Alfredo García
Executive Managing Director
Siete Energy
Expert Contributor

Implications of a Necessary Third Energy Reform in Mexico

By Alfredo Garcia Mondragón | Mon, 10/18/2021 - 13:05

Since the presidential campaign of now President Andrés Manuel López Obrador, he has expressed his dissatisfaction with the results of the Energy Reform of his predecessor, Enrique Peña Nieto. This reform undoubtedly was aligned with the highest standards of the international industry, which reflected the fact that Mexico has more free trade agreements than any other country, and these agreements seek free competition and an integration of its economic markets.

In the 2013 Energy Reform, all the edges were covered. Every last detail had to be taken care of, not only legal but regulatory, market, business, investments, future contracts, professional development of the country’s people and development of its service industry and national supply, among others.

Although it was far-reaching, the negotiations for the reform between political parties, however, left it flawed. The arrival of a new energy reform proposal, far from being ideological, is necessary.

Since the arrival of President López Obrador, he has made it clear that the entire legal and regulatory framework hinders the performance of the industry and that he would like to return it to the statist era of the 1970s, when the president had omnipotent control of the entire governmental apparatus.

Passing the powers of CENACE to CFE is against all economic competition and is a setback for the electricity sector in Mexico. The same will happen by transferring the powers of the National Hydrocarbons Commission (CNH) to Sener.

It should be remembered that in the early days of CNH, PEMEX remained self-regulated and its operating practices were far from international practices.

The era referred to as neoliberal has been distinguished precisely by the arrival of free trade agreements, which demonstrates that Mexico wants to be part of the select group of developed and economically stable countries.

Mexico followed OECD recommendations on the best practices of economic, social and market policies, and this is how the creation of regulatory bodies arises, that shape and control the operation of its market participants.

Mexico, for better and for worse, has become a benchmark in the global energy sector and all of its cases are case studies in regulatory and business policy. In contrast, the oil sector is where the energy industry is most dogmatized for being a source of wealth in countries, and in which the current government has not been able to dismantle oil contracts because there is much more experience in contractual oil generation and the contracts have international standards of investment protection.

In the case of the electricity sector, the creation of the Energy Regulatory Commission (CRE), Mexico established standards for its electricity sector, which many countries have emulated, even above a state monopoly, with the idea of creating a competitive electricity sector. In Mexico, its electricity sector is politicized by historical reasons, the permits granted do not have contractual protections due to the weakness of the regulatory bodies and, now, the developers of electrical projects in the world that are following Mexico's policy are thinking about how to demand clauses from the host country that provide order to the electricity market and mitigate investment risk. Regulatory agents, given their autonomy as national bodies, are of the utmost importance, because they are the counterweight to state decisions, made by a public servant or even the president himself.

Political decisions that affect large economic investments in a country due to social or nationalistic views affect the decision of investors to invest in that country.

It is no surprise to anyone that there is corruption in such countries, and Mexico is one of the countries that has corruption entrenched in its government and social practices. The problem is seeing corruption as part of the culture and worse still, as an agent for ​​change.

Former President Felipe Calderón made the decision to dismantle the Compañía de Luz y Fuerza del Centro due to the corruption of its unions and workers. Everywhere, there were arrangements of workers extorting companies and fraudulently charging them for their electricity consumption.

Before the Energy Reform, society in general complained about the theft of fuel, the theft of gasoline at gas stations, which dispensed incomplete liters, the sale of places in PEMEX, a union with leaders mocking the people with everything they stole at PEMEX.

An analysis of the energy sector showed that PEMEX had the largest budget in history from 1997 to 2013, so a lack of investment was not the problem. PEMEX managed more budget than entire states of the republic. As a result of this policy, there was a drop in reserves, a drop in production and the growing importation of natural gas and gasoline.

If PEMEX had continued to be successful, neither Calderón nor Peña Nieto would have had the need to open the industry to national and foreign private investment but the state monopoly model was proven to have reached its limit. The need to explore new basins and frontiers was imminent and PEMEX began its foray into deepwaters with the help of international operators to help mitigate the risk of access.

At the beginning of the administration of President López Obrador, he made it clear that the legal and regulatory framework was an accessory that hindered him. His appointment of the director of PEMEX and the appointment of directors of the regulatory bodies all violated the PEMEX law and regulatory bodies. None of them met the professional profile yet they were accepted by the Senate of the Republic. Then there is the lack of transparency as PEMEX supply has been handled with direct assignments that violate the regulations issued by its own board of directors.

Although, as mentioned, this third energy reform is necessary, López Obrador’s concept is to strengthen the Federal Electricity Commission, to eliminate the regulatory bodies and make CFE the dispatch office for the hydrocarbon and electricity sectors, at the mercy of a political interest group.

One of the commitments in free trade agreements is the strengthening of regulatory bodies and this reform proposal is against the spirit of strengthening that autonomy.

The point of giving PEMEX and CFE a legal structure as productive companies of the state was to give them that autonomy, so they would not be subjected to the filters of presidential, congressional and Senatorial approvals. This aligned them more with the largest companies in the world and provided a legal framework to be able to associate with the world’s leading companies and to have the facility to attract investment and best operating practices.

Here I want to point out that when talking about technology, although a lot of technology is in the market, to a large extent, what differentiates the international industry in the deployment of large-scale projects is the mitigation of risks and a company cannot depend on political decisions or interference.

I welcome this new energy reform but rather than thinking about dismantling the 2013 Energy Reform, it should be seen as an opportunity to remedy the legal and regulatory vices left by a negotiation of interests between political parties.

Photo by:   Alfredo García