Mexico
Q&A

'To the extent that CFE is protected from competition, it will be made weaker'

Bnamericas
'To the extent that CFE is protected from competition, it will be made weaker'

The Mexican government is promoting major changes in the energy sector that seek to benefit state companies Pemex and CFE over their private competitors.

While Pemex's difficult financial situation has been widely discussed in the industry, the national oil company’s counterpart in the electric power sector appears to be better positioned.

However, some experts say CFE employs a series of mechanisms that distort its accounting, and disguise the financial situation of its various subsidiaries.

BNamericas spoke with the energy coordinator of the Mexican Institute for Competitiveness (IMCO), Óscar Ocampo, about the finances of the state company and its role in the reforms of the energy sector promoted by the government of Andrés Manuel López Obrador.

According to Ocampo, although the current government intends to strengthen CFE by protecting it from competition, this strategy may backfire since the only way to bolster the company in the long term would be to increase its competitiveness.

BNamericas: The government has implemented in many areas a strategy to strengthen CFE and put off private producers. We have seen it in changes to the law, in regulatory changes, etc. Ultimately, what impact do you expect this to have on CFE and its finances?

Ocampo: The best way to strengthen CFE is to make it compete, and also inject more competition into the markets. To the extent that CFE is protected from competition, it will be made weaker, less efficient and with much more fragile finances.

CFE does not have the resources to invest what must be invested in all the links of the chain. It doesn’t have the capacity to generate with the levels of efficiency that the private sector can offer. CFE should focus on the businesses that legally correspond to it: transmission and distribution. And I'm not saying that you should totally drop generation. CFE must continue participating in the generation market but competing. This fixation with protecting it from the competition contributes little to having a stronger CFE.

In financial terms, the investments they’re making to expand their generation capacity, the way they’re investing, I think is going to have highly negative consequences for their financial position in the coming years.

BNamericas: What’s the current situation of CFE? Which of its subsidiaries have a more robust financial situation?

Ocampo: In recent years, CFE has been generating profits. 2017, 2018 and 2019 it posted positive numbers and in 2020 it lost money for a very interesting reason. Due to the pandemic and the drop in demand, there were very low fuel prices, but CFE lost money anyway. And this happened because they renegotiated the collective bargaining agreement with the union and that renegotiation, which was basically to reverse the changes that had been made four years before to have a slightly less onerous contract for public finances, caused CFE to lose more or less 35bn pesos [about US$1.7bn] in 2020. 

In other words, CFE is generally a profitable company, but it has a problem that has to do with where it invests its resources. With the energy reform [of 2013-14], CFE was separated along the components of the electricity value chain. Generation, transmission, distribution and basic supply to low consumption users were separated into different subsidiaries.

In generation, almost all lose money. There are six generation subsidiaries that at the time shared the plants operated by CFE. Of those six, five lose money year after year. The only one that generates profits is CFE Generación V. It’s the one that administers contracts with independent energy producers [PIEs]. The PIEs arose from the electricity law of 1992 as a way to reverse the prohibition of private participation in generation. At that time, combined cycle plants were on the rise and CFE didn’t have the technology or the resources to do that, and the PIE structure was created to make room for a kind of private participation. The PIEs sell all their energy to CFE and CFE Generación V is the subsidiary that manages these contracts and is the only one that generates profits.

In transmission and distribution, those two are very profitable subsidiaries. They are legal monopolies of CFE, although they have profits regulated by rates established by the energy regulator. This is where the revenues from CFE Transmisión and CFE Distribución come from.

And then there is the basic supply, which is a subsidiary that makes losses year after year. And it has losses not only because of the subsidized rate that it has to give to low-consumption users or the agricultural sector, but also because it’s a company that has never been reformed, that has a very large labor liability, that doesn’t work efficiently.

A very important business of CFE is, in addition to subsidiaries, the reform that allows it to create affiliates. The central difference is that subsidiaries operate as public companies and affiliates as private companies. In the affiliates you can include private investment, which has not been done, but theoretically it is a possibility. And the affiliates have very lucrative business, which are CFEnergía and CFE Internacional. These are two sister companies that are dedicated to the sale of fuel and specifically natural gas. CFE is a very important player at the North American level in the natural gas market, and that’s a great business. At the CFE level it may seem somewhat less, but it really has income that is quite significant.

Broadly speaking, that’s the financial situation of CFE. It has subsidiaries that generate a lot of resources and it has subsidiaries that drain resources.

BNamericas: What makes these transmission and distribution subsidiaries so profitable?

Ocampo: At the end of the day, CFE's greatest assets are not so much its generating plants, but its networks. They have three highly competitive networks: the transmission network, the distribution network, and the gas pipeline network. Nobody else has those networks in Mexico and that gives them a tremendous competitive advantage. Being the legal monopoly of the Mexican State, they would have to handle it very badly to have losses. Interestingly, CFE's large assets are not a priority. Since the recent blackouts, the focus has been more on the need to invest in the transmission network, but prior to this it was not really in the debate.

To illustrate this, in 2018, CFE Transmisión committed the income of some assets to raise capital via Fibra E, a trading instrument offered on the Mexican stock exchange in February of that year, and with which they raised 16.2bn pesos. That money, which is greater than CFE Transmisión's physical investment program for this year, which is more or less 10bn pesos, was intended to be reinvested in the transmission network. But since there is no lock on the destination of these resources, they decided to invest it in expanding the generating capacity of CFE, in building new plants, something that the private sector companies do better, cheaper and cleaner, instead of investing it in the transmission network.

If you look at the maintenance and physical investment budgets, transmission and distribution have tiny budgets compared to both the generation budget and the needs of the grid. We can see this in the blackouts of December 28, or the blackouts that have recently been afflicting the Yucatán peninsula. The network is saturated and suffers from lack of planning, this is a fact. And this has not been at the center of the debate. The current administration wants CFE to be an electricity factory. But CFE shouldn’t be an electricity factory, it should be a network company, a modern company, that's where it should move. Going there involves investing in transmission and distribution networks.

BNamericas: In your opinion, why has the growth of generation capacity been emphasized so much to the detriment of investment in networks?

Ocampo: The idea of seeing CFE in this way is closely linked to how they’ve attacked renewable energies. And no, this doesn’t happen because they’re fighting with the energy transition itself. Rather, it’s an aversion to competition. Since CFE doesn’t have clean [unconventional] energy, then they attack them.

The common denominator in all of this is that aversion. The idea that a critical activity such as electricity generation should be in the hands of the Mexican State and no one else. This is a completely wrong reading, which doesn’t contribute anything to the competitiveness of the country or in terms of prices, or to advance in the energy transition. The heart of the matter is this reluctance to compete with private companies, to become efficient, to have a more competitive fuels market.

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