1 The Political Economy of Energy Reform in Mexico Armando Jimenez San Vicente, Ph D. 5-6 April, Rio de Janeiro, 2004 Copies of the study available at:

1

The Political Economy of The Political Economy of Energy ReformEnergy Reform in in MexicoMexico

Armando Jimenez San Vicente, Ph D.Armando Jimenez San Vicente, Ph D.55-6-6 April April,, Rio de Janeiro, 2004 Rio de Janeiro, 2004

Copies of the study availableCopies of the study available at: at:

Htpp//pesd.stanford.eduHtpp//pesd.stanford.edu

Instituto de Economia Instituto de Economia &&

Stanford Stanford UniversityUniversity

2

IndexIndex

1. Evolving History of the Mexican Power Sector.

2. Industry Structure and Fundamentals

3. Industry Achievements

4. Challenges

5. Conclusions

3

The Evolution of the Electricity The Evolution of the Electricity

Sector in MexicoSector in Mexico Strong correlation between the evolution of the electric sector and the political system.

Early history of private participation in profitable markets. 1960 /1970 Import Subtitution/Back to State control. World wave of energy reforms and Mexico’s structural reorganization (1980´s to 1990´s) An evolving agenda towards a market structure currently stalemated due to political gridlock.

4

Industry Structure and FundamentalsIndustry Structure and Fundamentals 1. The Mexican Electric System works as a vertically

integrated state owned monopoly. 2. Two state owned power utilities CFE and LFC

(entangled between social and company goals).3. Constitutional constraints that limit private investment

are closely related to the country’s nationalistic ideology.

4. In the 1990´s market bases were developed in the legal system to allow private participation (IPPs).

5. New market institutions are developing (Energy Regulatory Commission)

6. Urge to restructure public companies to make them financially healthy and more efficient .

5

The Mexican power sector is a vertically integrated state owned monopoly.

Private investment is limited to cogeneration and self supply.

Final UsersFinal UsersGenerationGeneration TransmisiomTransmisiom DistributionDistribution

87%87% 100%100% 100%100%

4%4%

9%9%

Cogeneration and Self supplyCogeneration and Self supply

Structure of the Power SectorStructure of the Power Sector

Public Companies Public Companies (CFE y LFC)(CFE y LFC)

Public CompanyPublic Company(PEMEX)(PEMEX)

Private SectorPrivate Sector

August 2003

6

Permits Granted for Generation by CRE

ModalidadNúmero de Permisos

Capacidad(MW)

Energía(GWh/año)

Inversión(Millones de dólares)

Autoabastecimiento

Cogeneración

Producción Independiente

Exportación

Importación

Total

151

35

6,311.5 36,346.9 4.581.9

2,177.9 12,977.9 1,224.3

17 9,277.1 63,363.8 5,102.4

7

216

6 2,186.4

41.4

15,181.4

60.7

1,387.5

12.2

19,994.3 128,330.7 12,308.3

From January 1994 to February 2003, the Regulatory Commission granted 240 permits, 216 are in operation with a total capacity of 19,942.2 MW.

7

AchievementsAchievements1. Around 95% of the population is serviced by the two

utility companies.

2. Social compromise to guarantee reliable power supply at affordable tariffs to low income users.

3. A diversified fuel mix for generation despite been one of the largest world oil producing countries.

4. A reasonably reliable service for industry and citizens when compared to other public services.

5. No crisis in generation in the past that pressure for reform.

8

Electricity CoverageElectricity Coverage

Power electricity coverage in Mexico is one of the highest for developing countries, compromising around 95% of the mexican families.

Those outside the network are located in remote locations.

Due to the country`s irregular geography no all the States enjoy the same supply standards. Usually the poorest are the worse serviced.

97-99%97-99%

95-97%95-97%

93-95%93-95%

90-93%90-93%

87-90%87-90%

87.3

87.9

88.5

89.3

89.4

86 87 88 89 90

Veracruz

Guerrero

SLP

Chiapas

Oaxaca

Fuente: INEGI; XI Censo general de Población y Vivienda

States with the Lowest (%)

9

Power Generation according to Power Generation according to Fuel Source (2003)*Fuel Source (2003)*

Despite the fact that Mexico is one of the largest oil producing countries its fuel basket for power generation is quite diversified. In the future most of the infrastructure for power generation will be developed with natural gas .

Total 42,919 MW

Fuel Source:

Coal Coal (6.3 %) 2,600 MW (6.3 %) 2,600 MW

Dual (5.1 %) 2,100 MWDual (5.1 %) 2,100 MW

Internal combustion 144MW

Wind 2 MW

Nuclear (3.3 %) 1,365 MWNuclear (3.3 %) 1,365 MW

Combined cycle (17.8%) 11,964 MWCombined cycle (17.8%) 11,964 MW

GeGeothermical othermical (2 %) 853 MW(2 %) 853 MW

Hydroelectric (23.3 %) 9,608 MWHydroelectric (23.3 %) 9,608 MW

SteamSteam (41.7%)(41.7%) 14,283 MW14,283 MWFuente: Secretaría de Energía

* Datos hasta agosto de 2003

10

ChallengesChallenges

1. High growth rates in power demand forecasted for the next ten years.

2. Government unable to make the required investments.

3. Financial gridlock with heavily indebted public utility companies and large and inefficient subsidies in electric tariffs

4. The new economy requires highly reliable and affordable power sector to maintain competitiveness.

11

Evolution of Forecasted Evolution of Forecasted Power Demand 2002-2011Power Demand 2002-2011

0

10000

20000

30000

40000

50000

60000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Combined Cycle

Fiel Oil

Hidro and Geo

Dual

(Megawatts)(Megawatts) In the next 10 years more that 29,000 MW will be added to to current capacity. Most of the power generation capacity will come form combine cycle plants.

SupplySupply

The annual growth rate of 5.6% The annual growth rate of 5.6% will be triggered by the industrial will be triggered by the industrial and residential sectors.and residential sectors.

DemandDemand

50

80

110

140

170

200

230

260

290

1990 1996 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

5.6%

Fuente: Comisión Federal de Electricdad

Pu

blic

Ser

vice

sS

elf

con

sum

pti

on

TW

h

12

ChallengesChallenges

1. High growth rates in power demand forecasted for the next ten years.

2. Government unable to make the required investments.

3. Financial gridlock with heavily indebted public utility companies and large and inefficient subsidies in electric tariffs

4. The new economy requires highly reliable and affordable power sector to maintain competitiveness.

13Fuente: Secretaría de Energía con datos de CFE y LyFC.

39%

61% 59% 51% 52% 47% 41% 42% 41% 42%

61%

39%41%

49% 48%

53%59% 58.0%

59%58%

0

15,000

30,000

45,000

60,000

75,000

90,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

38.2

51.5 48.954.2 53.0

61.766.4 66.3

71.174.3

Investment Requirements for the next Ten Years

Around USD $ 56 billion will be required in the next 10 years to develop infrastructure.

Less than have of the required investment will come from the public budget. Almost all private investment will come from foreign companies.

Financed Public WorksFinanced Public Works

Public BudgetPublic Budget

2002-20112002-2011

(Billion USD ) (Billion USD ) Pesos of 2002Pesos of 2002

14

ChallengesChallenges

1. High growth rates in power demand forecasted for the next ten years.

2. Government unable to make the required investments.

3. Financial gridlock with heavily indebted public utility companies and large and inefficient subsidies in electric tariffs

4. The new economy requires highly reliable and affordable power sector to maintain competitiveness.

15

0

20

40

60

80

100

120

140

1998 1999 2000 2001 2002 2003 e/

CFE y LyFC Debt ProfileCFE y LyFC Debt Profile Total debt for 2003 amounted to Total debt for 2003 amounted to USD $ 13 billion dollarsUSD $ 13 billion dollars * *

((PIDIREGAS and labor obligations are not included).PIDIREGAS and labor obligations are not included).

Just in this administration the debt of CFE y LyFC has increased in 50%.

The current financial mechanism (PIDIREGAS) will last only for another five years, other mechanisms have been explored like PPPs.

(USD Billion)

CFE

LyFC

Fuente: CFE y LyFC. e/ Cifras estimadas al mes de diciembre de 2003.

9.57 9.32 9.07 8.79

12.2513.18

3.00 2.88 3.0 3.22

3.47 3.58

9.608.79

5.576.076.456.56

16

CFE debt is affected mainly by labor pensions, in 2002 it represented 58% of the company´s total debt.

In the last five years the burden on public finances of electric tariffs subsidies has double, amounting more than USD $ 5 billon per year.

Debt and SusidiesDebt and Susidies

Ratio Debt/Income * (%)

* Se refiere a los ingresos brutos por venta de energía, los pasivos incluyen obligaciones laborales y arrendamiento de PIDIREGAS.

Fuente: SENER con datos de CFE.

0%

50%

100%

150%

200%

2000 2001 2002 2003 e/

Subsidies CFE y LyFC(thousand million pesos )

0

100

200

300

400

500

600

700

1998 1999 2000 2001 2002 2003*

17

ChallengesChallenges

1. High growth rates in power demand forecasted for the next ten years.

2. Government unable to make the required investments.

3. Financial gridlock with heavily indebted public utility companies and large and inefficient subsidies in electric tariffs

4. The new economy requires highly reliable and affordable power sector to maintain competitiveness.

18

ConclusionsConclusions Reform efforts stalled due to lack of government

capability to build consensus for structural reforms. No power reform seems possible from here to the next

presidential elections. Urgency to reform: Most likely the financial crisis of

the power sector will blow up to the next administration.

No other financial mechanisms (PPPs) seem feaseable to finance the large requirements to develop infrastructure.

Too much competition for investment around the world.

Risk of devolving the achievements in building a market structure.