Leonardo Beltrán
Distinguished Visiting Fellow
Center on Global Energy Policy at Columbia University
/
Expert Contributor

Democratize CFE if It Is to Lead the Energy Transition

By Leonardo Beltrán | Mon, 03/28/2022 - 11:00

On Dec. 15, 2021, the federal Congress approved a parliamentary agreement to carry out a series of formal discussions in an “open parliament” to broaden the analysis of the draft constitutional reform put forward by the head of the executive branch in September of last year, that if passed will reconfigure the energy sector.[1]

From Jan. 17 to Feb. 28, six topics were discussed in 25 forums encompassing 136 individual presentations, where most of the speakers supporting the reform came from the state utility, Comision Federal de Electricidad (CFE). The themes discussed ranged from background knowledge about the power system created by the 2013 Energy Reform, including the role of government and its goals and results, to the content of the new reform, its environmental implications, the energy transition, and the role of electricity as a human right.[2]

The open parliament was a useful exercise for two reasons. On the one hand, it helped in raising the level of awareness among the public in general, given that it was broadcasted live by the Congress channel (public) and other digital media; on the other, it aided parliamentarians and the public in general to clearly identify pros and cons of the initiative. However, the rules agreed upon by the Political Coordination Board of Congress only indicated that the open parliament would help in broadening the analysis of the initiative, but not provide for any potential adjustments to the text of the initiative. Certainly, the open parliament is a very welcoming tool to contrast ideas and arguments, but it is also a missed opportunity to make effective the participation of the population in these processes. If we want to engage and create the incentives to have a more active electorate and increase the chances of passing a constitutional amendment in this sector, Congress could move for an agreement to adjust the text of the initiative. The draft could be enriched by conceding on those areas where there are more costs than benefits, including limiting competition (setting a cap on market participation), eliminating common regulatory practice (eliminating the regulators), and restricting economic activity (charging CFE to lead the energy transition, and cataloguing the exploitation of all critical minerals for the energy transition, including lithium, as an activity exclusive for the state).[3]

Furthermore, focusing on the principal premise where the initiative´s intention is to strengthen CFE, by pulling the company out from competition, effectively debilitates the national utility since the incentives to improve would be eliminated, given that its participation in the electricity market would be guaranteed. Moreover, CFE’s financial position and fiscal constraints hinder its ability to tap into other opportunities. Therefore, one option to boost our state productive enterprise would be to democratize it, to open the possibility to Mexican citizens to directly own a share of the company and inject a fresh dose of funding to support CFE’s goals.

The democratization of CFE would require the administration to set up a task force with the Ministries of Finance and Public Credit, Energy, Economy, Environment and Natural Resources and Comptrollership, and to prepare the prospectus of an Initial National Offering (INO) whereby up to 49 percent of the company could be open to investment from Mexican individuals and firms. CFE’s board of directors would be improved by incorporating representatives from the minority shareholders with a clear mandate to accelerate the shift toward the energy transition, while the government could retain the chairmanship and the existing three occupied seats (there are two unfilled positions).[4]

The power of such an alternative lies in two facts that will increase the competitiveness of CFE. First, it will augment and diversify the sources of finance available to the company, since today it is constrained by the limits set by the public budget. The INO will open the possibility to all interested Mexicans to actively participate in providing funding and even to take a more active role to help direct the company to lead the energy transition. Second, by bringing a diverse group of independent board members with a stake and a mandate to improve the competitiveness of the company on its road to the energy transition, there would be an alignment of incentives to steer the organization to lead those efforts. Additionally, there would be a need to increase transparency on the priorities set by the new board members and shareholders, requiring strengthening the reporting capabilities of the company, including environmental, social and governance performance indicators. The new reports would help measure the company against its competitors and act accordingly to improve its market position, while at the same time getting closer to the population and consolidating its leadership and bold action on its road to sustainability.

Therefore, if we are to strengthen CFE, the government should democratize it to ensure it has the instruments required to lead the energy transition.

 

[1] http://gaceta.diputados.gob.mx/PDF/65/2021/dic/20211215-A.pdf

[2] https://www.diputados.gob.mx/parlamentoreformaelectrica/foros.html

[3] (2022). Retrieved 8 March 2022, from http://gaceta.diputados.gob.mx/PDF/65/2021/oct/20211001-I.pdf#page=2

[4] https://www.cfe.mx/consejo/Pages/default.aspx

Photo by:   Leonardo Beltran