Electric futility.

Mexican President Ernesto Zedillo proposes rewiring the Constitution to hook up with private investors.

MEXICAN STATE-OWNED ELECtric company Compania de Luz y Fuerza stands for just about everything President Ernesto Zedillo does not. Workers have one of the most generous labor contracts in the country, with low productivity requirements and job descriptions set in concrete. Management is equally staid in its ways, tacitly allowing massive theft of electricity from power lines and widespread fraud in payments from even large customers.

The result: The federal government subsidizes the power company to the tune of US$900 million annually, despite the firm's monopoly on power distribution in central Mexico. That's apparently more than any Yale-trained economist like President Zedillo can bear. "Mexico needs an electricity sector that can meet its needs for years to come," said Zedillo during his speech to propose a new power policy. "Now, that is not the case."

After years of bypassing the Constitution through independent power concessions that did not attract major private investment, Zedillo is now proposing to change the law of the land to allow a wholesale opening in electricity generation and retail power distribution. Easier said than done. Congress will not formally debate the measure until the fall, and even then it's not clear legislators will approve the program.

But nobody doubts that the new opportunities in are huge. Energy Minister Luis Tellez says $25 billion in investment is needed over the next five years, and the government will only be able to provide a fraction of that. International firms, like Enron, El Paso Energy and Electricite de France, have expressed interest in the opening.

The electricity sector has already undergone an opening of sorts to private investment. The $647 million generation plant near Ciudad Juarez called Samalayuca II was built by the General Electric Company, El Paso Energy and several smaller partners. It recently came on line and its 700 megawatts have given northern Chihuahua. along the Texas border, all the power it needs for now. A similar project in the Yucatan called Merida III is also under construction.

Power Delays. But Samalayuca II took years just to break ground, due to the uncertainty surrounding how to deal with private investment in the electricity sector. The main sticking point has been rates on power sold to government-owned utilities. Private investors want guarantees that prices won't fall behind inflation as they have in the past. Last year, the government paid subsidies of $183 per customer for Luz y Fuerza's 4.98 million users and $112 per capita for the 17.17 million clients of the much larger Comision Federal de Electricidad, or CFE--a total handout of $1.9 billion.

The government, however, has been loath to sign on the dotted line for fear of locking in politically unpopular price increases and implicitly adding to its debt responsibilities by providing a sovereign guarantee on financing. The issues can be overcome, but if all such projects were delayed as long as Salamayuca, officials say, Mexico's power sector would only continue to atrophy.

Short blackouts are already common across the country due to outdated plants. Large companies are building their own electricity plants to guarantee a steady supply of juice. Nonetheless, business leaders say the lack of power could affect new investments. "The availability of electricity is the main concern of most businessmen." says Eugenio Clariond Reyes, the CEO of Imsa, a large Monterrey-based steel company.

To attend to the needs of business. however, Zedillo will have to do some nifty horse-trading. Opposition to the opening in Congress might yet stop the plan in its tracks, particularly if traditionalist-minded members of Zedillo's own ruling Institutional Revolutionary Party (PRI) draw the line at opening the energy sector to foreign investment. That could be especially true because, by the time the initiative is debated, Mexico's presidential campaign to succeed President Zedillo will be in full swing. The Mexican Electrical Workers' Union-which not surprisingly says that its members earn paltry salaries for the work they do and don't enjoy benefits commensurate with the risks they take-is a major political force.

So Zedillo's plan might still come to naught, and Mexico's electricity supply will likely remain one of the great question marks hanging over the country's industrial future. "We need to change, we need to create an industry that can meet the challenges of the future," says Juan Eibenschutz, the director of production at Luz y Fuerza. "But there's a special way of doing things here and changing it will not be easy."