Mexico Faces Chronic Electricity Shortfall; U.S. Energy Firms Seek to Step In Source: Knight Ridder/Tribune Business News Publication date: 2000-08-08

Aug. 8--MEXICO CITY--A few days after the election that swept Vicente Fox into Mexico's presidency, a spike in electricity demand pushed by torrid summer heat caused the lights to go out in several Mexican cities. To prevent a nationwide domino effect, the state-run Federal Electricity Commission had to scramble. The country's reserves of electricity -- the difference between consumption and generation -- had slipped to 2 percent. Mexico's reserves are normally around 7 percent.

The electric commission, known by its Spanish initials CFE, called on northern Mexico's manufacturing and industrial giants to drastically cut back production or switch to their own, expensive generators.

The outages and the impact on Mexico's critical manufacturing sector reveal one of Mr. Fox's most immediate problems: a chronic shortfall of electricity within two years.

But the outages also herald a potential business outlet for Texas companies, many of which are queuing up to help revamp Mexico's vast power grid.

"If you look at North America and you eliminate the borders, Texas is right in the middle of where natural gas and electricity are produced and where it's needed," said Robert Perez, manager of the Mexican subsidiary of El Paso Energy Corp.

"We opened the office deliberately in Mexico because the future looks promising for us here," said Mr. Perez, noting that the office is still in its first year.

Government power plants do not generate enough electricity to satisfy the needs of a population that's expected to hit 125 million by 2005, much less a rapidly expanding manufacturing sector at the heart of this flourishing economy.

Mr. Fox's challenge is to meet the surging electricity demand without breaking his campaign promise to not privatize CFE, which employs 75,000 people and has $35 billion in assets. Mexico's electric system must almost double in capacity by 2010 to avoid serious outages.

Electricity shortfalls like the one that struck this month are expected to get worse. So far this year, Gulf Coast manufacturers have reported 31 power failures that interrupted production.

But building plants and pipelines to carry electricity fuels like natural gas is expected to cost $26 billion -- money the cash-strapped Mexican government does not have.

The answer, according to some economists, is private enterprise. Texas energy companies stand to win big should Mr. Fox succeed in opening up the state-run electric industry. That's because the bulk of future needs lies in the northern industrial cities such as Ciudad Juarez, Monterrey, Laredo and Matamoros.

The cities are brimming with factories that make consumer goods for American retailers, and they're close to Texas' muscular network of natural gas lines and power plants.

Already, such companies co-own industrial power plants in northern Mexico and sell some electricity to the CFE.

But government regulations prevent faster and greater foreign investment along the industrialized border where demand is expected to grow by up to 18 percent per year.

President Ernesto Zedillo got nowhere last year in his attempt to rewrite the country's constitution to allow direct private sector and foreign co-ownership of Mexican power installations with CFE.

Average Mexicans and their congressional representatives blocked the move, which they saw as another sell-off of national industries to greedy foreign investors.

Beyond the promise of tremendous growth in electricity output, industry analysts say private investors have little incentive to jump wholesale into Mexico's power grid.

They face a bloated government bureaucracy, a host of power subsidies and expensive investment guarantees that artificially inflate power-generating costs and limit CFE's competitiveness, energy industry analysts say. A maze of government permits, about 150, can also cause fatal delays in foreign investment in the electric business.

Worse is Mexico's weak infrastructure of old power plants that run on oil or coal, and a limited system for delivering cheap and cleaner-burning natural gas to new generators.

Petroleos de Mexico, or Pemex, traditionally has mined the country's vast oil reserves, without paying much attention to its huge store of natural gas.

Pemex is expected to be a major headache for Mr. Fox. He must deal with its tangled management, strong labor unions and special government interests that feed off the world's fifth-largest oil producer. Pemex's revenue accounts for almost a third of the annual federal budget.

"It won't be easy. There are Mafialike groups that run Pemex, and breaking their grip on the company will require time and the skill of a political surgeon," said an adviser to a team that Mr. Fox appointed to study Mexico's economic challenges. The adviser spoke on condition of anonymity.

In his presidential campaign, Mr. Fox said he would not privatize Pemex -- reversing an earlier position. Instead, he plans to overhaul Pemex management and open subsidiaries such as natural gas to private investment.

Because Pemex lacks adequate storage facilities for natural gas, foreign investors would find it difficult to project stable supply and demand as well as prices in Mexico, said gas industry executive Mark F. Walsh in a commentary published in the Natural Gas Journal.

Ample storage capacity is essential for stable supplies and prices, he added.

Pemex's underutilized natural gas can potentially supply almost half of Mexico's future needs for electric-generating fuel.

Mr. Fox has also promised to cut Pemex's tax load, now 60 percent of revenue. That should help the company come up with the billions of dollars needed to upgrade natural gas infrastructure, analysts said.

But opening Mexico's power market does not mean selling stock in either Pemex or CFE, said Luis Ernesto Derbez, a former World Bank official assigned by Mr. Fox to help write Mexico's new economic game plan.

For now, Mr. Fox's advisers say he is likely to exploit short-term reforms already approved by Congress. In the last year or so, such changes have allowed $1.8 billion worth of foreign investment to build power plants.

Foreign gas suppliers can now more easily connect with Pemex's pipeline. And a 4 percent import tax on U.S. natural gas was recently eliminated.

"We want to create opportunities for private investors to have direct access to the [electric] distribution system," Mr. Derbez said. "With this, you won't see [some] subsidies which exist now, and those who invest will know exactly what is the profitability of their investment and, because of this, what project they will take to the market."

Mr. Derbez described the kind of independent pricing and distribution entities that other countries and U.S. states such as California have used to oversee electricity distribution in deregulated markets.

To get that -- and more private investment in a state-controlled power grid -- Mr. Fox will need congressional approval. But he insists that private enterprise will participate with CFE, not buy it off in pieces.

The recent reforms and Mr. Fox's pro-business profile are attracting a growing number of U.S. power interests, led by Texas' biggest energy companies.

Already, subsidiaries of Texas' El Paso Energy and Enron Corp. have won contracts to help Mexico meet present power needs. Analysts say the Texas-Mexico power relationship can be the model for bi-national power ventures.

In one deal, a unit of El Paso Energy just finished a pipeline connection to Mexico's gas-delivery network run by Pemex.

And El Paso Electric has also started selling power generated in Texas to Mexico's grid, while the Public Utility Board of Brownsville has set up a power import-export deal with Mexico's CFE.

Last year CFE also started buying electricity from California power plants.

Mr. Fox says he supports local government autonomy that could lead to faster and smoother regional deals along the U.S.-Mexico border.

"There is a very positive feeling in the air," said Stephen Pitner, director of the Gas Services Division of the Texas Railroad Commission. The state agency is talking with Mexican regulators about further easing rules that limit an expansion of power and natural gas trading.

"Texas involvement in Mexican power will take a lot of careful planning," Mr. Pitner said. "This effort was already under way before July 2, but people here are looking favorably on Fox, and that translates into a great potential for new business."

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-- Martin Thompson (mthom1927@aol.com), August 08, 2000