Let’s Kick Around CFE Some More

The electricity utility deserves it

On December 2013 the Mexican electricity industry underwent a profound transformation. The need for the reform was greatly justified by several factors, such as market diversity of the generation and sustainability, competitive pricing, efficient power system expansion, and CFE’s rickety financial performance and execution capabilities.

It went from a centrally planned system dating back to the mid-1900’s, where CFE had a social mission to supply electricity under a vertical monopoly arrangement, to a market where the benefits will be reaped by those who are most able to influence market dynamics. CFE has turned into -at least- 14 different companies, divided within the generation, transmission, distribution, basic supply and qualified supply segment.

From a customer’s view point the most significant consequence of the reform, is that CFE no longer has a social mission. Instead, the revenue requirement for each of the separate CFE entities will inevitably force management to compete with market forces to maximize profits. Set aside the CFE utility companies which are subject to a requirement that everyone gets some juice,  CFE is competing against new private market participants. These participants, represented by private global utilities, investment funds, and other investors are very competitive in their marketing, placing more pressure on CFE’s revenue requirement.

Baja California Sur has very peculiar characteristics when it comes to its power system. After four years of reforms, the winners are clearly the sellers, (CFE) and the buyers, (consumers), are the losers.

BCS is an island for power systems, because it is not connected to mainland Mexico or Baja California. This means we are not able to export electricity to other regions, nor able to import cheaper electricity from other regions.

CFE has neglected, for years, the maintenance and expansion of the high and low voltage grid. This, in turn, has caused that the grids are not able to sustain all the power needed to meet the current and forecast demand. According to official data, BCS is the fastest growing region in economic terms in Mexico. Well above the national average, and such growth is expected to sustain for the next 5 years. Nonetheless, the high voltage grid has capability of 0% growth rate for the next 5 years. Inevitably economic growth will stagnate in the region. It is well known that economic growth and power system expansion goes hand in hand.

The bottleneck created on the high and low voltage grid due to lack of proper maintenance and expansion creates a perverse incentive for the incumbents. No new sellers can come into the market, which means that established sellers will face no competition. For buyers, it means they will have to buy at whatever price seller sets. Surely, this issue has more to do with system expansion than market forces, but at the end is all tied up as one. Nonetheless, it’s nothing that a properly organized demand can’t easily overcome.

BCS power system runs on fossil fuels, and therefore its prices are heavily dependent on the fluctuating prices of oil and gas. Moreover, CFE has long term commitments for the purchase of natural gas, eliminating any incentives to allow new entrants. Surprisingly, CFE current interests in BCS do not use the renewable resources potential the region offers.

Much is said about the high electricity prices in BCS, and realistically they should be higher. There is a mismatch between wholesale and retail prices, which can only be explained by heavy government subsidies. Subsidies are perverse. First and foremost, they cloud price signals resulting in under investment. Second, they can be taken away any moment. And third, upgrading the infrastructure that requires subsidies, takes years to complete.

Ignoring price signals and deferring investments can be offset in the short term by subsidies. But in the long term, these situations can have dire results, such as shortages, black outs, and even negatively impact economic growth.