The Mexican Constitution

Article 25 of the Constitution reserves for the State the exclusive control of strategic sectors of the Mexican Economy.

Article 27 of Mexico’s Constitution reserves the generation, transformation, transportation, distribution, and supply of electricity exclusively to the Mexican State.

Article 28 of the Mexican Constitution states that the various governmental institutions and organizations charged with strategic sectors of the economy (such as oil and electricity), will not be considered to be monopolies.[1] 

In order to allow private sector participation in the electric sector, Articles 27 and 28 of the Constitution must be amended. Initiatives to reform the Constitution may be presented by either the Executive office (The President), or by the legislative branch represented by the two chambers of Congress (deputies and senators). 

Since the Constitution is Mexico’s supreme law, amendments must be approved by at least a two-thirds majority votes in both the chambers of the Mexican Congress. This means that in order to pass, constitutional amendments must have the support of at least 334 deputies and 86 senators.   

Electric Energy Public Sector Law (LSPEE) 

In 1992 a series of reforms began to be introduced to the LSPEE in order to attract the participation of private parties in the generation of electricity. These reforms allowed private parties to: 

1. Generate electricity for their private consumption (self-supply), cogeneration, and small-scale production. Where cogeneration refers to the production of electricity with steam or secondary energy sources, and fuels. Small-scale production refers to the electricity generated in plants that have a maximum capacity of 30 MW for its sale to CFE, private consumption or export.
2. Generation of electricity by independent private parties for sale to the Mexican government’s Federal Electricity Commission (CFE). Independent private parties are private generation plants of more than 30 MW authorized exclusively for sale to CFE and for export purposes.
3. Production of electricity for export.
4. The importation of electricity by corporations and individuals for their private consumption.[2]

In 1995 Congress unanimously approved reforms to allow private companies to invest in the construction of electric sector infrastructure for the government. Once the infrastructure is finished the builders’ costs become public debt that the government must repay. These private sector financing projects are known as “PIDIREGAS.”     

Required Legal Reforms for Mexico’s Electric Sector 

Mexican laws and regulations have been reformed to create an environment of transparency, certainty, and security to foreign investors. The Foreign Investment Rules have modified the sectors that are considered strategic and thus reserved exclusively to the State. Small-scale generation, co-generation, self-supply, independent production, and import-export for private consumption are no longer reserved to the State, leaving them open to 100% of foreign ownership.[3] 

While recent market-opening reforms now allow foreign firms to operate power plants in Mexico, there is still only limited incentive for such investments because the electricity must either be sold to CFE or exported.[4] 

The World Bank has suggested corporatizing of Mexico’s energy sector as the initial step for market liberalization.[5] Through this process government allows management to run the energy enterprises on a profit-oriented basis rather than trying to achieve socio-economic policy objectives of removing the political agenda from decision making in state owned enterprises. The OECD further suggests cultivating the support of utility management, staff, and unions using inducements such as: stock options, salary tracks based on job performance, training, retirement, and other compensation programs.[6]

Part II: Negotiation Round Analysis

Round I

1. President Zedillo’s initiative: February 1999

Background

Presidentialism in Mexico meant that all power rested on the President with the legislative and judicial branches playing subservient roles.  “ For seventy years, nearly all initiatives presented to the two houses of congress have been adopted. The effects of Presidentialism were helped along by the fact that the president’s party – the PRI- has always held majorities of seats in both houses…”[7] 

Upon taking office, President Zedillo’s government had to face the worst economic crisis to ever hit Mexico. Mexico’s economy experienced negative growth in 1995 and no significant growth during 1996. The first part of his six-year term was marked by the unpopular and Spartan measures imposed to Mexico by the IMF. No deficit spending meant unemployment and no social program spending. 

During his Presidency, Mr. Zedillo faced many other great challenges such as the bankruptcy of the newly privatized banks and the highway system. President Zedillo was forced to bail out the private investors to prevent the total collapse of Mexico’s financial system. 

Had the Zedillo government allowed the banks to fail, Mexico could have been submerged in a violent chaos. Mexican taxpayers will spend the next twenty fiscal years paying for the FOBAPROA bank bailout.[8] In return they will have acquired a federal insurance deposit like the FDIC in the United States. 

Just as Mexico’s economy had started its recovery in 1997, the Asian crisis slowed down the world’s economic growth. To make matters worse, oil prices dropped to their lowest levels in thirty years. Mexico’s oil revenues constitute over 30% of its total revenues. A sustained US $10 per barrel drop would have sunk Mexico’s economy into a dangerous depression with the serious possibility of social rupture and violence. 

In the federal elections of 1997 Mexican voters punished the President and his party, the PRI for the economic hardships of the administration by taking away its majority in both of the chambers, deputies and senators.[9] In this economic context, President Zedillo decided to open the electric sector to private investors. Without other sources for revenues the Mexican government could no longer plan on making the necessary investments for the electric sector. This sparked a strong feeling of division among the neo-liberals and traditionalist camps of the PRI.[10] The nationalized, state-run energy industries had been the pride and joy of the traditionalist PRI faction, and now Zedillo and his neo-liberals wanted to privatize it. 

Members of the PRI were frightened by the prospect of losing the Presidency in the 2000 elections. The party had been eroding into two factions since the catastrophic 1988 elections where it is said that President-elect Salinas stole the election from Cardenas and the PRD. On one side were the ever-dwindling neo-liberals and the more traditionalist and leftist PRI corporatists that believe in a State controlled economy. 

In order to choose a winning candidate for the 2000 presidential elections, the PRI had a public election with four candidates publicly campaigning against each other. The PRI’s strategy of selecting a candidate that would have the support of all party members backfired making the two factions choose a different candidate to represent them. With the support of the PRI apparatus, Zedillo’s candidate, Francisco Labastida beat the traditional party members candidate Roberto Madrazo, but only after a heated and injurious campaign that may have pushed disgruntled party members away from the PRI. 

On July 4, 2000 Vicente Fox, the PAN candidate was elected President of Mexico. The elections significantly reduced the number of PRI and PRD seats in congress of the. The PAN however, did not gain enough seats to impose its will and any potential reforms require inter-party alliances. The first-time opposition candidate Vicente Fox faces a hostile congress.

Zedillo’s Proposal 

The Principal elements of the market structures proposed by the presidential initiative were the following:[11]    

1. Transformation of the Existing Public electricity agencies into various specialized generation and distribution companies, plus one company called the National Electricity Grid in charge of the national transmission grid.
2. Creation of a decentralized public agency, the Center of Operations for the National Electrical System.
3. Opening of electric industry activities to domestic and foreign private investment.
4. The establishment of a spot market for wholesale electricity, in which generators would sell power under competitive conditions at a freely determined price.
5. Free access to the national transmission grid, and the possibility for qualified users to participate, whether directly or through marketers, in the wholesale electric market.
6. Application of a transparent, predictable legal framework giving private investors legal assurance and allowing the Energy Regulatory Commission (CRE), as an independent authority to regulate the price, investment, and service quality aspects of the natural transmission and distribution monopolies as well as other activities of the electric industry.

The government’s competition model would be based on private investment in generation and distribution. It stated that the CFE, despite its operating surpluses, could not finance the expansion without incurring further debt that ultimately had to be backed by the federal government. 

As the competition model became consolidated, it would see the CFE divesting itself of all power plants except the single nuclear plant, and it would no longer participate in distribution.[12]

The presidential initiative sent to the Senate in February of 1999 was forwarded to the Senate commissions of: Constitutional Matters, Non-Renewable Energy, and Legislative Studies.  The Commissions initiated a process of public consultation by means of five analytical forums held in eight different cities.

The Director of the CFE was summoned by the Senate Commissions, and the Minister of Energy was summoned to “exchange views” with the Senate.[13]

Normally, the initiative would have gone on to the plenum of the Senate, and from there, to the Chamber of Deputies. However, the initiative was so systematically and virulently rejected in the forums and by important sectors of public opinion that it never came back to the Senate plenary sessions, and never reaching the Chamber of Deputies.[14]      

Reactions and Responses to the Zedillo Initiative 

There was no single debate, discussion, or voting on the President’s initiative. The information presented in this section was obtained by following the stenographic versions of the sessions and debates in both chambers of Mexico’s Congress from 1999 to 2001.

This section will identify the key issues, objections, and arguments against the President’s initiative. 

1. According to the President’s initiative the need for privatization stemmed from the government’s inability to make the necessary investments in the electric sector to satisfy the fast growing demand for electricity. 

Legislators of the PRD and of the PT (a now extinct radical socialist party), reacted to this position by stating that the Zedillo government was following the privatization model imposed by the International Monetary Fund (IMF), the World Bank (WB), and the United States. According to the PT and PRD legislators this model is part of a conspiracy to steal the strategic and patrimonial assets of the Mexican people and to deliver them to agents of international capital.[15] 

In a November 16, 1999 Point of Order at the Chamber of Deputies, Deputy Maria Miroslava Garcia of the PRD, stated that the warnings from the President about not making the necessary investments in the electric sector that could result in serious supply deficiencies were a “Hollywood style, catastrophist farce.”[16] 

According to Deputy Garcia, the electric sector was already open to private capital investment in the forms of self-supply and cogeneration. She also pointed out that the government could already obtain the private financing it required so modifying the Constitution was unnecessary. She also stressed that the CFE and LFC had operated with profits in the past so they were capable of financing their own expansion in the future. 

It is important to note that in practically all of its statements and positions since February of 1999, the PRD reiterates that the state-owned electric energy companies, the CFE and LFC are profitable and financially sound even when the companies’ financial statements indicate otherwise. It is almost as if the PRD was convinced that the financial statements had been doctored to indicate the urgent need of investments and a national crisis.[17] 

According to PRD Deputy Benito Osorio the Ministry of energy had overestimated the investment needs since 40 percent of future investment was already guaranteed through PIRIDEGAS projects.[18] This is significant because CFE and LFC- supplied data should serve as the objective criteria to determine the needs of the electric sector in Mexico. The arguments of the PRD indicated the null trust it had on government data and seem to always return to the ideological position that the state should run the economy for the benefit of all Mexicans and not surrender to the competition model that would make all investors, especially foreign, rich with the patrimony of Mexicans. This ideological division is so deep and recurrent that Mexico’s congress seems threatened by the inability to reach agreements and legislate. This apparent paralysis may just be the product of the necessary readjustments to establish for the first time in recent history a productive parliamentary dialogue between opposition parties in Mexico. 

2. According to the Presidential initiative the liberalization would not imply a weakening of the State and its capacity to defend the sovereign interests of the nation. The reforms reaffirm the State’s role as the regulator of the economy within a context of greater openness and competition. By guaranteeing the future supply of electrical power under the best possible conditions of competition, the government was attempting to render the country’s productive facilities more competitive, strengthen the government’s financial structure and enable it to devote more resources to social programs.[19]

Deputy Rosa Delia Cota of the PT countered these arguments by stating that the governments of former President Salinas and of President Zedillo were undermining Mexico’s sovereignty by delivering the nation’s strategic sectors into the hands of profit motivated private investors, especially foreign ones.[20] Deputy Cota also pointed out that there would be no competition and benefits to consumers but rather a formation of oligopolies that would suck the blood out of the defenseless Mexican consumers. 

Deputy Miroslava Garcia also noted that the previous privatization processes had been complete failures. The bank and highway privatizations had resulted in massive failures that Mexican taxpayers had to bail out, and the telephony privatization had resulted in an increase of rates and not on better service to Mexican consumers. According to Deputy Garcia privatization would only mean increased electric bills and no benefits to Mexican consumers. She also stated emphatically that the government had no intention of using any resources “freed” from electric infrastructure investment to invest in social programs like health and education.[21] 

Another significant objection was the results in other countries of privatizations of the electric utilities. Senators of the PRD and PRI pointed out that privatizations in Argentina, Chile, and Great Britain were failures that resulted in rate increases and poor service.[22] This is another point where objective criteria has not been used successfully because some groups look at these privatizations as failures while others see them as success stories.[23] 

PAN legislators opposed the initiative on the grounds that there was no need to privatize existing infrastructure. The PAN supported private investment only for new infrastructure and did not contemplate the demise of the CFE. According to Senator Benjamin Gallegos, the State needed to retain considerable authority to regulate the markets and President Zedillo’s initiative did not accomplish this objective. The PAN’s position was that transmission and distribution should remain under government operation.[24]

2. Other Initiatives and Activities of the First Round 

President Zedillo’s neo-liberal outlook was similar to that of the PAN. In 1999 the PRI and PAN together held more than the required two-thirds majority to reform the Constitution. The PRI and PAN had already voted in concert to pass legislation such as the FOBABROA bank bailout. President Zedillo probably counted on this common outlook to convince PAN legislators to support his reforms. If he did, he was wrong. 

By 1999 Mexico’s presidential race was well under way and it took precedence over the privatization reforms. The PRD wanted to capitalize on the FOBAPROA issue to defeat the PAN and PRI. The PRI’s internal division and the hard economic times of the Zedillo administration gave the PAN a strong chance to take away the presidency from the PRI for the first time in its history. PAN legislators withheld support from Zedillo thinking that they could pass their own reform once they held the presidency.

The Zedillo initiative became part of the legislative backlog and it was never voted on. No major developments occurred on the issue until after the presidential election of July 2000 that gave the presidency to the PAN and Vicente Fox. 

The Secretary of Energy Luis Tellez appeared before the Senate on September 28, 2000. Two months before President Fox took office. During his appearance, the Energy Secretary testified that the presidential reforms were necessary. He also pointed out that the existing Constitutional framework was outdated and that new laws were necessary to ensure Mexico’s energy independence. Secretary Tellez pointed out that Mexico now depended on imports of gasoline, liquid gas, petrochemicals, and plastics from the U.S.[25]  

On November 21, 2000, ten days before President Fox took office, Senator Antonio Soto of the PRD gave his party’s official position at the Senate. The PRD denounced the privatization efforts as a conspiracy to deliver Mexico’s electric sector into the hands of greedy private investors who would suck Mexican electricity consumers dry.[26] 

Initiatives during the Fox Presidency 

President Fox took office in July of 2000. His administration has not been running smoothly. Major congressional realignments have resulted in new party positions and heated debates on issues like Chiapas and the Zapatistas, fiscal reform, and the rapidly deteriorating economic conditions sparked by the U.S. recession and the September 11^th attacks. 

President Fox has fought unsuccessfully against congress on issues like the Indian law reforms to end the conflict with Zapatista guerillas in Chiapas, and how to raise more revenues for the government through new taxes. These conflicts have delayed a long awaited Fox initiative for reforming the electric sector in what promises to be a tough second round of negotiations in congress this spring.  

Since taking office, President Fox has not yet sent out his initiative but others have been assembled for the second round. The climax of the first round then was the constitutional controversy against the President brought on by Senators of the PRI and the PRD who took their case against the Executive Power to Mexico’s Supreme Court. According to the opposition Senators, President Fox had tried to sneak through congress modifications to Mexican laws that required constitutional reforms to be admissible.[27] 

The PRI has recently presented a new initiative for reforming the electric sector. This new initiative marks the beginning of a second round of negotiations where initiatives from all major parties will be presented and debated in the spring of 2002 Congressional Sessions in Mexico City.

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