Electricity Across the Border

(The following is an excerpt from the introduction o forthcoming TransBorder Policy Report.)

The national electricity system in Mexico is undergoing a radical overhaul. Proponents assert that the reform will ensure a more fiscally and environmentally sustainable system.

The market-oriented reform enjoys widespread support because of the embarrassing dysfunction of the government-owned grid. Electricity prices, losses because of faulty infrastructure, losses from theft, and annual budget deficits make Mexico’s electricity system one of the most expensive and least efficient in the developed world.

Political and populist pressures have created a clunky system burdened by exorbitant subsidies. What is more, electricity generation has long been dependent on especially dirty fuels, notably low-quality coal and oil.

The future of electricity generation, transmission, and service is uncertain as the government opens up all facets of the electricity system to private companies, including foreign corporations such as General Electric.

The reform of Mexico’s national electricity system has been the subject of little public attention, political dispute, or congressional debate. Rather than being introduced as a separate bill, the Peña Nieto administration folded the proposed liberalization of the electricity system into the national energy reform bill, which became law in December 2013.

The contentious debate over the highly controversial energy reform focused on Mexico’s oil sector, which since the late 1930s has been managed by the state-owned Petróleos Mexicanos (PEMEX). The nationalization of foreign oil companies by President Cuauhtémoc Cárdenas and the subsequent creation of PEMEX were among the most heralded accomplishments of the post-revolutionary regime controlled by PRI political party.

The PRI controlled Mexico for seven decades, losing the presidency to the National Action Party (PAN) in 2000. In December 2012, the PRI -- with Enrique Peña Nieto as its presidential candidate -- reassumed its position as ruling party after two sexenios (6-year terms) by PAN presidents. Although traditionally opposed to the privatization and free market ideas advocated by the conservative PAN, the PRI since the 1980s has increasingly advocated the liberalization of the Mexican economy through free trade agreements and the transfer of state-owned corporations to private investors.

President Peña Nieto’s proposed liberalization of the national energy system counted on near-total support of the nation’s two largest political parties, namely PRI and PAN. As expected, the reform – which for the first time substantially opened the industry to private (including foreign firms) investment and control – encountered strong opposition from the left parties, principally PRD and the newly constituted MORENA, as well as from the powerful and shamelessly corrupt PEMEX workers’ union STPRM. 

The government of President Enrique Peña Nieto promises that the liberalization of Mexico’s national electricity system will increase efficiency and lower prices. But the sordid history of the liberalization of other previously state-owned sectors –most notoriously banking, mining, communications, and railways in the 1980s and 1990s – justifies some skepticism.