ELECTION, WIDE DISAGREEMENT EXPECTED TO DELAY REFORMS IN ELECTRICITY SECTOR UNTIL AT LEAST END OF 2003.

The debate over reform of the electrical-power sector remains very contentious, but little action is expected from the Mexican legislators because of the midterm congressional elections and because the two sides remain polarized.

The Congress has already decided that some reform to the electrical power sector is needed to help ensure an adequate supply of electricity for future generations. The extent of reform remains under question. President Vicente Fox and his supporters are pushing for reforms that would remove barriers to private investment.

As an alternative, the center-left Partido de la Revolucion Democratica (PRD) and most members of the former governing Partido Revolucionario Institucional (PRI) are seeking to provide greater self-determination to the state-run utilities Comision Federal de Electricidad (CFE) and Compania Luz y Fuerza del Centro (LFC) to allow them to become more efficient.

The issue has been under debate since 1999, when former President Ernesto Zedillo first proposed constitutional changes to allow private companies to participate in the generation of electrical power for Mexican consumers (see SourceMex, 1999-02-03).

A program implemented during the administration of former President Carlos Salinas de Gortari, the Produccion Externa de Energia (PEE), already allows companies to construct power plants to provide electricity for their own use and to sell to some commercial users under 25-year concessions.

Zedillo later withdrew his proposal because of strong opposition to the plan ahead of the 2000 election (see SourceMex, 1999-04-28 and 2000-02-02).

Fox has attempted to resurrect the proposal, sending his own proposal to Congress in 2002 (see SourceMex, 2002-09-25). Fox's efforts have been supported by members of his center- right Partido Accion Nacional (PAN), a handful of legislators and governors from the former governing Partido Revolucionario Institucional (PRI), and most business organizations.

Like his predecessor, Fox has run into stiff opposition from labor, the PRD, and a majority of PRI legislators (see SourceMex, 2001-01-06). The PAN, while continuing to support Fox's proposal to bring private investment into the sector, has backed off plans to push through constitutional reforms (see SourceMex, 2002-03-13).

In view of the opposition, Fox has attempted to implement small changes, such as proposing that the CFE and LFC be allowed to purchase electricity from private companies. But opponents have challenged this plan and other similar proposals as unconstitutional (see SourceMex, 2001-07-18).

Government says lack of reforms inhibits investment

The Secretaria de Energia (SENER) and some private analysts say the inability of Congress to approve reforms, regardless of whether they involve changes to the Mexican Constitution, could drive away potential investors from the Mexican electricity market.

"The climate of uncertainty regarding a legal framework for the energy sectors has reduced the interest of private companies to invest in generation of electrical power in Mexico," the CFE said recently.

The Comision Reguladora de Energia (CRE), which oversees investments in the electricity sector, estimates that private entities have frozen potential investment of US$3.67 billion in the Mexican electrical sector this year because of a lack reforms.

Some companies that have considered participation in electricity generation have been successful in projects under the PEE. Spokespersons for these companies say they may place investments in other countries unless the Congress moves forward with some privatization of the electrical-power sector, even without changes to the Constitution.

Electricite de France (EdF), the foreign company that has the greatest investments in Mexico, is among those that have threatened to significantly reduce expenditures in the country. In four years, EdF has spent US$1.3 billion on projects through the PEE, accounting for 2,230 megawatts in new capacity. This is equivalent to 6% of all the energy produced in Mexico.

Fernando Ponesso, vice president of Latin American operations for EdF, said the PEE scheme is no longer sufficient to attract needed investment to Mexico. "As long as conditions are not made attractive, investments are not going to come," said Ponesso, pointing out that companies are no longer taking the risks that they once took.

Critics say autonomy for state utilities could solve problems

But critics say it is in Mexico's best interest to retain sovereignty in energy generation. Several companies that have investments in Mexico, such as EdF, Belgian-French consortium Tractebel, and Spain's Ibedrola, are among a group of seven European-based entities seeking to dominate production of electricity in Europe and Latin America, said Steve Thomas, a researcher at Greenwich University in Britain.

In a recent paper, Thomas said there is no evidence that the free-market model would generate sufficient competition in the electrical sector. The researcher said government monopolies, despite their faults, provide a steady source of electrical power at prices that all consumers can afford.

The Frente Nacional de Resistencia en Privatizacion de la Industria Electrica argues that the Mexican electrical sector has the potential to become self-sustaining and does not need foreign investment.

The Frente, along with the Sindicato Mexicano de Electricistas (SME), said the policies of former Presidents Salinas and Zedillo and President Fox have prevented the CFE and LFC from using revenues to modernize. The SME said the CFE has accumulated as much as 17 billion pesos (US$1.51 billion), which it has not been allowed to invest in projects or maintenance. "These funds are urgent for the electricity sector to function properly," the SME said.

The proposal to award greater financial and managerial autonomy to the CFE and LFC is supported by all political parties and could be a starting point for energy reform, said analyst Cesar Hernandez Ochoa of Centro de Investigacion para el Desarrollo (CIDAC).

Hernandez Ochoa doubts, however, that the plan could advance without the endorsement of the administration. "The biggest loser would be the Secretaria de Hacienda y Credito Publico (SHCP), which would lose its ability to control tariffs and regulate the sector," said the CIDAC analyst.

With both sides so polarized, analysts doubt that any major reforms will be passed in the near future, especially with congressional and several key gubernatorial elections scheduled for this year.

Alberto Espinoza, president of the Instituto Mexicano de Ejecutivos de Finanzas (IMEF), said he did not anticipate a vote on the issue until the end of this year, at the earliest. "It would be wishful thinking that deputies could see the scenarios for Mexico if we don't approve an electrical reform as soon as possible," he said.

Even with companies like EdF threatening to reduce investments, the federal government is counting on the private sector to produce about 3,550 MW of new electrical capacity, accounting for more than 80% of the new energy generated in Mexico during 2003.

Eduardo Andrade, president of the Asociacion Mexicana de Energia Electrica, said foreign companies TransAlta, Iberdrola, and Union Fenosa are scheduled to complete five new thermoelectric plants this year at a cost of US$3 billion.

Government launches huge project in Nayarit state

The Fox administration is also proceeding with some very important electrical projects to enhance Mexico's capacity in the near future. Among the projects scheduled to be launched this year are the huge hydroelectric power plant El Cajon on the Santiago River in Nayarit state, the mixed-power plant Mexicali II in Baja California state, and an alternative- energy plant in Oaxaca state.

These plants are part of the Fox administration plan to construct 10 new electrical-power facilities over the next several years, which will help ensure an adequate supply of electricity in Mexico, said CFE director Alfredo Elias Ayub.

The administration's most ambitious project by far is El Cajon because of its magnitude and its impact on the Mexican electrical sector. The plant will require at least US$700 million in investment, funded in part through the government's long-term capital debt program (Proyectos de Infraestructura Productiva de Largo Plazo, Pidiregas). Funds for the project were set aside in the 2002 budget.

Construction of El Cajon, which will have the capacity to produce 750 MW, is expected to create 6,000 new jobs.

Three consortia comprising Mexican and foreign companies have qualified to submit bids to construct El Cajon.

Fox administration officials said the process will be fully transparent, ensuring that public funds are used in the most efficient manner. Federal Comptroller Francisco Barrio Terrazas said the organization Transparencia Nacional will ensure that the process is fair and meets the highest technical and financial standards required by law.

The Fox administration is also proceeding with a couple of projects that involve alternative energy. Construction and operation of the mixed-power plant Mexicali II will be open only to companies able to use combined cycles and solar power. The combined cycle process produces electricity both from natural gas and steam.

The CFE is prepared to offer a grant of US$49.3 million to the winning bidder. Funds for the grant were provided by Global Environment Facility, an organization affiliated with the World Bank. Several Asian, Mexican, and US companies have expressed interest in the project.

The CFE has also proposed the construction of a second environmentally friendly plant in Oaxaca state. The plant is modeled after a similar facility in the La Venta region, near the community of Juchitan, Oaxaca state. That plant was completed in 1994. The new plant, which will have a capacity of 50,000 kilowatts, will incorporate new technology that will reduce emissions of gas, carbon dioxide, and other harmful substances. Construction is scheduled for completion in 2005. [Note: Peso-dollar conversions in this article are based on the Interbank rate in effect on March 5, reported at 11.21 pesos per US$1.00] (Sources: Milenio Diario, 01/16/03, 01/21/03, 02/04/03; El Financiero, 01/21/03, 02/13/03; La Cronica de Hoy, 01/13/03, 02/04/03, 02/06/03, 02/10/03, 02/19/03; Reforma, 01/21/03, 02/20/03; Notimex, 02/23/03; Agencia de noticias Proceso, 02/19/03, 02/25/03; El Universal, 02/20/03, 03/04/03; La Jornada, 02/13/03, 02/18-20/03, 03/05/03)