S P E A K O U T

Power Sector Reform—

Blackouts Before Policy
Mexico typifies this pattern Demand, yes; capacity, no
For the moment, an economic slowdown is staving off a full-
BY GEORGE BAKER blown crisis in Mexico’s electricity sector, where the rate of
& FERNANDO R AMIREZ increase in industrial demand for electricity has slowed slightly.
Baker & Associates Nevertheless, the turnaround in the economy expected in com-
ing quarters will undoubtedly bring a return to 6–8 percent

O
increases in demand. Since 1999, the Mexican Government has
ver the last decade, in developing countries been warning that the investment requirements of the electric
everywhere from Asia to the Americas, gov- power sector over the next 15 years far exceed the capacity of the
ernment-run utilities have been on notice that Government to fund them. (The Energy Ministry’s most recent
their financing must change. The private sec- analysis of Mexico’s rising demand for electric power may be
tor must somehow replace the World Bank as found on the ministry’s Web site at http://www.energia.gob.mx .)
the main source of funding for energy projects in general and Most observers agree that extensive modernization of Mex-
for electric-power facilities in particular. ico’s power plants, grids, and substations is necessary. But
The recent history of many of there are sharp differences over
those nations has been discourag- how to pay for it.
ing. Warnings from the World Since 1996, projects in the energy
Bank proved inadequate. Ulti- sector have been funded by an off-
mately only an ugly and embar- balance-sheet financing program
rassing series of outages in major known as Pidiregas. Though the
metropolitan areas prompted effec- financial obligations assumed
tive action to privatize power and through it constitute public debt, the
energy—a “reform-by-blackouts,” government reports only part of the
if you will. yearly payment obligations as such.
Mexico is the gateway between The administration of President
North and South America, a rising Vicente Fox has begun demanding
industrial power, and a key trading that residential customers be charged
partner of the United States. It more for their electricity. Because of
serves as an assembly and manu- subsidies, they pay on average only
facturing site for the subsidiaries of 27 percent of what it costs utilities to
international companies, which produce what they use. Fox has also
export their products mainly to the been blunt about the need to make
U.S. market. Industrial exports utilities more competitive and has
account for more than 20 percent of raised the possibility of private com-
total industrial power demand. And panies producing and selling elec-
once again, it remains to be seen tricity. This has met stiff resistance
whether policymakers in the gov- from legislators of the PRI and PRD
ernment and their opponents in the Mexican Congress can (Partido Revolucionario Institucional and Partido de la Revolu-
jointly bring structural reforms to an inefficient state-run ción Democrática, respectively), who have made a sovereignty
• May 2002

monopoly before a string of costly and dangerous blackouts issue out of the proposals, pointing out that the private compa-
forces drastic action. nies would almost certainly include non-Mexican organizations.
The outcome will affect not only Mexico and its North The Fox administration counters with a vision in which the
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American trading partners, but will be of keen interest to a private sector has a substantial role alongside the state-owned
number of other large developing countries. India, for one, energy companies. The administration’s latest proposals call for:
is also grappling with an aging electrical infrastructure, high • Allowing independent power producers to sell power
MICK WIGGINS

government subsidies for electricity, predictions of steep directly to end-users.

increases in demand, and stubborn legislative resistance to • Changing the fiscal relationship between the Federal Gov-
14 privatization plans. ernment and the state energy companies—Petróleos Mexicanos

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 (Pemex), the Comisión Federal de Electricidad (CFE), and the Neither the Ministry of Energy, as head of the energy sector, nor
Light and Power Co., in Mexico City—so that these companies the Ministry of Finance, as the agency authorized to approve
may keep part of the revenues and profits to fund, at least in electric tariffs, has direct access to information and data.
part, the investments needed for expansion of the sector. With no reliable and authoritative figures, political parties
• Allowing Pemex’s gas stations to sell all brands of motor can—and often do—complain that any forecast and evaluation
oil instead of just one—Pemex’s own brand. of the electric sector is likely to have been manipulated. So they
• Inviting non-Mexican companies to invest in retail dis- often simply reject energy forecasts. A much more construc-
tribution of liquefied petroleum gas. tive posture would be to demand transparency—that is, pub-
• Creating regulations for investments in liquefied natural lic access to information in the energy sector, so that anyone
gas (LFG) in accordance with international standards. may be in a position to evaluate any forecast and proposal.
• Inviting non-Mexican oil and gas companies to bid on
projects to develop dry gas fields. Such is the case with the mul- Indicators of efficiency?
tiple service contracts proposed by Pemex to develop fields in the Not surprisingly, the figures that the CFE does release about
Burgos Basin, an extension of the South Texas Embayment. itself portray a world-class model of productivity and efficiency,
Outside the Partido de Acción Nacional (PAN)—with which with power plants available 85 percent of the time at an aver-
President Fox is affiliated—no Mexican legislator supports Fox’s age thermal efficiency of 34 percent. The PRI and PRD have
full agenda, partly out of suspicion that the administration has seized on the numbers to support their contention that Fox’s
a much deeper privatization agenda than it has so far revealed. privatization plans are extreme and unneeded.
The PRI, the political force with the largest share of seats in Con- Of course, both have fallen into the CFE’s trap, thanks to the
gress, opposes the Fox plans and any changes to the constitution- hidden and distorted information. The questions that the PRD
al framework in oil, gas, and power. Historically, the PRD, an should be asking are: How many workers per plant does the CFE
ultra-nationalist, socialist party, has opposed the PAN initiatives. employ to achieve those figures for plant availability and thermal
The Fox proposals for the energy sector are no exception. efficiency? What is the quality of service—how frequent are vari-
Nevertheless, something must be done. Avoiding blackouts ations in voltage? Put it this way, and the CFE is not even close
and system disruptions in the near term through increased gen- to the record of U.S. and Canadian utilities, for example.
eration and transmission capacity has come at a high cost Additionally, both parties argue that the benefits of low pro-
because of the public debt incurred to finance the infrastructure. duction costs and the low prices that competition among private
The low levels of efficiency and productivity of the CFE have been generators can provide had already been achieved; electricity
a concern for a long time. Observers also note that the company’s prices in Mexico are among the lowest of developed countries.
too-large staff has become a considerable financial burden due Therefore, they conclude, private participation is not needed.
to benefits, pensions, and other employee-related benefits. However, electricity prices in Mexico have been kept arti-
ficially low through high subsidies. Prices do not reflect pro-
Statistics as secrets duction costs. Also, the quality of service is low. When subsi-
Theft is another problem. An estimated 23 percent of all power dies and service quality are taken into account, the CFE prices
produced by the state-run Light and Power Co. is illegally are among the highest in the industrialized world. Some politi-
siphoned off (as is all too customary in developing countries). cians in and out of the PRD have even argued that the solution
But perhaps the biggest issues are the absence of accurate is to force the commission to become financially self-sufficient
data about the electricity sector and the lack of public access to by granting it budgetary and administrative autonomy. But
what data is available. what “budgetary autonomy” means as applied to the heavily
Mexico’s federal power utility, the CFE, monopolizes not only subsidized CFE and Pemex is anybody’s guess.
the generation, transmission, and distribution of electricity, but Nevertheless, the PRD may be right when it asserts that the
information about its operations and finances. Critics say that Fox administration has overestimated future demand for elec-
agencies such as the CFE and Pemex systematically hide and dis- tric power, and that the legal status quo, especially if coupled
tort information, essentially preventing serious analysis of any with new measures to promote energy savings, may be ade-
issue within these sectors. Thus, there has been hardly any mean- quate for the rest of the Fox administration (to 2006). The fact
ingful evaluation of policy options and company performance. remains that neither the World Bank nor the Mexican gov-
Experts and officials outside those organizations cannot ernment is prepared to put up the tens of billions of dollars
answer even basic questions. They cannot say what capacity needed to upgrade and expand the power grid and distribution
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expansion and investments in generation, transmission, and system. Moreover, the outlook for more off-balance-sheet
distribution will be necessary in the next five years to meet the financing in the form of independent power projects is dim.
expected increase in demand. Nor can they evaluate the true Thus, sadly, to the extent that demand exceeds the ability
investment requirements for upgrading and maintaining cur- of the CFE to upgrade its efficiency, Mexican energy policy in
rent transmission and distribution assets. Answers to these electric power will be noted for blackouts, not forward-looking
• May 2002

questions require data that no one outside the CFE pos- ideas. If so, we can only hope that the Mexican experience will
sesses—not even Fox and certainly not members of the PRD. serve as a warning to other countries, such as India, where
This secrecy hampers enquiry in other ways. Historically, local governments believe that time is on the side of the oppo-
the CFE and Pemex have operated as self-regulated agencies. sition to private investment. • 15

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