Power reform tops Mexico President-elect Fox's agenda; clout questioned

Just 2 weeks after Vicente Fox dramatically won Mexico's presidential elections and unseated the Institutional Revolutionary Party from the national government for the first time in over 70 years, the president-elect's transition team has already indicated that they will seek a further opening to private investment in Mexico's energy sector. It's an open question, however, whether Fox will have the political clout to undertake additional reforms in the state-run petroleum company Pemex.


MEXICO CITY�Just 2 weeks after Vicente Fox dramatically won Mexico's presidential elections and unseated the Institutional Revolutionary Party (PRI) from the national government for the first time in over 70 years, the president-elect's transition team has already indicated that they will seek a further opening to private investment in Mexico's energy sector.

Top Fox economic advisor Luis Ernesto Derbez�a former World Bank employee and likely candidate for Finance Secretary�indicated in a July 18 press conference that Fox's first priority would be to push for reforms in Mexico's woefully undercapitalized electricity and petrochemical sectorsg. "We are reviewing all the legislation both in the electricity and petrochemical sector to later take proposals to Congress for their approval," Derbez said.

Although he offered few details, the incoming administration's plans on the electricity sector appear similar to President Ernesto Zedillo's 1999 congressional initiative, which did not garner enough political support to be voted into law. Both the Comisi�n Federal de Electricidad and Luz Y Fuerza del Centro would remain in state hands, but new generation capacity would come from private investment.

Derbez said the Fox proposal would allow investors complete access to sell energy to the national network through an "autonomous and automatic" pricing scheme.

"With this, you won't see crossed subsidies which exist now, and those who invest will know exactly what is the profitability of their investment and, because of this, what project they will take to the market," Derbez said.

Asked about the prospects of getting the proposals through the new Congress, in which Fox's National Action Party (PAN) will need the support of either the PRI or the leftist Democratic Revolutionary Party to have a majority, Derbez said, "We hope that, by clearly stating that this is not a sell off of assets, Congress will be disposed to find a way for Mexico to obtains the necessary energy at adequate prices for the population."

Is Pemex next?
While Fox's first efforts will be to open up the electricity and petrochemical sectors, it's an open question whether he will have the political clout to undertake further reforms in the state-run petroleum company Petroleos Mexicanos. Michelle Michot Foss, director of the Energy Institute at University of Houston's College of Business Administration, says the political scenario precludes any major changes in Pemex.

"Changing the ownership structure of Pemex, its role as a state company, that's off the table," said Foss. "But how Pemex is managed and the way they do things, certain aspects of their capital budgeting, the types of contractual relationships they're allowed to make, that might be fair game."

Foss also pointed out that the trend toward decentralizing government decisions in Mexico, which Fox and the PAN support, could lead to more influence by state and municipal governments in energy projects: "You could see some of these northern states in particular wanting to have some say in how projects in their states, like pipelines and gas distribution systems, are set up for bidding, how bids are handled, and how the projects are managed."

According to Juan Quintanilla, an energy specialist at the Universidad Nacional Aut�noma de M�co, Fox will almost certainly aim to reform Pemex's tax structure as part of an overall national tax reform. Currently Pemex provides the government with over 30% of its annual budget, leaving the company with precious little investment capital.

"I would think Fox will look for a reduction on the taxes Pemex pays, to allow them to invest more," Quintanilla said.

The first major decision Fox will take in the energy sector is to pick a new Energy Secretary, expected to be named along with the rest of the cabinet before September. Current Energy Sec. Luis T�ez has been mentioned in local newspapers as a candidate to retain his post under Fox, in part due to his good relationship with US Energy Sec. Bill Richardson and his success in negotiations with the Organization of Petroleum Exporting Countries.

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