The federal government has placed self-supply at the center of the dispute over the electricity reform, a figure that dates back to before the 2013 reform. The president has included in his reform initiatives the proposal to cancel all contracts of this type, an idea that Manuel Bartlett, the director of the Federal Electricity Commission (CFE) and one of the main ideologues of the document, has dragged along since the PAN member Vicente Fox occupied the presidential chair.
The path to eliminate the figure of self-supply was initiated by Bartlett more than 20 years ago, when he filed a complaint with the Superior Audit of the Federation (ASF) that would later become the precedent of two constitutional controversies to try to stop this scheme, but they never received the backing of the Court. In the complaint, the former senator assured that the supply of energy by the cogeneration and self-supply permit holders constituted a fraud of the Law. The ASF carried out audits of the Energy Regulatory Commission (CRE) and inquired about the legality of the permits. But the Court decided that the Audit did not have the power to question these schemes. And the denunciation and the controversies only remained in attempts.
Now, its elimination has been put back on the table and the continuation of these contracts, say the market participants consulted, has been placed as the bargaining chip within a negotiation that takes place between the representatives of the executive, the legislature and private initiative.
NAFTA, industrialization and the origin
It was 1992, Mexico was negotiating a free trade agreement with the United States and Canada, it was preparing to receive large investments from industries such as the automobile and maquila, and at a global level, the opening of this market to private initiative had already begun. But in the country, the state-owned CFE had a monopoly on the electricity market and public service. Its capital to invest in new generation plants was low and there was a high risk that it could not meet the demand of the large companies that had set Mexico as their destination.
A change to the electricity public service law took the first steps to allow private investment. Among other modifications, companies other than the CFE could not provide energy to the population, but could build plants for their own service and that is where self-supply was born. “Since the 90s, the CFE already had many financial problems to build infrastructure, since then it was clear that it did not have enough money to be able to invest at the rate of a country that was growing like Mexico. We were in full economic growth, NAFTA was coming and many things had to be reformed in economic matters to achieve integration with the United States,” explains a former senior official of the Energy Regulatory Commission who has requested anonymity.
But the CFE had little infrastructure and did not have transmission networks in many places where the plants had to be installed. An agreement was then established: the private initiative would build the necessary infrastructure to interconnect its new plants with the state company’s substations, donate them to the State and in return receive a preferential transmission rate, sufficient to cover the maintenance costs that the company would have to pay. CFE.
And so it remained: the owners of the new plants would have to pay a fixed rate indexed to inflation for using the transmission network of the state company. The payment had been made “in advance”, say the interviewees. The preferential price was established because the companies had already disbursed large amounts of investment and the State had accepted the deal because it needed to grow its networks, it did not have the capital to do it by itself and it had to guarantee that the companies had the electricity they demanded.
And so a large number of new plants were built. At the beginning they were plants that worked with fossil fuels, such as natural gas. Renewable technologies would come a few years later.
The change to the law established that one or more companies could build a plant only for their own consumption. The legislation did not foresee that the electricity they produced could be commercialized, but it established that the companies that co-owned the plant or that were within the company that owned the asset –regardless of how many– could be creditors of the energy generated there.
The new plants built by private companies had more efficient costs because they did not have large liabilities or a large union like the CFE, and many companies that arrived in the country or were already on Mexican soil saw in these assets an option to lower their costs and be more competitive.
These companies could not buy electricity from the new plants, but they could buy one or more shares that could automatically place them as recipients of electricity. Receiving energy from one of these plants would not be a sale, but an internal transaction between the shareholders of the asset.
“When a company makes a type of transaction with its owners, with its shareholders, it is considered from the legal point of view that it is not going to the market, and that began to be applied with all the schemes. What can be criticized the most is that a creative and bold interpretation of the constitution was being made, but impeccable from a formal point of view,” says a former CFE official. “And if you start to see corporate creativity, where you start to see very powerful developments, with up to 500 members. And the CFE realizes that its main clients are beginning to hemorrhage, because self-supplies existed simply because they were cheaper than the CFE.”
The self-supplies and the thousand partners
The low costs of these plants, say the interviewed sources, became the greatest incentive. The CFE carried great costs: a large labor liability, a powerful union, and a structure that did not encourage it to become more efficient. The private ones had a totally opposite structure, they became more competitive, and the rates they offered were lower. The state company stopped signing new big contracts and lost some of its big customers, including some municipal governments.
The Secretary of Energy assures in its latest Energy Sector Program that these contracts “were used to simulate the original concept, through incorporated consumer ‘partners’ with tiny capital shares, which has allowed them access to subsidized porterage rates, using the transmission and distribution infrastructure of the CFE”.
The state company has accused losses due to the fixed rates paid by these plants. But the participants in the sector defend that it is a model designed by previous administrations that has allowed economic development in some regions of the country where the electric company would have taken years to arrive.
“The figure is criticized, but an internal criticism has not been made to lower costs and make CFE rates attractive,” says another former official of the Energy Regulatory Commission who has also requested anonymity. “The other way to see this is why the private sector does not want to be with the CFE.” The sources have asked not to be cited due to the series of accusations that the current administration has made frequently.
His exclusion from the reform and renewables
And in 2008, high oil prices –which brought with them large increases in electricity rates, especially for industrial ones– and an increasingly large wave of the use of renewable power plants gave another push to self-supply societies.
The state-owned CFE once again required greater generation capacity, to start displacing its old plants and meet some demands for clean generation, but again there was no capital for the construction of the plants and the transmission network in places with wind potential like the Isthmus of Tehuantepec. And then the federal government at that time, headed by PAN member Felipe Calderón, found in these figures a way to encourage the construction of power plants, but this time using renewable technology.
The formula was similar: the private ones would put the capital for the construction of wind power plants – those that were feasible at that time -, they would build infrastructure to transport electricity in exchange, again, for a fixed transport rate, known as portage stamp .
The construction of these plants allowed an increase in the country’s wind capacity, at a time when these technologies still did not have affordable costs, as they do now.
And five years later came the reform, which would remove the generation monopoly from the state-owned CFE. The legislative change would no longer include the figure of self-supply, nor that of Independent Energy Producer –which has also been one of the targets of continuous criticism–, but it would respect the contracts. “The contracts had an expiration that did not exceed 20 years, there was no point in not respecting the rule of law by eliminating these permits that were soon to expire,” says an official close to the design of the 2013 reform.
The plan of the previous administration was based on waiting for the contracts to expire, so that after this they could be part of the electricity market, enter into bilateral contracts with industrialists or participate in the short-term market.
“The self-supply companies have always been imperfect figures, but the law could not be made retroactive and that is why they allow them to stay. They are clearly an imperfect figure, but the joke was to perfect the market so that all the permit holders gradually migrated to the market. But the market was created in 2013, by 2018 it was already being destroyed,” he says.
The reform also created, through the CFE, the figure of intermediary generator. The entity in charge of administering self-supply contracts, representing power plants and load centers.
CFE Generator of Intermediation is the figure that receives payments for transportation, related services, power and is responsible for selling surpluses from self-supply contracts in the short-term market. But this subsidiary of the CFE, which began operating in 2017, has annually reported negative financial balances, which the National Center for Energy Control (Cenace) distributes among all market participants in proportion to their physical energy purchases, so they mostly fall to the state-owned CFE, which is the largest player in the sector.
Market losses stood at more than 7,000 million pesos in 2018 – its highest figure since its creation – and were reduced to around 1,000 million pesos during 2020, possibly driven by increases in porterage fees imposed by the regulator during that year. These figures are the ones that the federal administration would be referring to continuously when it refers to the losses that these contracts would cause.
But although most of the negative financial balance falls on the national electricity company, that figure is taken into account by the Energy Regulatory Commission in the calculation of user fees, says a document from the Independent Market Monitor.
The market, say the specialists in the sector, had some imperfections that should be adjusted by Cenace as the consolidation of the market progresses. The sources agree that self-supply figures must gradually disappear, join the market where the rest of the participants are –including the CFE– and join a competitive process. “I asked myself: Is it necessary to change the Constitution for a model that represents 12% of total generation?” says the former CRE official.
The reform under discussion and its disappearance
The reform initiative includes as one of its main objectives the total disappearance of this figure and the immediate cancellation of contracts. But that, say those interviewed, would not fully resolve the need for lower rates for the population in general, the private sector and industrialists.
The sources point out that a constitutional change is not necessary to eliminate this figure and that these contracts have only been used continuously in public discussion to avoid delving into other issues included in the reform. And some companies with self-supply contracts have no impediment to migrate their assets to the electricity market, where they can enter into bilateral contracts with other private parties, but the federal administration has paused this process to join the market.
“I think the objective is being lost, which is to generate energy at the best possible prices. CFE is one way to do it, but it should not generate a conflict if there are other ways. The objective is not for CFE to be the figure, CFE should be in many areas, but in the end the primary objective is still to have cheap and accessible electricity and that is not resolved by the reform”, concludes Eleazar Castro, a market specialist.
