Mexico’s electric power market – who is subsidizing whom?
As Mexico’s government pushes a narrative that large private consumers are being favored by the electric power system at the expense of public utility CFE, an expert tells BNamericas the opposite may be true.
President Andrés Manuel López Obrador has repeatedly said that large private power consumers often pay lower electricity rates than local households and small businesses, and are thus being “subsidized” by the market, with CFE footing the bill.
This narrative has taken several forms – from the government pushing for higher transmission rates for renewable generators to the president’s public spat with Oxxo, Walmart and Bimbo, which were accused of paying artificially low rates despite the fact they get most of their electricity through self-supply and not CFE generation.
But the truth is more complicated than the administration lets on. In fact, CFE's transmission and distribution rates may be generating high profits that are used to surreptitiously offset deficiencies in other, less profitable activities at the utility.
According to Pablo Zárate, managing director at FTI Consulting México, the CFE Transmisión and Distribución units have been making transfers to commercialization arm CFE Suministro Básico to hide big losses at the latter.
Zárate told BNamericas that, since CFE’s transmission and distribution arms are supposed to provide services to Suministro Básico, the transfers – documented by the finance ministry every year – act as a discount on transmission and distribution services between subsidiaries that by law are supposed to work independently from each other.
“If you take away those payments filed as ‘guaranteed demand’, what you would have all of a sudden is a subsidiary [Suministro Básico] that loses money and CFE would be left exposed as a company that loses money in every activity except those where it has a monopoly,” Zárate said.
In 2019, CFE Transmisión made transfers of 16bn pesos to CFE Suministro Básico, and CFE Distribución did so for 18bn pesos, meaning the transfers totaled some US$1.7bn that year at the current exchange rate.
“And when you add those transfers back to transmission and distribution earnings, which would clear these accounting distortions, you realize that the profitability of transmission and distribution activities are 25% and 45%, respectively. For a regulated monopoly. It is several times what it should be, and something the CFE receives from the system as a whole,” Zárate said.
As a reference, it is common practice internationally to cap the profitability rate of transmission and distribution activities – usually below 15% – due to their monopolistic nature.
According to Zárate, if CFE’s current profitability in distribution and transmission was capped at 8%, in line with regional peers such as Chile, the firm would have to give up 65bn pesos in yearly profits that it receives today.
This amounts to a huge inefficiency that affects public finances and Mexico’s international competitiveness. “This is particularly relevant today, when the government is complaining about ‘hidden subsidies’ [benefitting private players] and perhaps it has not properly measured that there are hidden subsidies for state-owned companies that are enormous,” the expert said.
The government narrative that CFE and the national power system are burdened by private players also received a blow earlier this week when public policy research center IMCO warned that CFE could suffer a high cost if it decides to get rid of independent power producers (PIE) that supply Suministro Básico.
CFE could review or cancel PIE contracts due to new faculties granted by the recent reform to the electric power sector. For now, the law’s application has been suspended pending a series of amparo trials and a constitutional appeal approved by minority senators.
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But according to IMCO, PIEs produced 36% of the energy purchased by CFE Suministro Básico last year, and replacing that energy with CFE-produced power would invariably raise costs for Suministro Básico and end-users.
The center’s estimates suggest that, were PIEs completely barred from generating power this year, added generation costs would total 382.8bn pesos between 2021 and 2024. If PIEs were allowed to dispatch half the energy they currently do, the cost would reach 141.6bn pesos.
Mexico is pursuing a sweeping legal strategy aimed at curbing private participation in the electric power market through a reform of the electric power industry law (LIE) enacted by the president last month.
The new law changes the order of dispatch by putting public electricity generation first, regardless of cost; rewrites the rules for clean energy licenses and for self-supply contracts, and allows the government to review legacy contracts. It has drawn strong criticism from the private sector and market observers.
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