The Legal Separation of Mexico’s Federal Electricity Commission

By Jose María Lujambio

The constitutional energy reforms enacted in Mexico in late 2013, mandated Congress to grant the Department of Energy (known by its Spanish acronym as “SENER”) the authority to establish rules strictly separating certain activities of the electricity sector in order to promote open access and efficient operation, and to monitor its compliance. Since then, the bases for the disaggregation of the sector’s value chain activities have been established, aimed to serve as a fundamental component of ensuring effective competition.

 

The Electric Industry Law (known by its Spanish acronym as “LIE”) of 2014 provided that the activities of generation, transmission, distribution, commercialization and supply of primary products should be performed independently, under a strict regime of legal separation. Further, when such a structure is deemed to be insufficient to ensure compliance with the constitutional purposes, the SENER may order the corporate divestiture of assets and rights.

 

In light of the outlined principles, the Fourth Transitory Article of the LIE states that the Federal Electricity Commission (known by its Spanish acronym as “CFE”) should reorganize its corporate structure into distinct state-owned companies, pursuant to the following rules:

  • Vertical legal separation among generation, transmission, distribution and commercialization.
  • Horizontal legal separation of generation to a number of units that will promote the efficient operation of the sector and be subject to standards of competition and free market participation.
  • Horizontal accounting, operational, functional or even legal separation of distribution in a regional manner.

 

After intense discussions within the federal government, in January 2016, the SENER finally published the Terms for the strict legal separation of the CFE (the “Terms”) in the Official Journal of the Federation (known by its Spanish acronym as “DOF”). In the implementation of the Terms, the prior administration created six subsidiary generation companies with power plants assigned without any specific geographic or technological criteria; a transmission subsidiary for assets with a voltage equal to or greater than 69 kV; a distribution subsidiary with sixteen regional subdivisions; a subsidiary for basic supply; an affiliate for qualified supply; an “intermediary generation” affiliate for the management of legacy contracts; and two affiliates for the purchase and sale of fuels (CFEnergia in Mexico and CFEi abroad).

 

During 2016, the new entities supposedly began operating independently, with their own personnel. By January 2017, they were supposed to have independent systems and facilities, and the unbundling process was supposed to be completed by December of that same year. It was undoubtedly a very complicated and painful process for a state monopoly that had existed for eight decades.

 

Without having in place any true “Chinese walls”, those within the CFE who strongly opposed the legal separation of the CFE embraced the arrival of Andrés Manuel López Obrador as the President of the Republic of Mexico. His administration adheres to an ideology that favors state monopolies. Within three months of the start of his administration, the SENER has already decided to take a few steps back and modify the Terms of separation of the CFE. The preliminary draft of this plan was submitted for a brief period of public consultation on March 13 and was published in the DOF after only twelve days.

 

Although the restrictions imposed by higher-ranking rules prevent a total reintegration, the following proposed changes are concerning:

  • Where at least four generation subsidiaries were supposed to be created, now the Terms simply say that there will be one or more companies to perform such activity. It is expected that this flexible rule will be fulfilled with the creation of only one subsidiary. Although horizontal unbundling seemed to be an illusion, at least it was an attempt to create competition.
  • In transmission and distribution, the new rules eliminate the possibility of having associations or contracts with private parties for financing, installation, expansion, maintenance, management and operation of infrastructure, so that now it is established that said services will be provided in accordance with Article 27 of the Constitution. This seems inconsequential because the aforementioned possibility is foreseen by the Constitution itself and the LIE. However, this sends another message of disdain with respect to the involvement of the private sector in these activities.
  • The various entities may coordinate with each other, if the objective is the reduction of operating costs and prices for the end user. Could these new companies then openly collude to exclude competitors? The Federal Economic Competition Commission should have the last word.
  • Employees can be shared amongst companies when costs in commercialization (supply) and distribution can be reduced and when there would be an advantage owing to economies of scale. Doing such may ruin the separation of functions between grid connection and power supply, with the possible conditioning of services to the detriment of qualified suppliers.

 

The CFE has sixty calendar days to submit to SENER a proposal for the reallocation of assets and generation contracts. If the CFE proposes to reintegrate the generation companies into only one company, it would not appear to be the path to efficient operation of the sector, under competition and free market participation, as prescribed by the LIE. The new government might be willing to take part in the electricity market under the legal framework of the 2013-14 reform, but through a strongly reinforced CFE. We hope that the results of this will feature a true electricity market.