Mexico ponders power reform
No one said it would be easy. In February 1998, Mexican president
Ernesto Zedillo announced an ambitious proposal to overhaul the
country's electricity sector allowing greater private investment.
His administration hoped to swiftly pass the programme and begin an
effort to stave off a looming energy shortage. Instead, opponents
of the plan have stalled congressional debate and the
constitutional amendments necessary to implement it until the next
legislative session begins in September 1999. While many believe
that Zedillo's party, the Partido Revolucionario Institucional
(PRI), can push the programme through the lower house of congress,
the political toll may be high.
In Mexico, where brownouts are commonplace, few doubt the need for some level of power sector reform. Still, the Mexicans are frustrated with the expense and mixed results of privatization to date.
The prospect of opening yet another industry to foreign control has raised nationalist sentiment among voters. As the July 2000 presidential election approaches, the PRI's opponents are capitalizing on it. The PRI faces tough competition in this contest ? Zedillo is ineligible for reelection ? and cannot afford for electricity sector reform to become a great political liability. Consequently, once congressional debate begins a much less radical plan may emerge.
Mexican energy secretary Luis Téllez projects that demand for electricity will grow at an annual rate of 6% over the next six years and will quickly outstrip supply. To ensure an adequate supply of reliable, competitively priced electricity over the long term, he predicts that approximately $25 billion in investment will be needed by 2005. This would expand Mexico's generating capacity by 13,000MW ? one-third of existing capacity ? to 52,000MW, and would modernize the country's distribution and transmission systems to improve quality and reliability of service.
A central issue of the reform debate is whether this investment should be financed from the state's coffers or whether one of the remaining bastions of national control should be opened to foreign investment. Zedillo's administration has emphasized that the government simply cannot afford to divert resources from other priorities.
Until 1992, the Mexican constitution had vested within two vertically-integrated state-owned monopolies, Comisión Federal de Electricidad (CFE) and Compañia de Luz y Fuerza del Centro (LFC), the exclusive authority to generate and supply electricity in Mexico. In 1992 the Carlos Salinas de Gortari administration liberalized the power sector, allowing private companies permits to own and operate generating facilities, provided that they sold their electricity output to CFE or used it for private consumption. As a result of these reforms, a nascent private power industry now exists in Mexico.
Despite developer interest in expanding into the Mexican market, the growth of independent power producer (IPP) projects has been limited by access to the long-term financing. While multilateral and export credit lenders can provide such long tenors, their appetite for Mexican IPP projects is limited by country exposure ceilings and credit exposure limits to the state electricity authority. Zedillo's proposal would address this quandary by freeing independent power projects from CFE credit limitations.
The proposed reforms would establish a competitive electricity market, allowing private companies even greater opportunities.
Private companies would be permitted open access to the transmission grid and could bid for 30-year regional distribution and transmission concessions. Further, they could enter into long-term bilateral contracts with other market participants on freely negotiated terms. A wholesale market, the Mercado Eléctrico Mayorista, would be created, allowing market participants to buy and sell electricity under open, competitive conditions. Generating companies operating under existing contracts could either accept a government buyout or continue under their current contracts.
Under the proposal, CFE and LFC would be reorganized into generation companies, regional distribution companies and the Red Eléctrica Nacional, which would operate the national transmission grid. In a few years, the publicly-owned generation and distribution companies, as well as the Red Eléctrica Nacional, would be privatized. Exceptions are made for the country's nuclear power plants, which will remain under government control, along with its hydroelectric plants, but which may be operated under private concessions. A decentralized, state-owned entity would be created to be a market operator to control the physical and financial flows of the system.
The devil is in the details. While announcement of the reform package has piqued foreign investors' interest, the level of foreign activity will depend on the thrashing out of regulatory details.
Developers are enthusiastic and say they are ready to make considerable investments in the Mexican energy industry, should the reforms come to pass. Lenders, on the other hand, are more reserved, incredulous that Mexico will be able raise $25 billion in so short a timeframe.
Thomas Hechl, partner, and Wendy Hannan, associate, represent the International Finance Corporation with respect to the financing of the 450MW Altamira power project in Mexico.
In Mexico, where brownouts are commonplace, few doubt the need for some level of power sector reform. Still, the Mexicans are frustrated with the expense and mixed results of privatization to date.
The prospect of opening yet another industry to foreign control has raised nationalist sentiment among voters. As the July 2000 presidential election approaches, the PRI's opponents are capitalizing on it. The PRI faces tough competition in this contest ? Zedillo is ineligible for reelection ? and cannot afford for electricity sector reform to become a great political liability. Consequently, once congressional debate begins a much less radical plan may emerge.
Mexican energy secretary Luis Téllez projects that demand for electricity will grow at an annual rate of 6% over the next six years and will quickly outstrip supply. To ensure an adequate supply of reliable, competitively priced electricity over the long term, he predicts that approximately $25 billion in investment will be needed by 2005. This would expand Mexico's generating capacity by 13,000MW ? one-third of existing capacity ? to 52,000MW, and would modernize the country's distribution and transmission systems to improve quality and reliability of service.
A central issue of the reform debate is whether this investment should be financed from the state's coffers or whether one of the remaining bastions of national control should be opened to foreign investment. Zedillo's administration has emphasized that the government simply cannot afford to divert resources from other priorities.
Until 1992, the Mexican constitution had vested within two vertically-integrated state-owned monopolies, Comisión Federal de Electricidad (CFE) and Compañia de Luz y Fuerza del Centro (LFC), the exclusive authority to generate and supply electricity in Mexico. In 1992 the Carlos Salinas de Gortari administration liberalized the power sector, allowing private companies permits to own and operate generating facilities, provided that they sold their electricity output to CFE or used it for private consumption. As a result of these reforms, a nascent private power industry now exists in Mexico.
Despite developer interest in expanding into the Mexican market, the growth of independent power producer (IPP) projects has been limited by access to the long-term financing. While multilateral and export credit lenders can provide such long tenors, their appetite for Mexican IPP projects is limited by country exposure ceilings and credit exposure limits to the state electricity authority. Zedillo's proposal would address this quandary by freeing independent power projects from CFE credit limitations.
The proposed reforms would establish a competitive electricity market, allowing private companies even greater opportunities.
Private companies would be permitted open access to the transmission grid and could bid for 30-year regional distribution and transmission concessions. Further, they could enter into long-term bilateral contracts with other market participants on freely negotiated terms. A wholesale market, the Mercado Eléctrico Mayorista, would be created, allowing market participants to buy and sell electricity under open, competitive conditions. Generating companies operating under existing contracts could either accept a government buyout or continue under their current contracts.
Under the proposal, CFE and LFC would be reorganized into generation companies, regional distribution companies and the Red Eléctrica Nacional, which would operate the national transmission grid. In a few years, the publicly-owned generation and distribution companies, as well as the Red Eléctrica Nacional, would be privatized. Exceptions are made for the country's nuclear power plants, which will remain under government control, along with its hydroelectric plants, but which may be operated under private concessions. A decentralized, state-owned entity would be created to be a market operator to control the physical and financial flows of the system.
The devil is in the details. While announcement of the reform package has piqued foreign investors' interest, the level of foreign activity will depend on the thrashing out of regulatory details.
Developers are enthusiastic and say they are ready to make considerable investments in the Mexican energy industry, should the reforms come to pass. Lenders, on the other hand, are more reserved, incredulous that Mexico will be able raise $25 billion in so short a timeframe.
Thomas Hechl, partner, and Wendy Hannan, associate, represent the International Finance Corporation with respect to the financing of the 450MW Altamira power project in Mexico.
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