This story will have you shaking your head in disbelief in multiple dimensions. The electricity industry in Mexico is government-owned but decentralized, with multiple public distribution utility companies. As reported in the Wall Street Journal, over the weekend the Mexican government took over the second-largest of these government-run distribution companies, Luz y Fuerza del Centro, because of their inefficient operations and lack of funds.
Mr. Calderón’s decree said that Luz y Fuerza’s costs were almost twice its income from energy sales, and that last year the company lost 32.5% of the energy it bought from Mexico’s main power generator, the Federal Electricity Commission or CFE. For now on, the CFE will be in charge of Luz y Fuerza’s operations.
The government plans to dissolve the company and lay off the more than 44,000 workers that make up the Mexican Electricians Union, or SME, the only union at Luz y Fuerza; the government said it plans to rehire some of the workers.
Analysts say featherbedding by the union, or requiring extra workers to provide more jobs, is a major reason for Luz y Fuerza’s financial problems and endemic inefficiency. Some analysts say the company could have been run by a fraction of that number of workers.
Large central generation of electricity is more inefficient than you think — 100BTUs worth of fuel into the generator generally creates 1BTU worth of useful electricity at the consumer’s end — but Luz y Fuerza’s numbers are staggeringly bad. And the political power of the union in this case is on par with what we see in the U.S. in the automobile industry … and we’ve seen the disastrous effects of that kind of political power over the past year, and will be paying for that kind of power for some time.
But the Mexican taxpayer, and electricity consumer, pay much, much more for the political power of the electrician’s union and the inefficiency of the operations of their publicly-owned distribution utilities. Mexico’s Federal Electricity Commission, to which control of Luz y Fuerza reverts with this takeover, has been using taxpayer funding to subsidize their operations for years (and the operations of other state-controlled utilities in Mexico). This is a long-standing practice in Mexico; when I was in Mexico City in 2004 giving a presentation on competition and dynamic pricing to the Mexican legislative staff and industry, this pattern was well entrenched. From the Financial Times article on the federal takeover:
In a press conference Saturday, Fernando Gómez Mont, Mexico’s minister of government, claimed that state subsidies to the company this year were roughly equivalent to Oportunidades, the federal government’s poverty-alleviation programme that serves millions of families.
Left unchecked, the costs to the public coffers during this administration could amount to 300bn pesos, equivalent to about $23bn, he said.
This episode illustrates the failures associated with concentrated political power, and Mexican citizens are the ones who pay the costs through high taxes and some of the highest retail electricity prices in the world, despite the fact that their prices are regulated. The combination of monopoly public ownership, state control of resources, a monopoly union controlling labor relationships, and a concentrated, monopoly state regulator has created massive energy and economic inefficiency, opaque costs imposed on citizens, and Byzantine subsidies to try to mask and prop up the political house of cards.
People often say that in an industry this conservative and regulated, it takes a crisis to get any meaningful change. For the sake of Mexican individuals, I hope this crisis does lead to the demise of this toxic and costly concentration of political and economic power. The technology exists to distribute that power among more and more individuals, and with the politicians and unions back on their heels and facing enormous deficits from their craven policies, now is the time.