Veronica Irastorza
Principal
The Brattle Group
/
View from the Top

State Must Choose Where Private Sector Can Invest and Excel

By Cas Biekmann | Wed, 11/03/2021 - 14:55

Q: How does the individual experience of The Brattle Group’s principals allow it to consult optimally in the Mexican market?

A: Brattle is a young but rapidly growing firm consisting mainly of economists. The firm has a strong international presence and delivers exceptional results. We began in the US and recently opened two offices in China. We also have a significant presence in Europe, Canada and Australia. Many of Brattle’s local principals have been working in Mexico for years, having been involved in the creation of the 2014 Energy Reform and in the design of the long-term energy auctions, among other provisions for the Wholesale Electricity Market. We have experience in the natural gas industry, as well as in the telecom industry and in competition assessments.

Brattle has a strong arbitration area that provides excellent expert witnesses for litigation and arbitration cases. Many of my colleagues were involved in landmark Spanish cases that transformed the rules of the energy market there after renewable energy companies won against the state. This experience can, unfortunately, soon become very relevant in Mexico.

 

Q: What are the implications of the new constitutional reform for finance and antitrust regulation?

A: In terms of competition, the environment and the energy sector’s efficiency, the proposal has strong implications. It generates a great deal of uncertainty for investors. The reform basically aims to move the industry back to a centralized model, financed by public resources. Importantly, this proposal and its implications go beyond the energy industry and affects sectors such as oil, gas and mining. It is also worrisome that the changes proposed seem to cancel existing generation permits, power purchase agreements (PPAs) and pending processes. Currently, the private sector owns about 48 percent of total installed energy capacity, including the pre-2014 Energy Reform’s Independent Power Producers (IPPs). All of that associated investment that is at risk because of the proposal.

Furthermore, anyone can see that the proposal goes clearly against the concept of free competition. It eliminates independent regulators, who serve as referees for this market. They would be consolidated as a part of CFE, which would give the public utility all the advantage in the market, such as controlling the grid as well as pricing transmission and distribution. I do not believe it would be possible to have fair and open access to the network this way.

I think that the proposal will be cause for arbitration cases if it is voted through. Hopefully, it will not get that far but investors will be harmed so they will have to do what they can to recover what they invested. It is not just large companies that put money down: pension funds and small-scale investors have a stake in these projects too.

 

Q: How would the reform impact Mexico’s transmission and distribution network, managed by CFE?

A: The transmission and distribution network is key for a free competition-based environment. This area has always been in the hands of the state through CFE’s ownership, so that is why it is important to keep CFE vertically and horizontally separated. Many other markets around the world have a similar system, considered one of the only ways to guarantee that all other power producers outside of CFE have access to the grid on an equal footing.

The same goes for grid operator CENACE. It should remain outside of CFE’s control and be a referee for all market participants. What is puzzling to me is that despite the government having control over transmission and distribution, there has been little to no investment in that area in recent years. From 2019 to 2020, only 1km of transmission lines was added to the 400Kv system; the overall growth rate has been below 0.1 percent. The world is moving toward renewable energy, which requires an even stronger grid, so the situation is worrying. There is always a choice the government can make when it comes to public investment: it can also invest in hospitals or schools. The government’s job also is to figure out where the private sector can do a better job than itself.

 

Q: How could the government centralize the energy sector in a less drastic, and therefore less controversial, manner?

A: Certainty is the most important part of the discussion. If the government wants to move back to a centralized model for the industry, it should have a real plan in regard to how to deal with Mexico’s massive previous investments and future needs. It would require a long transition to ensure that these investors are not harmed and that the path forward is clear. Changing as abruptly as proposed is troubling, in my opinion. I do not agree with such a centralized model because I do not believe the government should use its scarce resources for initiatives the private sector can carry out, and at a cheaper cost.

 

Q: What is the potential for US-Mexico cross-border energy projects?

A: There is a huge potential for renewable energy projects to take advantage of the border dynamics on both sides, which involves diversity in load patterns and changing prices. Mexico has a massive potential to produce green energy, such as solar and wind. However, these energy projects require large investments. Because the government has limited money to spend, developing such projects will be challenging if the private sector is not allowed to participate.

Another aspect to consider is that the US-Mexico transmission infrastructure is still extremely limited. While hydrocarbons trade is huge, while electricity trade is tiny. The total cross-border transmission capacity is about 23,000MW, which is not much considering the size of both countries. The US has about one million MW of capacity, whereas Mexico has around 90,000MW. There are many reasons for this but there is, nonetheless, huge potential for both countries to cooperate and benefit from renewable energy trading. Emissions trading would be a good opportunity too because US President Joe Biden is very bullish on decarbonization. Mexico could reduce its emissions easily and then trade the surplus.

 

Q: As founder of Voz Experta, how do you think the energy sector should work to get past its male hegemony?

A: The issue of having mostly men representing the energy sector has always been a challenge. For this and other reasons, we founded Voz Experta, a group of women who aim to always have a female expert on every panel and in every publication. Unfortunately, male-only panels are still the norm. I recently saw a panel from CFE with more than 10 directors and not one of them was a woman. I think it is sad to see that this is how important decisions are made, while ignoring our perspective. There is a lot of work to do in that sense. With Voz Experta, we point out the issue and highlight that there are many female experts in the industry. We are often told that companies had wanted to invite a female speaker but could not find any. For this reason, we have put together a list of expert women in the energy industry that we provide to anyone interested in adding some more gender-diversity to the experts on their platforms.

 

Q: How can companies improve their gender parity from within?

A: In Mexico, being aware of the problem is already a good start. If you look at the figures, you can see that the number of women in C-level positions is still relatively low. Much of this has to do with the workload in the domestic sphere, which is often not shared between partners. It is important for companies everywhere to allow paternity leave and to allow men the space to participate in care activities, as well as to provide support like day-care centers.

The Brattle Group answers complex economic, finance, and regulatory questions for corporations, law firms, and governments around the world. It is distinguished by the clarity of our insights and the credibility of our experts, which include leading international academics and industry specialists. Brattle has 500 talented professionals across four continents.

Photo by:   The Brattle Group
Cas Biekmann Cas Biekmann Journalist and Industry Analyst