IMCO: CFE has Distorted Financial StatementsBy Cinthya Alaniz Salazar | Thu, 07/29/2021 - 12:24
The Federal Electricity Commission (CFE) has been found to be providing its partnering production companies with subsidies between those incurring losses with funds from those making gains, effectively distorting the financial and operational effectiveness of the company and its subsidiaries. A recent report by the Mexican Institute for Competitiveness (IMCO) found this to be in violation of the 2016 Terms for Strict Legal Separation (TESL) and claims this may be curbing subsidiary incentives, hurting market competition and inflating consumer prices.
The report detailed that the financial statements of the company led by Manuel Bartlett does not reflect the actual state of the independent subsidiaries of CFE, since they do not disclose transfers or cross subsidies. According to the report, between 2018 and 2020, CFE Distribution and CFE Transmission transferred MX$820,150,000 million to CFE Supplier of Basic Services. It has been found that cross-subsidies have been realized since 2015 despite a direct prohibition for CFE and its subsidies to carry out corresponding activities.
Even though this does not alter CFE’s consolidated financial statements from an accounting perspective, it misrepresents the actual performance of each subsidiary company engaging in cross transfers. The IMCO says that this not only has negative implications in terms of transparency, but that it could also be influencing decision-making, potentially curbing improved functional efficiency. On a grander scale it could also be hurting market competition within the electricity market; which as a byproduct could result in higher premiums for families and business. Lastly, it may also be reducing available resources that could go towards continued investment in transmission and distribution networks.
In order to address these pitfalls, the IMCO recommends that CFE make transparent horizontal and or vertical subsidies. It also recommends that the company present disaggregated financial reports in order to better analyze independent performance. Finally, and perhaps most importantly, was to revert the modifications the Ministry of Energy (SENER) made to the TESLs in March of 2019. “As stated by the Federal Economic Competition Commission (COFECE), this agreement allows the legal and functional integration of the generation subsidiaries and compromises the vertical separation between CFE Distribution and CFE SSB.”
“We also have to consider if the institutional design of the public organisms involved is adequate” says industry analyst, Fulvio Ruiz Alarcón. According to him, the implementation of the Energy Reform was necessary, but its implementation ended up being needlessly aggressive toward productive enterprises of the state. Thereby giving the implication that the current model in which CFE is meant to operate may make it difficult to maintain and build new business upon.