GovelaGuillermo Govela--MartínezMartínezSecretaría de Energía, MEXICOSecretaría de Energía, MEXICO

Stanford UniversityFebruary 19-20, 2003

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Case Study: Mexico

Origins of the System Evolution from 1920 to 1980Consolidation and Challenges: 1980 to

1990The system from 1990 to 2000Remaining challenges in 2003

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Origins of the System

1879: The first thermoelectric plantMining and Textile industriesExcess production: residential and commercial users

=> Vertically integrated privately owned monopolies

Regionally distributed More industrialized and populated citiesThis created a very profitable business

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Creation of Comision Federal de Electricidad (CFE) In 1939: CFE’s expanding role

0%10%20%30%40%50%60%70%80%90%100%

1930 1940 1950 1960

CFEChapalaImpulsoraMexicana

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Evolution from 1920 to 1980

1960: ”Luz y Fuerza del Centro” (LFC)

=> 1960: Nationalization of the electricity industry

The Mexican electricity supply industry transformed into a vertically integrated state owned monopolyIt was a “natural monopoly” formed by two state enterprises: CFE and LFC

=> Energy Law (LSPEE) is established in 1975

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Consolidation and Challenges: 1980 to 1990

Consolidation of the System under the following characteristics

Governance: Monopoly formed by CFE and LFCDirectors appointed by the Mexican PresidentObjective was to provide electricity to all Mexicans regardless of costsTariffs were set by the budget ministerSubsidy policy for all users

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Consolidation and Challenges: 1980 to 1990

Finance:Federal investmentCFE’s resourcesLocal debtForeign debtSubsidies by government

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Consolidation and Challenges: 1980 to 1990

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The system from 1990 to 2000

Motivations for reformEconomic efficiency: Inefficient system because

Main decision are taken outside the firmsPrices are set by budget ministerEnergy Losses are hugeNumber of employees is growing over time Obsolescence of installed capacity and transmission

Exponential Growth in demandA crisis in supplyA continuously growing need for new capacity

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The system from 1990 to 2000

1992: Reforms to the LSPEEObjectives:

Provision of a better public serviceAllow private investment to reduce public investment and increase productivity

Public Service activities exclude:Self-generation, CogenerationSmall scale productionIPPExportation and importation

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Other Important events in the 1990s

Reforms in infrastructure industriesPorts TelecommunicationsGas

1995: CRE (Energy Regulatory Commission) 1997: PRI loss control over Congress1999: Proposal by President Zedillo2000: PRI loss election for President

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Mexico’s energy sector challengesMexico’s energy sector challenges::

I.I. Guarantee energy supply Guarantee energy supply to a country with one of the to a country with one of the world´s world´s highhighestest growth rategrowth ratess in demand.in demand.

II.II. Meet Meet investment requirements investment requirements to adequately expand to adequately expand energy infrastructure.energy infrastructure.

III.III. Carry Carry out out a a structural reformstructural reform to introduce higher to introduce higher efficiency and quality of service, andefficiency and quality of service, and toto promote private promote private participation.participation.

IV.IV. Strengthen the Strengthen the regulatory regulatory and and institutional framework institutional framework to encourage the expansion of energy infrastructure.to encourage the expansion of energy infrastructure.

V.V. Transform Pemex and CFE Transform Pemex and CFE into into worldworld--class companies.class companies.

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The Challenge of Meeting Electricity DemandThe Challenge of Meeting Electricity Demand

Demand for electric power will grow at an annual rate of 5.6%, reaching 290 TWH in 2011.Power sales for industrial use will increase in 6.2% per year for the period. The Northeast and the Northwest region will experience the greatest rate of growth for the period, 6.5% and 5.6% respectively.

Total Sales

Cogeneration andSelf-supplied

National Power Demand 2001National Power Demand 2001--20112011(TWH)(TWH)

50

80

110

140

170

200

230

260

290

1990 1998 2001 2003 2005 2007 2009 2011

5.6%

Fuente: Comisión Federal de Electricdad

14Source: Energy Ministry with CFE and LyFC data.

38,195

51,468 48,94654,244 53,064

61,72366,401 66,352

71,19174,334

Expected Investments in the Power Sector: Growing Role for IPPs

Close to 60 billion dollars will be required during the next 10 years in the power sector.Only 47% of the investment is expected to come from the Federal Budget.

20022002--20112011(Billion pesos of 2002)(Billion pesos of 2002)

IPP and FPIPP and FP

Federal BudgetFederal Budget

39 %

61% 5 9% 51 % 52 % 47% 4 1% 42 % 41%4 2%

61 %

39%4 1%

49 % 48 %

53% 5 9%58 .0%

59%5 8%

0

15 .000

30 .000

45 .000

60 .000

75 .000

90 .000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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CFE’s Financial Constraints

CFE’s total debt amounts to 130% of sales.

Labor liabilities represent more than 60% of the total debt.

Apart from labor liabilities, CFE’s financial requirements amount to 56 billion pesos per year, which contrast dramatically with sales of 120 billion pesos. Even with the long awaited provision of financial autonomy, CFE could only afford 40% of total investment requirements.

If CFE were totally responsible of the investment requirements, by 2011 the net debt would grow by five. The debt/asset ratio would increase from 16% in 2001 to 104% by the year 2011.

CFE faces serious financial restrictions to be able to expand itCFE faces serious financial restrictions to be able to expand its s infrastructure in order to meet the growing demand.infrastructure in order to meet the growing demand.

Private investmentPrivate investment will complement the government’s objectives of will complement the government’s objectives of supplying electricity at competitive rates.supplying electricity at competitive rates.

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Objectives of Government’s Reform ProposalObjectives of Government’s Reform Proposal

The main objectives of the reform are:To modernize and grant a larger degree of autonomy to the government-owned CFE and LFC. The privatization of both companies is not part of the government’s proposal.

To create a modern industry, that expands by itself, without a complete reliance on government financial resources.

To increase private and social participation in the sector.

To be able to guarantee supply of power at competitive prices.

To have enough financial resources, in order to be able to expand general access to electricity.

As a consequence, to be able to raise the standards of living for the less privileged, as the consumption of energy directly influences the quality of life.

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The government’s reform proposal, introduces the concept of self-consumers (users whose consumption requirements are greater than 2,500 MW hour a year).

Existing schemes for self-generation, co-generation, small scale production and independent generation, will remain unchanged.

The transmission grid and distribution lines will remain in the hands of the State. Private generators and self-consumers will have non-discriminatory access to the grid.

The National Dispatch Center will be transformed into an independent entity to guarantee transparency and fairness in the power dispatch system.

Structural Reform ProposalStructural Reform Proposal

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Remaining challenges in 2003

Structural Reform ProposalStructural Reform Proposal by Fox

Supreme court decision

Other Proposals PRIPRD