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Approving AMLO electricity reform would be going back to the sixties says CEESP

January 17, 2022.- According to the Center for Economic Studies of the Private Sector (CEESP) in its Executive Economic Analysis of January, the electricity system under the current law works well in favor of the country, so the approval of the constitutional reform would be a strong step backward towards a situation similar to that of the 1960s. The blow to confidence in the country would be disastrous.

The industry requires adequate and flexible network regulation, not nationalization. The reform under consideration today eliminates independent regulatory bodies.

Low investment is an obvious risk that could manifest itself in accidents, blackouts, and lack of service in various geographic areas.

With insufficient investment, it is highly likely that failures associated with network saturation, such as blackouts, interruptions, and voltage irregularities, will severely damage economic growth, employment, and social welfare.

Last October in this space it was argued that the constitutional reform proposed by the executive in the matter of electrical energy is unnecessary, wrong and unacceptable. Postponing its discussion and its rejection or approval for this year, it is pertinent to continue analyzing some of its most relevant features.

If approved, the reform would mean that the Federal Electricity Commission (CFE) would centralize the most vital functions of the national electricity system, ending the electricity market and becoming practically the only producer, buyer and seller in the sector. It would be, as this phenomenon is called in economic theory, a monopoly and at the same time a monopsony. That is, the only producer and seller and the only buyer.

This note argues that the main role of the CFE under the current law is the administration, maintenance, and expansion of the electricity transmission and distribution network. It is a fundamental task for the system and one that can give it financial viability. However, the company has not dedicated enough resources to invest in these activities.

In general, the CFE’s total investment has been lower than planned. According to SHCP figures, up to November 2021, the CFE’s physical investment totaled 29.7 billion pesos, far from the 52.5 billion pesos approved for the entire year.

In particular, in recent years investment in transmission and distribution tasks has been insufficient, which brings with it a significant risk for the country that, if materialized, would stop economic activity in important parts of the national territory. This, at a time when economic reactivation is urgently required in order to stop and reverse the deterioration of economic activity and of income and social welfare, which large segments of the population have evidently suffered.

The system under current law works well in favor of the country. Even before the measures adopted by the administration that have finally led to the constitutional reform under analysis, its benefits were already palpable and had not fully materialized.

The advantages of the current electrical system are many, just to mention a few:

The costs of the system decreased, the companies have a more competitive supply, the budgetary resources of the CFE were optimized and already allowed its profitability, progress was made in the energy transition towards clean energies, and investment flows in infrastructure of the sector were presented highest in history, favoring these sources. In 5 years, investment in the sector reached around 250 billion pesos (billion pesos). In annual terms, the figures are approximately double the investment capacity of the CFE.

The dispatch of electricity is done with internationally recognized good practices. Thus, the cleanest and cheapest generation is prioritized, using the most expensive and polluting in periods of high demand. This system inherently has an incentive for innovation and efficiency.

The massive investment and the creation of the electricity market under the current law have made it possible to lower the total costs of the system by around 50% and market prices are lower than the CFE rates.

The approval of the constitutional reform would be a strong step backward towards a situation similar to that of the 1960s. It would increase the cost of electricity, open a hole in public finances, cancel the transition towards clean energies and violate the precepts of the trade agreement between Mexico, the USA, and Canada (USMCA). The blow to confidence in the country would be disastrous.

To a large extent, the constitutional reform presented by the executive is based on the assumption that there are elements that generate losses for the CFE and profits for private participants, both unjustified.

Assuming without accepting that this is the case, the regulatory framework contained in the current law has precisely the function of eliminating distortions of this type. The electricity industry requires adequate and flexible network regulation, not nationalization. The reform under consideration today eliminates independent regulatory agencies.

Currently, the sectors that work in networks, such as telephone, electricity, and railways, among others, require regulation that takes into account the implications of the actions of some participants on the interests of others who share the networks. This is the modern regulation that makes possible private participation in sectors previously considered “natural monopolies” and that is socially more convenient.

The regulation of the network has as one of its primary functions the adequate and fair distribution of the burden of costs and the opportunities for equitable access in the different segments of activity. It is highly complex and requires strong and independent regulatory agencies, such as those created with the 2013 reform and which this initiative intends to eliminate.

The electricity sector reform in 2014 has been subject to various significant technological and participant changes. Given this, the regulation must be firm but flexible. If the circumstances are or become unfairly unfavorable for a participant, such as the CFE, the rules must be reviewed and corrected. That is the correct answer for the good of the sector and its consumers (in electricity, the entire society). The wrong one is to cancel the competition and all its benefits, which seems to be the spirit of the constitutional reform.

To face the problems that arise in the electricity sector, we must prioritize the public good and the welfare of households with a long-term vision, instead of destroying the electricity market and returning to a state monopoly scheme. The positive aspects of the current electricity market and its future development must be preserved, such as the lower costs of the system and the incentives for technological progress and the transition to clean energy, among others. This, in addition, avoiding higher rates or additional subsidies to keep them low with higher costs, as would inevitably happen if the reform in question is approved.

All this can be achieved with adequate and solid regulation, which always faces the challenges that inevitably arise.

Taking into account the particularly complex network characteristics of the electrical system, the current law assigns a crucial responsibility to the CFE in the maintenance and expansion of the transmission and distribution networks in the country.

Transmission and distribution are the means by which electricity reaches homes and production centers. If these means fail, blackouts and irregularities occur in the service and production stops at the plants, thus putting jobs at risk. The attention of the networks is an inherent responsibility of the State and for this reason, its assignment to the CFE, oblivious to the interference of private generators, is a success.

However, in recent years, the CFE has invested less than necessary to maintain the transmission and distribution networks and expand them sufficiently. The company has devoted its scarce resources to a greater extent to other activities in which it incurs losses.

Until now, the investment in transmission and distribution networks -by the CFE- has been less than what is estimated necessary. The planned investment to maintain and expand the networks in order to ensure sufficient capacity to avoid oversaturation with the investment was published in the 2018 National Electricity System Development Program (PRODESEN). These goals are compared in the following table with the investment actually made in 2019 and 2020 -according to the public account of the federation- and the budgeted for the two subsequent years.

Clearly, the investment in the electricity transmission and distribution networks by the CFE, which is the responsible agent, is far below enough to keep them in good condition and without saturation. This represents an obvious risk that could manifest itself in accidents, blackouts and lack of service in various geographical areas.

The impossibility of the CFE to carry out sufficient investment in the networks would surely be accentuated with the approval of the constitutional reform, since this would add to the company the responsibility of expanding the generation capacity in the coming years in order to count on the growing energy that the country will require.

The constitutional reform would imply that the CFE would take over the vast majority of electricity generation. As the company has higher generation costs than the rest of the market participants, the cost of generation with the current stock of plants would rise substantially. In addition, the commission would have to invest in new capacity. Both tasks imply additional expenses for the commission of 549 billion pesos until 2028, according to independent estimates, which would represent between 0.3% and 0.4% of annual GDP.

By giving it even more responsibilities than those that the current law gives it -energy generation-, in a context of scarcity of resources and losses, the constitutional reform in question seriously endangers not only the electricity service in general but jobs in places where network saturation occurs due to lack of investment in transmission and distribution.

In summary, in addition to all the problems that have been pointed out in multiple spaces about the drawbacks of the constitutional reform presented by the executive before Congress in electrical matters, it is necessary to consider that the CFE has not been able to invest what is necessary to maintain the networks of electrical transmission and distribution, despite the fact that it is its main task under the current system.

In addition, its current tasks that have not been able to attend adequately judging by the investment figures made, if the reform is approved, the CFE would face difficulties in finding sufficient resources for the maintenance and expansion required by the transmission and distribution networks, which is inherently a state responsibility.

Under these circumstances, service failures associated with network saturation, such as blackouts, interruptions, and voltage irregularities, are highly likely to severely damage economic growth, employment, and social welfare.

Mexico

Recent economic information confirms that the recovery has stalled and the economy has entered a new period of weakness.

The recovery or the rebound of the variables of economic activity has stopped without having recovered the dynamism of before the pandemic, which was already meager.

After the rebound after the sharp drop in 2020, virtually all indicators have lost the momentum that brought them closer to their pre-pandemic levels. There is even concern that, given the situation, the variables will take even longer to recover the mediocre dynamism that was already observed in 2018 and recent previous years.

This situation reflects the absence of policies to support people and companies since before the pandemic and which were able to significantly mitigate the damage caused by the effects of the health crisis, which has spread more than expected with new outbreaks and an impact on various economic activities.

In this context, consumption has entered a state of sluggishness and investment and industrial production have returned to negative territory.

Although it is true that consumption has been one of the sectors most affected by the pandemic, it must be considered that as of the 2018 electoral period it showed a clear stagnation. Between July of that year and February 2020, the month before the start of the pandemic, the private consumption indicator in the internal market accumulated an advance of only 0.3%.

The most recent information shows that during October the consumption indicator increased 0.2% which, although it represented its fourth consecutive month with positive figures, its dynamics has not been enough to recover what was lost.

The impact of the pandemic and the lethargy it has recently entered keeps the consumption indicator 3.0% below its level prior to the start of the health crisis, and it is just over 10% below the level of the upward trend that maintained until the end of the last six-year term.

On the investment side, we have already pointed out that it weakened after the 2018 presidential elections, but that its deterioration worsened after other public policy decisions that violated the perception of the rule of law and have inhibited new investment.

The INEGI report indicates that during October investment remained in negative territory, reporting a drop of 0.01%, its second in a row. This was mainly due to the 0.6% decrease in investment in construction, especially in non-residential, which fell 1.0% in the month. Although investment in machinery and equipment increased 2.8% in the month, it was not enough to offset lower investment in construction.

Physical investment has fallen 16.6% between July 2018 and October 2021. This within an environment of high insecurity and failures in the rule of law, which has led to arbitrary measures that naturally scare away new investments. Regarding its pre-pandemic level, it remains 3.7% below.

In this context, productive activity also weakened. During November, the indicator of industrial production had a monthly decrease of 0.1%, after a month before it had had a rebound of 0.6%. In addition, it contrasted markedly with the point estimate of a 0.6% advance that was anticipated by the timely indicator from INEGI.

This behavior responded mainly (given its greater relative participation) to the monthly fall of 0.6% in construction, followed by the 1.2% drop in the generation, transmission and distribution of electricity, water and gas supply through pipelines to the consumer. final. On the contrary, mining grew 0.4% and manufacturing activity remained unchanged. Compared to November of last year, industrial production grew 0.7%, but compared to the month before the start of the pandemic, production is still 3.5% lower.

U.S

The Labor Department reported that during December consumer prices increased 0.5%, exceeding the market estimate that anticipated a rise of 0.4%. Food prices increased 0.5%, while energy prices fell 0.4%, responding largely to the 2.4% drop in fuel oil prices. The price of gasoline fell 0.5%.

Excluding food and energy, the core price index registered a monthly increase of 0.6%, slightly above the 0.5% increase estimated by the market.

Thus, annual inflation for December was 7.1%, the highest since June 1982. Annual core inflation was 5.5%, the highest since February 1991.

Although the market already anticipated weakness in retail sales during December, anticipating that they would remain unchanged compared to the previous month, the Department of Commerce reported that during that month sales decreased 1.9%, which represented its first drop after four consecutive months with increases. With the exception of sales of articles for health and personal care, construction material, and gardening and retail stores, the rest of the sales segments reported declines in December. According to specialists, this suggests that inflation is beginning to affect consumer spending.

The Federal Reserve pointed out that in December industrial production decreased 0.1%, while the market anticipated an increase of 0.3%. This was in response to a 0.3% drop in manufacturing production and a 1.5% decline in utility production. For its part, mining increased 0.2%. Compared to the same month of the previous year, industrial production grew 3.7%.

Source: reportacero.com

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