Mexico’s CFE power generation asset reallocation stokes monopoly concerns

Energy ministry finalises CFE generation asset reallocation

Changes allow for CFE regional concentration

Sources say change hurts competition, may be appealed

MEXICO CITY (ICIS)–Mexico’s energy ministry SENER has released a final plan for reshuffling state-owned utility CFE’s generation assets based on geographic proximity to its subsidiaries, in a move that sources say could consolidate its market dominance.

The new plan, in Mexico’s federal gazette, rearranges CFE’s generation assets between its six generation companies to improve cost efficiencies, according to the document. SENER had not responded to requests for comment at publication. “The initiative will permit the CFE to compete under equal conditions in the electricity market against its competitors,” SENER wrote in a March justification provided to regulatory reform agency CONAMER which is charged with examining the cost of new regulations.

SENER said in the 25 November document the new assignment of assets will continue to honour the vertical separation of the CFE.

In reassigning the assets, SENER said in the document it considered ways to increase operational and administrative efficiency in each region. Mobile emergency units were put under the authority of its unregulated business unit, to help ensure the reliability and security of the national power grid, SENER said.

generation concentration

The new configuration, however, will also increase the concentration of generation of regional CFE subsidiaries within a given local market. It increases their market power, undermining the planning that had attempted to level the playing field, according to market participants, who say that while it does not violate the related 2014 laws, it certainly undermines their spirit.

“The main concerns about this new agreement is that they are totally forgetting about the reason for the previous allocation, and the need to create competition conditions,” said Rosanety Barrios, an independent energy analyst and former SENER official who participated extensively in forming the post-reform power strategy. “This is totally aligned with the current energy policy, which consists mainly of going back to the state monopoly.”

The announcement comes more than six months after SENER originally proposed the restructuring, saying it needed to move the assets to make CFE more efficient. The change comes on the heels of a recent decision to allow CFE to gain clean energy certificates (CELs) for many of its existing plants, reducing the need for the CFE to invest in private renewable generation. It also follows a March 2019 decision to allow CFE to share information and personnel between its subsidiaries, which market participants have also said has been damaging to the development of a healthy market that attracts international investment.

“These two movements return CFE much closer to the monopoly structure that it had before, the consequence being that it is going to be a lot harder for new entrants to enter the market,” Dwight Dyer, another former SENER official said.

The previous assignment of CFE assets was passed into law in 2016. It was part of the implementation of the 2014 energy reform laws, which had further opened the power sector to private investment. Those laws specified that the CFE needed to be broken up between generation and transmission to encourage competition. SENER determined CFE’s generation assets also needed to be divided up to prevent the company from dominanting the sector in a given region.

The method for making the assignment of these assets to the CFE’s six generation businesses had been done on the basis of economic studies. The goal was to begin to provide domestic competition between the CFE subsidiaries, as a way of establishing a viable wholesale market within Mexico.

“The reason why the previous administration established the allocation the way they did was to create competition conditions,” Barrios said. “The fact is, the CFE was a state monopoly. The constitution established the vertical separation and although it did not address the horizontal separation within the CFE, it was totally necessary.”

Mexico’s regulatory body charged with ensuring fair competition, COFECE, would be within its legal rights to review the November SENER decision and investigate whether it hampers competition, Barrios said.

Whether this happens in the current political environment is another matter, however.

“The way that it works is that someone has to go to COFECE and report that it will impact market conditions, and then they can do any investigation they want,” Barrios said. “What I see is that COFECE already has a lot of battles to fight. They are trying to survive with a reduced budget and less people. I am not sure that they are going to find the time and the resources to attend to this problem.”