When Mexico decided to liberalize its electricity market, it knew it was going to be a titanic enterprise. Probably the biggest challenge of all will be that of transforming CFE into a productive enterprise of the State and ensuring that the market is a fair playing field. CFE has been ruling the Mexican electricity sector for almost 80 years, and has been in charge of all electricity-related activities, which has made it the largest electric utility in Latin America. By 2016, CFE was serving 39.7 million clients, with over 54 GW of installed capacity, including residential, commercial, and industrial sectors. The scale and longevity of the company add more complexity to restructuring the national electricity industry from a monopoly to a competitive market, but the Mexican authorities are determined to take the leap and have already started to put the transformation into effect.

According to the legal terms published by the Ministry of Energy in January 2016, CFE has six months to complete its restructuring and start operating in the market like any other company. The separation terms state that CFE should undergo a vertical separation in electricity generation, transmission, distribution, and supply activities, and an additional horizontal separation in electricity generation and distribution. In the power generation sector, CFE is required to open different business units subject to competition and free market criteria. Similarly, in electricity distribution, the parastatal is obliged to carry out a horizontal separation according to the number of regions in the country, currently set at 16.

CFE separation diagram

The Ministry’s separation terms state the minimum number of subsidiaries that CFE must create, but the parastatal can add more at its convenience.  So far, CFE has decided to separate into seven subsidiaries, four for electricity generation, and three focused on transmission, distribution, and basic supply activities. Furthermore, CFE has resolved to create three branches, one serving qualified consumers, and two for commercialization of fuels on a national and global scale. Finally, CFE will establish 17 business units, one per each distribution region, and one specifically for nuclear power generation, the latter as a result of the national security status of nuclear power.

Unions and million peso losses on the way

The directive board of CFE has shown strong willingness and openness to smooth the company’s transition. Nevertheless, several challenges have arisen along the way, hindering the work of Enrique Ochoa Reza, CFE’s Director General. In February, Víctor Fuentes del Villar, General Secretary of SUTERM, the electricity workers union, called on the union’s affiliates to block the implementation of the reform and avoid participating in any meeting related to the company’s restructuring. The relationship between the management board and the union has been tense since the approval of the reform, but the conflict reached boiling point when CFE’s Administrative Director, Héctor de la Cruz, tried to implement a new working structure that had not been approved by the union. At the moment, Ochoa Reza is trying to negotiate the new terms of the collective labor contract with the union’s director to make it more suited to the company’s new status of productive enterprise of the State. If the negotiations fail, CFE will be open to million peso liabilities that could compromise its competitiveness in the new market. In the words of Ochoa Reza, “CFE’s labor liabilities are equivalent to around MX$620,000 million. In 2015, CFE lost MX$68,564 million due to labor liabilities that pertain to a collective contract that was signed in a monopolist context, which is no longer the case.”

Enrique Ochoa Reza, CFE’s Director General in a reunion with SUTERM, the electricity workers union, representatives (Source: @EnriqueOchoaR)

Enrique Ochoa Reza, CFE’s Director General in a reunion with SUTERM, the electricity workers union, representatives (Source: @EnriqueOchoaR)

In addition to the union’s resistance and the huge labor liabilities, in 2015, CFE also suffered from the depreciation of the Mexican peso against the US dollar, and an 8.1% revenues drop, equivalent to MX$27,000 million. All these factors brought historical losses to CFE, wiping out MX$93,912 million from the company’s financial portfolio. The red numbers reached by the company last year contrast with the electricity tariffs drop announced recently, which is the sum of 15 months of consecutive falling prices. CFE’s directive board and the Mexican authorities justified the lower tariffs with the drop in the natural gas prices and the revamping of CFE’s old fuel oil facilities into cogeneration units. Ultimately, the current critical financial and political environment adds further complications to the company’s restructuring, and it makes it clear that CFE’s Director General will have to make a titanic effort in order to move the company successfully into the new era.

Sources: Diario Oficial de la Federación, CFE, El Economista, BNamericas, Televisa, El Universal, El Economista

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