Mexico Mulls Steps to Privatize Power Utilities

President Ernesto Zedillo on Wednesday proposed constitutional reforms that would allow private investment in the electric power industry, taking a major step toward what would be one of the largest privatizations in Latin America.

If Congress ratifies the reforms, Mexico would join a stream of Latin nations that have abandoned exclusive public ownership of their electric utilities in the last decade. The move could also advance an even more emotional issue: whether to privatize Mexico’s state-owned oil industry.

The privatizations also could mean major opportunities for U.S. energy companies, which have long eyed the vast Mexican market for investment opportunities and the potential of an integrated cross-border energy grid.

Zedillo told Congress that Mexico will need $25 billion in investments in the power industry during the next six years--equivalent to one-fourth of this year’s government budget--to keep up with an annual 6% growth in electricity consumption.

“To try to meet these needs only with public resources would not only mean putting at risk the modernization of the electricity sector, but also using up scarce funds that are indispensable to meet the basic needs of Mexican families,” Zedillo said.

The proposals call for a two-year transition period, starting with negotiations on the constitutional amendments. Once passed, the government would split up the nation’s power plants and distribution systems into regional companies that could gradually be sold to private investors. The state would maintain control of the transmission system and would regulate the industry-- common practice in other privatizations.

Although the assets to be privatized still must be determined and nothing would be sold before December 2000, “as a sector, it’s massive. It’s got to be worth more than $100 billion, maybe $150 billion,” said Salomon Smith Barney senior energy analyst Sandra Boente.

“It’s a move in the right direction,” Boente said from New York. “They didn’t have much of a choice, given that so much investment is needed and the government cannot afford it.”

The mainly foreign-owned electric companies were nationalized in 1960 by President Adolfo Lopez Mateos, as he sought to fend off criticism from the aging but resurgent ex-President Lazaro Cardenas, who had nationalized most of the oil industry in 1938. Huge electric billboards were erected at the time proclaiming, “The Electricity Is Ours!”

The congressional debate, coming just a year before the next presidential election, could again prove heated. Already, left-of-center Party of the Democratic Revolution leader Porfirio Munoz Ledo, a likely presidential candidate, vowed: “We oppose absolutely any change to the character of electrical energy as a public service. . . . It’s not that there’s a lack of power, but that a few American companies want to invest in [Mexican] electricity.”

Although Zedillo’s Institutional Revolutionary Party has lost its majority in Congress, it could expect to gain support from the center-right National Action Party to win the two-thirds majority needed to adopt the amendments.

The main electrical workers’ union also has endorsed the change in principle, a concession that analysts attribute to detailed preparatory discussions led by Energy Secretary Luis Tellez. The smaller Mexico City power workers’ union, however, declared its opposition Wednesday, saying adequate capacity exists for projected demand until 2001, “so what’s the hurry?”

Tellez’s cautious groundwork with the unions and potential investors, who received advance summaries of the proposals, appeared aimed at avoiding repeats of some recent botched privatizations.

The attempted privatization of the petrochemical industry, in which private investments were limited to 49%, drew little interest. And the sell-off of the banking sector was a disaster. Nationalized in 1982, banks were sold off in the early 1990s at inflated prices, often to unqualified buyers, and the system later had to be bailed out at immense cost. The same crisis befell the privatization of the nation’s toll roads, which are again in state hands.

Neither Zedillo nor Tellez used the P-word, given the loaded political overtones of privatization in Mexico, but the documentation makes clear that the power plants would ultimately be sold to investors. Distribution, now controlled by two government companies, would be divided into 20 or 21 regional distribution operations that would be leased to investors for renewable 30-year terms.

Likely investors would include Spanish, French and Belgian electric companies as well as major U.S. firms.

Stephen Baum, vice chairman of San Diego-based Sempra Energy, said in a telephone interview that “We would be very interested in the privatization of the energy grid, especially in areas where we already have natural gas service, given the obvious synergies.”

Baum noted that Sempra already holds concessions to provide natural gas systems in Mexicali and Chihuahua and also has a project in Baja California, so the firm already has experience in northern Mexico, where energy consumption is growing even faster than in the interior.

“If you do the arithmetic, 6% consumption growth would mean doubling the capacity every 11 years,” Baum said. Given such growth, he said he could envision a possible investment in a gas-powered electric plant of 1,500 megawatts, costing roughly $750 million, in northern Baja.

Sandra Scott, Latin American energy analyst for Cambridge Energy Research Associates in Mexico City, said the Mexican market is extremely attractive for several reasons.

First, she said, Mexico is a dense market with major urban centers that reduce distribution costs. Annual consumption growth also is high and has stayed buoyant, even during economic downturns such as the 1995 recession.

“This is a very aggressive and courageous move on the part of the Zedillo administration, and one that the majority of people in Mexico think is the right decision,” she said. “Tellez should get tremendous credit for building up consensus and trying to avoid what happened in the petrochemical industry. That makes this different.”