Opinion » Mexico: Institutions for Good Energy Policy

Mexico: Institutions for Good Energy Policy

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By: Charles B.
Published: November, 2014

Economic figures for Mexico are still gloomy. Analysts have reduced their economic growth forecast from 2.5 percent to 2.4 percent this year. Electricity demand (measured in Gwh) grew just 0.6 percent from September 2013 to September 2014. Hence, the Mexican government is hurrying to launch an energy reform that looks to be the most important tool for reaching higher rates of growth. Laws and rules defining the reform are almost set, but state institutions required for the task are still under construction. Recent turmoil in Mexico has revolved around municipal governments serving the interests of criminal gangs and governors unwilling to enforce the law, showing the worst example of institutional weaknesses in Mexico. President Peña’s slogan is “moving on Mexico,” but two years of feeble economic growth has put pressure on him to offer good results to Mexicans, mirroring the same two years he has been in office. Now, two more bad pieces of data are putting additional pressure on the system: low oil prices and criminal violence.

Last summer energy reform seemed a good bet for reaching a better economic performance by the end of President Peña’s term in 2018. Oil and power projects need several years to develop, but good outcomes in job creation and production are feasible by that date. Today some analysts think good economic numbers from energy reform could be the only life vest available to President Peña in a stormy Mexico. For this to happen, it is crucial to build good regulators for the new energy markets to come. The four crucial players are the National Center for Power Control (CENACE), the National Center for Natural Gas Control (CENAGAS), the National Hydrocarbons Commission (CNH), and the Energy Regulation Commission (CRE). CENACE and CENAGAS will take care of activities previously in the hands of state monopolies: operating the national electric grid and natural gas pipelines. In both cases it is imperative not to import vices from state monopolies, such as overstaffing and costly labor benefits related to unions. Otherwise, power costs in Mexico will remain above the U.S. level, as is happening today.

Something similar could be said for regulators. The regulatory agencies should be lean, but this is not to say that officers should be poorly paid. In fact, human capital could become a problem for regulators. Up until today, most specialized personnel has worked for the state monopolies, PEMEX and CFE, both of which offer generous conditions for their workers. Newcomers to the Mexican energy sector, including foreign firms, will be competing for this scarce human capital. Wages for Mexican public officers in the last ten years have decreased in real terms, since their pay has been frozen for a decade. Maybe it is impossible to match an offer from a private energy firm, but the Mexican government should at least try not to impose a dysfunctional scheme on CRE and CNH, on the grounds that this is how other agencies work. In exchange, it would be healthy for CRE and CNH stick to a defined number of workers over a long period of time and pledge to contract out non-essential activities. Under this arrangement, it would be possible to have good technicians in CRE and CNH and to reduce risks of corruption in their decisions.

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