High Costs Drive Government to Take over Government-Owned Electric Utility in Mexico

Lynne Kiesling

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.

2 thoughts on “High Costs Drive Government to Take over Government-Owned Electric Utility in Mexico

  1. About two years ago, I moved to a well-to-do neighborhood in México City, one of the areas served by Luz y Fuerza. My experience with the company during this time has been quite awful, but sometimes the kafkian aspects of it make me smile. Here are some of the things that have happened to me:

    The voltage has been around 105-110 since I am here (this been the situation since long before I arrived).

    The Washing Machine, microwave oven, and laptop computer wouldn´t work without a regulator. So I bought several of different sizes. It is funny that so many of my rich neighbors are beeing forced into consuming low quality electricity.

    The 100-what lightbulb were as brilliant as a 60-what lightbulb. The light was kind of yellow, uncomfortable to read in and depressing. I solved this problem by swithching to fluorescent bulbs, which seem to have some kind of regulator inside which compensates for the voltage problem.

    Excluding weather related outages, we have had around three outages per week in average. Most of them of less than five minutes, some over an hour, including a couple of them that lasted more than 24 hours during a completely calmed day.

    On the billig side, the company has been completely incompetent.

    For one year after I sign the contract the company didn´t bill me or did any attempt to collect the money. When I called, the employees were clueless and didn´t have a database to check in, besides being quite rude.

    I lost interest in trying to make them charge me. A year later, out of nothing an order to shut down the service was issued somehow. The employee show up at my place informing of what he was going to do. Obviously, he wanted to “make thing easy for me” if I gave him some money. So he took away the gauge and conected the house directly, He told me that I was no longer a costumer, but I should go to sign a new contract in order to regularize my situation.

    Two months later, I went to sign a new contract. Nothing of the previous situation or money I owed came out. They didn´t even knew that I was a costumer before and owed money. The around $2,000 us dollars I owed have been forgotten. There has been no attempt to collect them.

    The two months I was connected illegaly when on uneventfully.

    I signed a new contract six months ago. I haven´t received my first bill.

  2. Lynne, you can’t be serious that electric systems deliver energy from fuel at 1% efficiency. A 10,000 net-plant heat rate is about 30% efficiency from burner tip to switchyard. A CC plant with a 7800 heat rate is almost 50% efficient. [Heat Rate is in BTU-in/kWh-out] Losses in transmission and distribution are less than 10% on average. So the efficiency to the outlet isn’t impressive when you put it in fuel-in/kWh-out terms, but it’s certainly better than 1%.

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