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The financing of the Mexican electrical sector
Energy Policy 29 (2001) 965}973
The "nancing of the Mexican electrical sector Jorge Islas*, Ubaldo JeroH nimo Center for Energy Research, National University of Mexico Apartado Postal 34, 62580 Temixco, Morelos, Mexico Received 5 September 2000
Abstract This paper analyses the "nancial pattern of the Mexican electricity sector, its "nancial limits in both development and modernization of this strategic sector, and the main options for resolving this "nancing problem including the proposals of the President Fox government. Our allocation of risks and pro"tability analysis explain the present success in attracting private investments to expand both generation and transmission capacity through BLT and IPP projects. The "nancial limitation is nevertheless the low self-"nancing of Federal Electricity Commission (CFE) that will make it very di$cult to obtain "nancing to ful"l BLT and IPP contract compromises and to invest large sums in the expansion and modernization of the electricity sector. The main options to resolve the "nancial problems of the Mexican electricity sector are: (1) the improvement of the present "nancial pattern, (2) the opening of generation and supply segments to private capital with the preservation of the vertically integrated state-owned utilities, and (3) the proposals of the President Fox economic transition team that consider the opening of generation and supply segments, the setting up of an independent state-owned company to operate both the electrical dispatching and a power pool, and, "nally, the transformation of CFE into a holding of state-owned utilities of generation, distribution and transmission. 2001 Elsevier Science Ltd. All rights reserved. Keywords: Financing; Energy reform; Mexican electricity sector
1. Introduction In 1992, in Mexico, there was an e!ort to attract private investments to increase the "nancial capacity of the electricity sector (Islas and RodrmH guez, 1997) through the most important reform of the Electric Power Public Service Law (DOF, 1992) since the nationalization of the electricity sector in 1960. With this reform a new organization was set up that has the following main characteristics: (1) The Federal Electricity Commission (ComisioH n Federal de Electricidad, CFE), a national and vertically integrated state-owned utility, is the dominant utility in this organization. In particular, the new law preserves the monopoly of the CFE in the public electricity service. The other state-owned utility, the Center for Light and Power (Luz y Fuerza del Centro, LyFC), is a regional utility and has a smaller role in the new organization. * Corresponding author. Tel.: #52-5622-9719; fax: #52-5622-9742. E-mail address: [email protected] (J. Islas). LyFC is essentially a distribution utility. This utility has few generation and transmission assets and buys from CFE almost all the electricity that the utility supplies.
(2) Electricity generation is opened up to private investment through the external power producer which includes the Power self-supplier (PSS), Combined heat and power producer (CHPP), Small power producer (SPP), Independent power producer (IPP), Exportation power producer (EPP) and Power importer (PI). These activities are not considered as public service in the new law. (3) In this new organization the CFE is the only purchaser of power from IPPs and SPPs and of the electricity surplus from CHPPs and PSSs. Also, the electricity network is owned by CFE and consequently this utility is the only seller of transmission services and back up power. (4) The coordination between CFE and the external power producers is through long term contracts (or noti"cations in the case of short-term electricity surplus). These contracts include power purchase agreements (PPA) prices or tari!s associated with the electricity network services of CFE for CHPPs and PSSs, EPPs, IPs. In this new organization, the CFE obtains bids to develop the power capacity with private investment. This bidding is the main mechanism to introduce competition in the electricity sector.
0301-4215/01/$ - see front matter 2001 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 1 - 4 2 1 5 ( 0 1 ) 0 0 0 3 0 - 1
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Fig. 1. Average electrical tari!s by sector. Source: SE (2000).
An important outcome of this energy reform is a new "nancing pattern in the Mexican electricity sector. This paper analyses the "nancial pattern of the Mexican electricity sector and its "nancial limits in both development and modernization of this strategic sector. We made this through analysis of the structural characteristics of the "nancing pattern, particularly, in terms of allocation of risks and pro"tability, and the identi"cation of the weak points. Finally, we discuss the main options to increase the "nancial capacity of the Mexican electricity sector including the proposals of the President Fox government.
2. The pace of the energy reform Structures: In the beginning, energy reform moved slowly. The CFE bidding for the "rst IPP ended in 1997, three years later than the original planned date, and "ve years after the 1992 energy reform. Meanwhile, between 1989 and 1997 CFE bids for building, leasing and transfer (BLT) projects have totaled 2.1 GW. In 1998 this situation changed dramatically when CFE bids for IPPs increased to 3.7 GW. In relation to the SPP that was supposed to stimulate the use of new and cleaner sources of energy, particularly, renewable energies, the energy reform has not shown any results. The CHPPs and PSSs have increased quickly their participation in electricity generation. At present, these kinds of projects with authorization total 5501 MW (CRE, 2000). Their legal de"nition is so broad in the new law that several companies can join together on bids. Furthermore, municipal or state governments in association with local companies can take part with self-supply goals. One additional result of the increasing use of CHPPs and PSSs is that it has produced in some cases open access to CFE electricity network by third parties. As far as CHPPs are concerned, the energy reform did not give any results in terms of CHPPs with surplus sales
to CFE, which represent half of the CHPPs potential from a total of 14 GW. The main problems to developing this segment of the CHPP market are both low purchase prices and regulatory barriers that discourage the development of cogeneration systems with surplus of more than 20 MW. Competition: BLT bids and especially IPP bids introduced a limited but positive competition into the Mexican electricity sector. Important outcomes of these bidding process have been to obtain low PPA prices, between 2.5 USA 1997/kWh and 3.0 USA 1997c//kWh. Tariws: Fig. 1 shows the evolution of real tari!s in the Mexican electricity sector between 1993 and 1999. The average tari!s for the agricultural and domestic sectors dropped in real term 25% and 12%, respectively, between 1993 and 1995 and later become more stable. However, at present these tari!s bene"t from a high subsidy (70% and 32%, respectively). In 1999 the average industrial tari! improved 25% in real terms compared to 1993, while in the same period commercial and public tari!s improved 15% and 10%, respectively. At present commercial tari! do not bene"t from subsidy meanwhile industrial and public services tari!s have a subsidy of around 9% and 6%, respectively. Without these subsidies, the reductions between 1993 and 1999 of the industrial and public services tari!s could be 16% and 4%, respectively. These last "gures re#ect in some degree that the economic e$ciency of the electricity sector has improved after the 1992 energy reform.
3. Financing pattern The new "nancing pattern is described in Table 1. Column 2 shows the present trends for each one of the "nancial sources. These trends indicate, of course, the
In this paper the monetary terms are expressed in USA1997 $ or in USA1997c/.
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Table 1 Financial sources of the Mexican electric sector after the reform of 1992 Source
Trends
Government
Domestic and agriculture Tari! subsidies Decreasing Limited use Principally on electrical grids Growth use in transmission Principal "nancial source in generation
Financial loans to CFE by international development "nance institutions (IDB, WB) Access of CFE to international "nancial markets CFE Self-"nancing for investment Building, leasing and transfer (BLT) Independent power producer (IPP) Own data.
4. The allocation of risks in electricity generation
Fig. 2. Public investment in the Mexican electrical sector, 1988}1997. Source: CFE (1998).
actual "nancial restrictions imposed by the Federal Government (see Fig. 2) as well as restrictions from traditional "nancial sources. Table 1 shows that BLT projects and IPPs have become the main external "nancing source for the Mexican electricity sector. The "rst BLT project used to "nance the electricity sector dates from 1989, but its regulation was de"ned in the energy reform context in 1996 through the Accountancy and Federal Public Spending law that regulates the PIDIREGAS projects (Proyectos de Impacto Diferido en el Registro del Gasto). These projects became the main private "nancial source for development of new electricity generation during the "rst "ve years of the 1992 energy reform. In 1997 the CFE bidding program for BLT projects represented 2.1 GW. In recent years the use of this "nancial source has decreased in the generation segment, but it has become an important private "nancial source in the transmission segment. In relation to the IPP, after a slow start the IPP become the main "nancial source for developing the new electricity generation. We will see that this trend seems to continue for the next years.
These "nancial restrictions and the slow pace in the energy reform explain the present dangerously low reserve margins (frequently less than 6% ).
The growing use of BLT and IPP projects is associated with a favorable structure in the allocation of risks in electricity generation investments. Risks in BLT Projects: Table 2 shows the allocation of risks in a BLT investment project. The private consortium that won the CFE bid and the insurance companies assume all the construction risks: engineering, supply of materials, design, construction and operation during a test period (Blaylock, 1997). As far as the "nancing package is concerned the private consortium and lenders (commercial banks, international "nancing institutions and export credit agencies) assume the "nancial risks associated. CFE assume all the risks associated with the plant operation. In the same time, through a leasing contract CFE commits itself to pay a 20 year lease during which is paid back the investment and pro"ts of the private consortium and lenders. According to the leasing contract, at the end of this period the assets of the BLT project (the electricity plant) are transferred to CFE. CFE also takes the responsibility of the risk associated with fuel supply especially in the case of a fuel price increase. At this point it is important to mention that the CFE margin to reduce these risks is not large because the Ministry of Finance and Public Credit (MFPC) establishes the tari! structures and must approve an increase in the tari! level. Therefore, it is not easy for CFE to transfer fuel supply risks to the customers. There are also not market risks for the investors of the BLT project. All these market risks are also assumed by CFE. Finally, the BLT contracts establish that CFE should pay a 20 year lease in an unconditional way. Risks in IPP projects: In the IPP projects the winning private consortium in the bidding process has to take care of "nancing, engineering, equipment supply, design, construction and operation of the plant. The regulator gives to IPP a license to generate electricity for a 30 years period. As opposed to BLT projects where the plant is leased, operated and "nally owned by CFE, in the IPP case the plant is never owned by CFE and the IPP sells
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Table 2 Risk Allocating through BLT and IPP projects Risk
BLT
IPP
Financial Construction Operation Fuel supply Regulatory Market Political CFE risk
Private consortium, lenders Private consortium, insurance companies, contractors CFE CFE/private consortium, fuel suppliers Private consortium CFE Financial institutions Private consortium
Private consortium, insurance companies Private consortium, fuel suppliers Private consortium
Government support letters
Own data.
its production to CFE through a long term PPA. The IPP has nevertheless the obligation to inform CFE how to operate the electricity plant, the technical characteristics (voltage, reactive power, and frequency), the maintenance program and the emergency program in case of a plant failure. The third column of the Table 2 shows the risk allocating in an IPP project. Risks associated with the "nancing package, design and construction are assumed, as in the BLT case, by the private consortium, lenders and insurance companies. As far as risks associated with fuel supply are concerned, we notice the following evolution. In the "rst IPP project (Merida III), almost all risks were assumed by CFE because a passthrough was applied in which CFE supplies the fuel and the private consortium only takes care of the natural gas transformation to electricity (Bond and Carter, 1995). However, for the second IPP project (Hermosillo plant) the fuel supply risks were assumed by the IPP (IDB, 1999). Finally, in an IPP case the private consortium and insurance companies also assume plant operation risks which is not the case with the BLT projects. As in BLT projects, CFE assumes the market risks of the electricity generated by the IPPs. Once the IPP has sold its electricity and plant capacity to CFE, the market risk for an IPP is zero and this ensures that there will be revenues and dividends for the private investors. In the IPP case it has been necessary to o!er government support letters to the IPP contracts to more easily attract these private capitals. This mean that at present the perception of the risk in which the CFE breaks the PPA is high and with these government compromises these private investments are protected against this hypothetical case. In terms of allocation of risks, these guaranties mean a clear transfer of risks to the federal government if CFE breaks the PPA contract
In this hypothetical case the government support letters force the government to respect the contract.
In summary, we can see that in BLT and IPP projects the private consortium, insurance companies and lenders assume all risks associated with the design and construction of the plant as well as the "nancial package. However, in an IPP case the private consortium, insurance companies and fuel suppliers assume plant operation and fuel risks which is not the case with the BLT projects. Finally, in both cases, BLT and IPP projects, the market risks are assumed by CFE. The present trend of private consortium demands for government support letters, is an important protection against the perception that in the future the CFE could default on the IPP contract. We can say that an important consequence of the 1992 energy reform is that private investors assume important risks in the electricity sector, particularly in the IPP projects, but in general the allocation of risks in the Mexican electricity sector is favorable to private investments because there are no market risks and the `CFE riska is in the case of IPPs covered with government support letters.
5. Analysis of private investments pro5tability Divers technical and economical factors de"ne the internal rate of return (IRR) of the private projects, among them are the economic life of the plant, construction period, thermal e$ciency, load factor, fuel cost, discount rate and PPA price. Table 3 shows technical and economical data of two combined cycles plants of di!erent sizes that we consider representatives of private projects developed and planed up to now in Mexico and we use to calculate the unit costs of generation. To calculate the unit net pro"t of the private investment, we consider a "gure of 2.5 USA 1997c//kWh to represent PPA prices applied in Mexico. With these guaranties the private investors are covered principally from the historical low self-"nancing of CFE, big local money devaluation and abrogation of the energy purchase contracts. This is one of the lowest PPA prices achieved in the bidding of IPP projects in Mexico.
J. Islas, U. JeroH nimo / Energy Policy 29 (2001) 965}973 Table 3 Economic and technical assumptions for analysing the unit costs of generation and the internal rate of return (IRR) of private projects in Mexico
Table 4 Results of sensitivity analysis at 10% of parameter variations Parameter
Power plants (combined cycle gas turbines) Net capacity (MW) Investment cost (US$ 1997/kW) Economic lifetime (years) Load factor Thermal e$ciency (%) O&M (USA $1997/MWh) Discount rate (%) Levelized gas price (USA 1997$/1000 ft) PPA price (USA 1997/kWh)
1;268 528.92 25 0.90 56.03 3.18 10.0 2.6
1;532 447.52 25 0.90 56.03 2.17 10.0 2.6
2.5
2.5
COPAR, CFE, 1997 and own data.
With these data and using the levelized cost method we obtain the unit cost of generation and the IRR for private investments. For the 268 MW project the unit cost of generation and the IRR are 2.45 USc//kWh and 10.75%, respectively. These "gures are better for the 532 MW project which have 2.25 USc// kWh and 17.42%, respectively. These results indicate that plant scale is very important in unit generation cost and in project pro"tability. In addition, these results clearly explain the present trend in plant scale selection (around 450 MW) in the CFE bids for combined cycles with private investment. Finally, our results con"rm that it is possible to obtain low unit generating costs and high IRR from private investments, particularly for the equity of the private consortium, in the electricity generation in Mexico.
6. Sensitivity analyses Table 4 shows the results of a sensitivity analysis of the unit generating cost and the IRR of private investments in Mexico considering a 10% variation of the parameters evaluated. According to these results the unit generation cost and IRR sensitivities in relation to the economic life of the plant are small. For the load factor and thermal e$ciency the results show that unit generation cost and the IRR have signi"cant sensitivities. Finally, natural gas prices (Fig. 2), discount rate and PPA prices (Fig. 3) are the most important factors in the sensitivity analysis. The latest results explain the interest that private consortia have in obtaining higher PPA prices. It also shows
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Lifetime Load factor Thermal e$ciency Fuel price Discount rate PPA price
Sensitivity Cost (USA 1997/kWh)
IRR (%)
$0.035 $0.077 $0.136 $0.146 $0.179 *
$1.0 $2.6 $4.2 $4.9 * $6.5
JeroH nimo (1999).
the importance of the bidding process in stimulating competition to balance the private demand for higher PPA prices (Fig. 4). The sensitivity analysis in relation to natural gas prices re#ects the importance of the long-term gas supply contracts and the necessity of low gas prices to achieve lower generating unit costs and higher IRR. On the other hand, our results show that with a 10% increase of natural gas prices (no expected) the IRR would fall abruptly (from 17.42% to 12.52% in the 532 MW combined cycle case). This is an important result because it shows that in the present context where the combined cycle is the more competitive technology, the private investors could reduce their investments in the generation when they anticipate an important increase in natural gas price. On the other hand an increase of natural gas price means, through the PPA price formula, CFE strong demand for higher electricity tari!s or rapid degradation in CFE self-"nancing. Since we know that the natural gas prices in Mexico are linked to the natural gas prices in the Houston Ship Channel in Texas by a net back rule, and since there is high volatility in natural gas prices in this market, we can anticipate problems in the private investment expectations, or in the electricity tari!s, or in the CFE self"nancing. The sensitivity analysis of the discount rate shows a rapid degradation of the unit costs of generation when this parameter increase. This con"rms the importance of the perception of risks for private investment in Mexico. High perception of risks means higher discount rates, higher unit costs and higher PPA prices or demand for government supports letters. Contrary to this, when the perception of risks goes down the BLT and IPP generating costs (and the reward) and the PPA prices go down.
7. The electricity sector 5nancial viability For a "nancial structure of 80% loan, 20% equity and a 9% interest rate on loans, which is frequently used to "nance an IPP project in Mexico, the "gure of 10.75% means an IRR of 17.75% for the equity of the private consortium.
Is the new "nancial pattern a success in increasing the "nancial capacity of the sector? The answer is positive even if the pattern is still weak in some parts, as we will
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Fig. 3. Sensitivity analysis in relation to the fuel price. Source: JeroH nimo (1999).
As far as transmission is concerned, we also notice an important increase in private investment through BLT projects (SE, 1998). In between 1998 and 2007 this investment will reach USA 1997$ 3864 millions which means 39% of the total new investment in transmission. In between 1998 and 2007 the new private investments will be USA 1997$ 14 672 millions and will represent 42% of the total investment in the electricity sector. Globally in between 1989 and 2007 the total private investment in the electricity sector will reach USA 1997$ 18 567 millions.
8. CFE self-5nancing: the weak point of the 5nancing pattern Fig. 4. Sensitivity in relation to the PPA price. Source: JeroH nimo (1999).
see later. At present the capacity coming from private investments (BLTs and IPPs) is 6.2 GW which represents 17.8% of the total installed capacity in 1998. From this total BLT projects represent 2.1 GW while IPP projects represent 4.1 GW . The total private investment represented in this new electricity capacity has increased to USA 1997$ 3895 millions among which USA 1997$ 2357 millions are from IPP investments. In the following years, the CFE bids for 14.8 GW of additional capacity until 2007 through BLT and IPP projects means 2.4 times more electricity capacity than is "nanced by private investments today. These investments will represent USA 1997$ 10 808 millions. When this expansion plan is completed, the total private investment in generation plants since 1989 through BLT projects and IPPs, will represent about 21 GW (or 60% of the installed capacity in 1998) and USA 1997$ 14 703 millions.
Many factors explain the success of these projects in obtaining private investments in this sector. However according to our risks and pro"tability analysis, the two most important factors are: the favourable structure in the allocation of risks for the private investors and the possibility to obtain high IRRs. However, the success of this "nancial pattern is relative and shows weaknesses that have to be corrected as soon as possible so the "nancial pattern can be viable in the medium and long term. The Achilles' heel of the present "nancial model is in the CFE self-"nancing. Self-"nancing means the CFE capacity to obtain "nancial resources (without "nancial transfers from the federal budget other than subsidies) to ful"l BLT and IPP contract compromises and to "nance between 1998 and 2007 most of the USA 1997$ 20386 millions that state-owned utilities will invest for the expansion and modernization of the electricity sector (SE, 1998). According to the Energy Ministry (SE, 1998) from 1998 to 2005 CFE will have to pay yearly USA 1997$ 616 millions in leasing agreements in the BLT projects. In 2006 and 2007 this amount will reduce to USA 1997$ 109
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millions yearly. Moreover, in the next years the cash #ow of the CFE has to integrate the "nancial compromises with the IPPs. Finally, between 2000 and 2007 the CFE investment in the electricity sector will reach more than USA 1997 $ 2000 millions yearly. In order to cope with these "nancial requirements, CFE will have to strongly improve its self-"nancing capacity, particularly through its annual "nancial surplus that reached only USA 1997$ 327.81 millions in 1996}1997 (CFE, 1997).
9. Main options to resolve the 5nancing problem In the beginning of 1999 the Zedillo government (Libro blanco, 1999) presented proposals to adopt a structural change similar to the British model that considers the privatization of the assets of the stateowned utilities except the transmission assets, the dispatching and the nuclear and geothermal plants. This controversial initiative was not voted by the Congress which was divided by the approach of the presidential elections and the political repercussions that contained this initiative. At present these proposals appear to be abandoned, instead of them three main options, that we discuss in the following paragraphs, are considered.
10. The improvement of the present 5nancial pattern A "rst option is improving the present "nancial pattern, particularly through an major increase in the self"nancing of CFE. Reaching this goal depends on the following considerations. Tariws and regulation: The MFPC does regulate tari!s. The lack of transparency in the determination of tari!s and their manipulation to achieve other macroeconomic goals is one of the main reasons of private investors demand government guaranties. The transfer of electrical tari! regulation to the Energy Regulatory Commission is, from this viewpoint, a necessary step in obtaining transparent and adequate tari!s in order to establish an appropriate self-"nancing of CFE which will enable it to cope with its contract compromises. Subsidy policy and xscal policy: The "rst task is to eliminate the subsidies to the industrial and service sectors. At present, that is an easy goal because the subsidies to the tari!s of these sectors are low, 9% and 4%, respectively. The domestic and agricultural tari!s are subsidized on average 60% and 70%, respectively. These last subsidies mean most of the federal government budget transfer for USA 1997$ 2580 millions (CFE, 1997) to the electrical sector in 1997. However, CFE "scal policy is applied through the tax called aprovechamiento.
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In 1997 this tax generates for the federal government USA 1997 $ 2987 millions, that is to say more than the subsidies given to the electricity sector. This "scal policy has important and negative e!ects on CFE self-"nancing. If the federal government desires improved CFE self"nancing and which will make the present electricity sector "nancial pattern working correctly, it is necessary to revise the "scal policy, particularly when we know that the applied tax to CFE is 600% higher than the 1.5% rate of tax applied to private companies assets. Finally, the strict application of subsidies only to social sectors that seriously need it would save a considerable money that could enable a drop in the "scal policy applied to CFE. CFE entrepreneurial autonomy: CFE has never worked with a real entrepreneurial strategy. The CFE has always been an instrument to control the macro-economic in#ation by means of tari!s, to distribute the income through subsidized tari!s, or to achieved political goals of the government. Also, CFE was always subject to political interference and government involvement in day to day a!airs. All these factors are unrelated to providing electricity service, and explain an important part of the historically low CFE self-"nancing. In consequence, an important step to increase the CFE self-"nancing, is to achieve the commercial and entrepreneurial autonomy of CFE. Power Purchase Agreement Price: If the average PPA prices are less than the CFE generation average cost (3.0 USA 1997/kWh in 1997), the IPP private investments are viable and "nanceable because electricity tari!s will cover the "nancial agreements with private investors. To obtain lower PPA prices, it is important to continue the transformation of the bidding process to a truly competitive bidding processes. Electricity losses: There are important electricity losses in transmission and the distribution segments. In this last one, losses reach 10% of the electricity that is sold. These losses are a real opportunity for the Mexican electricity system to increase "nancial surplus. From this viewpoint the application of BLT projects and the investment of CFE's own resources in the transmission network is a necessary and urgent task. Development of large scale CHPPs market: This market represents a potential of 14 GW and an important electricity surplus generation that cogenerators can sell to CFE. To encourage the development of this market it is necessary to set up both adequate purchase prices and regulation. An additional result of this can be also to stimulate the production of large electricity surpluses from PSS. The following two options have as a main premise the non-privatization of the state-owned utilities assets. Today this premise has been accepted by the President Fox government in order to reform the electricity sector in Mexico.
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11. The opening of generation and supply segments with the preservation of the vertically integrated state-owned utilities This option (Islas, 1999) considers the opening of the generation and supply segments to private capital as a necessity to increase the "nancial capacity of the Mexican electricity sector. This option allowes a direct transactions between customers, private suppliers and private generators, and an open access of the state-owned electricity network. Three other important components in this option are the preservation of the present stateowned utilites and of their vertical integration, the setting up of long term contracts between customers, private suppliers and private generators, and "nally, an increase in the CFE self "nancing through the improving the parameters discussed above in tari! levels, regulation, subsidy policy, CFE "scal policy, CFE entrepreneurial autonomy, PPA price and reduction of electricity losses. 12. The President Fox economic transition team proposals Another important option are the proposals of the President Fox Economic Transition Team (Equipo de TransicioH n EconoH mica, 2000) which will presumably be presented o"cially as a presidential initiative in the Congress. As in the former option these proposals maintain the premise of non-privatization of the state owned utilites assets. These proposals also require both the opening of the generation and supply segments to private capital and the open acces to the electrical network. Moreover they include the incorporation of an independent statedowned company to operate both a power pool and the electrical transmition system. In this option CFE will be transformed into an integrated holding company of CFE distribution companies, CFE transmision company, CFE fossil fuel-"red power plants, CFE hydroelectricity and geothermal plants, CFE nuclear plants and the IPPs division of CFE. Along with this option there will be structural change with a subsidies rationalization and a stronger regulator. Also the setting up of an adequate tari!s structure will help both to sustain the development of the electrical sector and to transfer to the customer the bene"t of higher e$ciency in the sector. Finally, in this option in the long term, concessionary companies will carry out the operation, maintenance and the construction of the distribution networks. 13. The political context A deep structural change in the Mexican electricity sector requires necessarily the modi"cation of the Mexican Constitution whereas a minor structural change requires only modi"cations to the secondary laws,
particularly the Electric Power Public Service Law. This is is very important because changing the Constitution requires (RodrmH guez, 2000) the approval of 2/3 of the Mexican Congress and a simple majority in each local Congress of the 32 States of the Republic. Whereas changes in the secondary laws need only the approval of a simple majority of the Congress. The political alliance (PAN and PVM) that supported Vicente Fox in the presidential elections, represents today in the Mexican Congress 39% of the Chamber of Senators and 44.8% of the Chamber of Representatives. This means that the presidential initiative to reform the electricity sector could be substantially modi"ed or abandonned in favor of other proposals that could generate a political consensus in the Mexican Congress. In this context the strategy for the Presidential initiative in terms of legal requirements to achieve the structural change in the electricity sector will be an important element of the success or failure of the Fox government proposals. As we have seen the solution of the "nancing problem of the Mexican electricity sector mainly depends on Congress's decision about the modi"cation of the Constitution or of the secondary laws. That is why today it is di$cult to know with certainty what is going to happen with the Mexican electricity "nancing problem.
14. Conclusion The electricity sector "nancial pattern established after the 1992 energy reform has been very successful in bringing in private investments in the generation and transmission segments. This success is due to a favourable allocation of risks to the private investors and the possibility to obtain high IRRs. However CFE low self-"nancing is the weak point of this pattern in the medium and long term. Given the inability of the State to transfer funds to the electrical sector, at present it is very di$cult to see how CFE can ful"ll its contractual promises and invest its own resources in the development of the sector. In this paper we present the main options under discussion to resolve the "nancing problem in Mexico. One considers the amelioration of the present "nancing pattern through modi"cations in tari! regulation, subsidy and "scal policies, bidding process, CFE entrepreneurial autonomy and development of large scale CHPPs and electricity surplus market. The others two options try to increase the "nancial capacity through a structural change that opens the supply and generation segment to private capital and sets up an open access to the CFE electricity network. Nevertheless, there are important di!erences between these two options. One considers as important elements the preservation of state-owned utilities with vertical integration, long term contracts, and the same modi"cations discussed to increase the
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CFE self-"nancing. Meanwhile the other, the Fox government proposals, mention the transformation of CFE into a holding of state-owned utilities, a state-owned company to operate both a spot market and an independent system operator, a subsidies rationalization, a strong regulator and an adequate tari! structure. As none of the three main political parties in the Congress has a majority su"cient to make changes in the Constitution or in the secondary laws to bring about changes in the electricity sector, it is not possible to know in which direction the Mexican electricity sector will evolve to solve the "nancing problem. The non-privatization of CFE and LyFC assets is today the only political restriction accepted by all the political actors including the Fox government, but this important political departure point, even if it determines the structural change possibilities, is not enough to de"ne what will happen with the electricity sector in Mexico. The strategy of the Presidential initiative in terms of legal requirements to achieve its proposals for structural change in the electricity sector and the conformation of alliances between political parties in the Congress will be two important elements that will de"ne the "nal solution to resolve the "nancing problem of the Mexican electrical sector and its organizational evolution. Acknowledgements We thank the DGAPA-UNAM for "nancial support through project IN303400. References Blaylock, B., 1997. El proyecto de Samalayuca II: Una Nueva GeneracioH n de Estructura de Financiamiento en MeH xico. Potencia (13), September-October, pp. 40}43.
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Bond, G.y Carter, L., 1995. Financing energy projects: Experience of the International Finance Corporation. Energy Policy 23(11) 967}975. CFE, (ComisioH n Federal de Electricidad), 1997. Costos y ParaH metros de Referencia para la FormulacioH n de Proyectos de InversioH n en el Sector EleH ctrico, GeneracioH n CFE, MeH xico, D.F. ComisioH n Federal de Electricidad, 1998. Informe Anual 1997, CFE, MeH xico, D.F. CRE, 2000. ComisioH n Reguladora de EnergmH a.- Permisos entregados. Web page: http://www.cre.gob.mx. DOF, 1992. Ley del Servicio PuH blico de EnergmH a EleH ctrica, DiarmH o O"cial de la FederacioH n, 23 de diciembre de 1992. MeH xico, D.F. Equipo de TransicioH n EconoH mica del Presidente Electo Vicente Fox Quesada, 2000. ReorganizacioH n de la Industria EleH ctrica Nacional, CoordinacioH n para la ReorganizacioH n de la Industria EleH ctrica, MeH xico, D.F., 5 de octubre de 2000. Islas, J., RodrmH guez, L., 1997. Las Nuevas TeH cnicas de Financiamiento y la ReorganizacioH n de la Industria EleH ctrica en MeH xico. In:. IIEUNAM (Ed), la Apertura Externa en el Sector EleH ctrico MeH xicano, PUE-UNAM, MeH xico, D.F., pp. 67}81. Islas, J., 1999. Problema& tica Financiera y Propuesta de Organizacio& n para el Sistema Ele& ctrico Mexicano, presentada en la SesioH n Plenaria VII `PrivatizacioH n de la EnergmH a EleH ctrica en MeH xicoa del 1er Foro de PROFMEX-Guanajuato de Ideas Innovadoras Para el Desarrollo de MeH xico, Visiones Compartidas, Guanajuato, MeH xico, 14}17 de abril de 1999. JeroH nimo, U., 1999. AnaH lisis de las Inversiones en Proyectos de GeneracioH n en el Entorno de la Reforma de la Industria EleH ctrica en MeH xico, Tesis de MaestrmH a en IngeniermH a Industrial, Facultad de Ciencias QumH micas e IngeniermH a, UAEM, Cuernavaca, Morelos, MeH xico. Libro Blanco, Zedillo, P. de L. E, 1999. Presidente de los Estados Unidos Mexicanos, Decreto por el que se reforman los ArtmH culos 27 y 28 de la ConstitucioH n PolmH tica de los Estados Unidos Mexicanos, en Materia de EnergmH a EleH ctrica, 2 de febrero de 1999. RodrmH guez, V., 2000. Panorama de la PolmH tica EnergeH tica y Perspectivas con el ProH ximo Gobierno, Documento de InvestigacioH n, Posgrado en EnergmH a, FI-UNAM. SecretarmH a de EnergmH a, 1998. Prospectiva del Sector EleH ctrico 1998}2007, SE, MeH xico, D.F. SecretarmH a de EnergmH a, 2000. EstadmH sticas del Sector, internet page http://www.energia.gob.mx/frame4.html', SE, MeH xico, D.F.
The "nancing of the Mexican electrical sector Jorge Islas*, Ubaldo JeroH nimo Center for Energy Research, National University of Mexico Apartado Postal 34, 62580 Temixco, Morelos, Mexico Received 5 September 2000
Abstract This paper analyses the "nancial pattern of the Mexican electricity sector, its "nancial limits in both development and modernization of this strategic sector, and the main options for resolving this "nancing problem including the proposals of the President Fox government. Our allocation of risks and pro"tability analysis explain the present success in attracting private investments to expand both generation and transmission capacity through BLT and IPP projects. The "nancial limitation is nevertheless the low self-"nancing of Federal Electricity Commission (CFE) that will make it very di$cult to obtain "nancing to ful"l BLT and IPP contract compromises and to invest large sums in the expansion and modernization of the electricity sector. The main options to resolve the "nancial problems of the Mexican electricity sector are: (1) the improvement of the present "nancial pattern, (2) the opening of generation and supply segments to private capital with the preservation of the vertically integrated state-owned utilities, and (3) the proposals of the President Fox economic transition team that consider the opening of generation and supply segments, the setting up of an independent state-owned company to operate both the electrical dispatching and a power pool, and, "nally, the transformation of CFE into a holding of state-owned utilities of generation, distribution and transmission. 2001 Elsevier Science Ltd. All rights reserved. Keywords: Financing; Energy reform; Mexican electricity sector
1. Introduction In 1992, in Mexico, there was an e!ort to attract private investments to increase the "nancial capacity of the electricity sector (Islas and RodrmH guez, 1997) through the most important reform of the Electric Power Public Service Law (DOF, 1992) since the nationalization of the electricity sector in 1960. With this reform a new organization was set up that has the following main characteristics: (1) The Federal Electricity Commission (ComisioH n Federal de Electricidad, CFE), a national and vertically integrated state-owned utility, is the dominant utility in this organization. In particular, the new law preserves the monopoly of the CFE in the public electricity service. The other state-owned utility, the Center for Light and Power (Luz y Fuerza del Centro, LyFC), is a regional utility and has a smaller role in the new organization. * Corresponding author. Tel.: #52-5622-9719; fax: #52-5622-9742. E-mail address: [email protected] (J. Islas). LyFC is essentially a distribution utility. This utility has few generation and transmission assets and buys from CFE almost all the electricity that the utility supplies.
(2) Electricity generation is opened up to private investment through the external power producer which includes the Power self-supplier (PSS), Combined heat and power producer (CHPP), Small power producer (SPP), Independent power producer (IPP), Exportation power producer (EPP) and Power importer (PI). These activities are not considered as public service in the new law. (3) In this new organization the CFE is the only purchaser of power from IPPs and SPPs and of the electricity surplus from CHPPs and PSSs. Also, the electricity network is owned by CFE and consequently this utility is the only seller of transmission services and back up power. (4) The coordination between CFE and the external power producers is through long term contracts (or noti"cations in the case of short-term electricity surplus). These contracts include power purchase agreements (PPA) prices or tari!s associated with the electricity network services of CFE for CHPPs and PSSs, EPPs, IPs. In this new organization, the CFE obtains bids to develop the power capacity with private investment. This bidding is the main mechanism to introduce competition in the electricity sector.
0301-4215/01/$ - see front matter 2001 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 1 - 4 2 1 5 ( 0 1 ) 0 0 0 3 0 - 1
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Fig. 1. Average electrical tari!s by sector. Source: SE (2000).
An important outcome of this energy reform is a new "nancing pattern in the Mexican electricity sector. This paper analyses the "nancial pattern of the Mexican electricity sector and its "nancial limits in both development and modernization of this strategic sector. We made this through analysis of the structural characteristics of the "nancing pattern, particularly, in terms of allocation of risks and pro"tability, and the identi"cation of the weak points. Finally, we discuss the main options to increase the "nancial capacity of the Mexican electricity sector including the proposals of the President Fox government.
2. The pace of the energy reform Structures: In the beginning, energy reform moved slowly. The CFE bidding for the "rst IPP ended in 1997, three years later than the original planned date, and "ve years after the 1992 energy reform. Meanwhile, between 1989 and 1997 CFE bids for building, leasing and transfer (BLT) projects have totaled 2.1 GW. In 1998 this situation changed dramatically when CFE bids for IPPs increased to 3.7 GW. In relation to the SPP that was supposed to stimulate the use of new and cleaner sources of energy, particularly, renewable energies, the energy reform has not shown any results. The CHPPs and PSSs have increased quickly their participation in electricity generation. At present, these kinds of projects with authorization total 5501 MW (CRE, 2000). Their legal de"nition is so broad in the new law that several companies can join together on bids. Furthermore, municipal or state governments in association with local companies can take part with self-supply goals. One additional result of the increasing use of CHPPs and PSSs is that it has produced in some cases open access to CFE electricity network by third parties. As far as CHPPs are concerned, the energy reform did not give any results in terms of CHPPs with surplus sales
to CFE, which represent half of the CHPPs potential from a total of 14 GW. The main problems to developing this segment of the CHPP market are both low purchase prices and regulatory barriers that discourage the development of cogeneration systems with surplus of more than 20 MW. Competition: BLT bids and especially IPP bids introduced a limited but positive competition into the Mexican electricity sector. Important outcomes of these bidding process have been to obtain low PPA prices, between 2.5 USA 1997/kWh and 3.0 USA 1997c//kWh. Tariws: Fig. 1 shows the evolution of real tari!s in the Mexican electricity sector between 1993 and 1999. The average tari!s for the agricultural and domestic sectors dropped in real term 25% and 12%, respectively, between 1993 and 1995 and later become more stable. However, at present these tari!s bene"t from a high subsidy (70% and 32%, respectively). In 1999 the average industrial tari! improved 25% in real terms compared to 1993, while in the same period commercial and public tari!s improved 15% and 10%, respectively. At present commercial tari! do not bene"t from subsidy meanwhile industrial and public services tari!s have a subsidy of around 9% and 6%, respectively. Without these subsidies, the reductions between 1993 and 1999 of the industrial and public services tari!s could be 16% and 4%, respectively. These last "gures re#ect in some degree that the economic e$ciency of the electricity sector has improved after the 1992 energy reform.
3. Financing pattern The new "nancing pattern is described in Table 1. Column 2 shows the present trends for each one of the "nancial sources. These trends indicate, of course, the
In this paper the monetary terms are expressed in USA1997 $ or in USA1997c/.
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Table 1 Financial sources of the Mexican electric sector after the reform of 1992 Source
Trends
Government
Domestic and agriculture Tari! subsidies Decreasing Limited use Principally on electrical grids Growth use in transmission Principal "nancial source in generation
Financial loans to CFE by international development "nance institutions (IDB, WB) Access of CFE to international "nancial markets CFE Self-"nancing for investment Building, leasing and transfer (BLT) Independent power producer (IPP) Own data.
4. The allocation of risks in electricity generation
Fig. 2. Public investment in the Mexican electrical sector, 1988}1997. Source: CFE (1998).
actual "nancial restrictions imposed by the Federal Government (see Fig. 2) as well as restrictions from traditional "nancial sources. Table 1 shows that BLT projects and IPPs have become the main external "nancing source for the Mexican electricity sector. The "rst BLT project used to "nance the electricity sector dates from 1989, but its regulation was de"ned in the energy reform context in 1996 through the Accountancy and Federal Public Spending law that regulates the PIDIREGAS projects (Proyectos de Impacto Diferido en el Registro del Gasto). These projects became the main private "nancial source for development of new electricity generation during the "rst "ve years of the 1992 energy reform. In 1997 the CFE bidding program for BLT projects represented 2.1 GW. In recent years the use of this "nancial source has decreased in the generation segment, but it has become an important private "nancial source in the transmission segment. In relation to the IPP, after a slow start the IPP become the main "nancial source for developing the new electricity generation. We will see that this trend seems to continue for the next years.
These "nancial restrictions and the slow pace in the energy reform explain the present dangerously low reserve margins (frequently less than 6% ).
The growing use of BLT and IPP projects is associated with a favorable structure in the allocation of risks in electricity generation investments. Risks in BLT Projects: Table 2 shows the allocation of risks in a BLT investment project. The private consortium that won the CFE bid and the insurance companies assume all the construction risks: engineering, supply of materials, design, construction and operation during a test period (Blaylock, 1997). As far as the "nancing package is concerned the private consortium and lenders (commercial banks, international "nancing institutions and export credit agencies) assume the "nancial risks associated. CFE assume all the risks associated with the plant operation. In the same time, through a leasing contract CFE commits itself to pay a 20 year lease during which is paid back the investment and pro"ts of the private consortium and lenders. According to the leasing contract, at the end of this period the assets of the BLT project (the electricity plant) are transferred to CFE. CFE also takes the responsibility of the risk associated with fuel supply especially in the case of a fuel price increase. At this point it is important to mention that the CFE margin to reduce these risks is not large because the Ministry of Finance and Public Credit (MFPC) establishes the tari! structures and must approve an increase in the tari! level. Therefore, it is not easy for CFE to transfer fuel supply risks to the customers. There are also not market risks for the investors of the BLT project. All these market risks are also assumed by CFE. Finally, the BLT contracts establish that CFE should pay a 20 year lease in an unconditional way. Risks in IPP projects: In the IPP projects the winning private consortium in the bidding process has to take care of "nancing, engineering, equipment supply, design, construction and operation of the plant. The regulator gives to IPP a license to generate electricity for a 30 years period. As opposed to BLT projects where the plant is leased, operated and "nally owned by CFE, in the IPP case the plant is never owned by CFE and the IPP sells
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Table 2 Risk Allocating through BLT and IPP projects Risk
BLT
IPP
Financial Construction Operation Fuel supply Regulatory Market Political CFE risk
Private consortium, lenders Private consortium, insurance companies, contractors CFE CFE/private consortium, fuel suppliers Private consortium CFE Financial institutions Private consortium
Private consortium, insurance companies Private consortium, fuel suppliers Private consortium
Government support letters
Own data.
its production to CFE through a long term PPA. The IPP has nevertheless the obligation to inform CFE how to operate the electricity plant, the technical characteristics (voltage, reactive power, and frequency), the maintenance program and the emergency program in case of a plant failure. The third column of the Table 2 shows the risk allocating in an IPP project. Risks associated with the "nancing package, design and construction are assumed, as in the BLT case, by the private consortium, lenders and insurance companies. As far as risks associated with fuel supply are concerned, we notice the following evolution. In the "rst IPP project (Merida III), almost all risks were assumed by CFE because a passthrough was applied in which CFE supplies the fuel and the private consortium only takes care of the natural gas transformation to electricity (Bond and Carter, 1995). However, for the second IPP project (Hermosillo plant) the fuel supply risks were assumed by the IPP (IDB, 1999). Finally, in an IPP case the private consortium and insurance companies also assume plant operation risks which is not the case with the BLT projects. As in BLT projects, CFE assumes the market risks of the electricity generated by the IPPs. Once the IPP has sold its electricity and plant capacity to CFE, the market risk for an IPP is zero and this ensures that there will be revenues and dividends for the private investors. In the IPP case it has been necessary to o!er government support letters to the IPP contracts to more easily attract these private capitals. This mean that at present the perception of the risk in which the CFE breaks the PPA is high and with these government compromises these private investments are protected against this hypothetical case. In terms of allocation of risks, these guaranties mean a clear transfer of risks to the federal government if CFE breaks the PPA contract
In this hypothetical case the government support letters force the government to respect the contract.
In summary, we can see that in BLT and IPP projects the private consortium, insurance companies and lenders assume all risks associated with the design and construction of the plant as well as the "nancial package. However, in an IPP case the private consortium, insurance companies and fuel suppliers assume plant operation and fuel risks which is not the case with the BLT projects. Finally, in both cases, BLT and IPP projects, the market risks are assumed by CFE. The present trend of private consortium demands for government support letters, is an important protection against the perception that in the future the CFE could default on the IPP contract. We can say that an important consequence of the 1992 energy reform is that private investors assume important risks in the electricity sector, particularly in the IPP projects, but in general the allocation of risks in the Mexican electricity sector is favorable to private investments because there are no market risks and the `CFE riska is in the case of IPPs covered with government support letters.
5. Analysis of private investments pro5tability Divers technical and economical factors de"ne the internal rate of return (IRR) of the private projects, among them are the economic life of the plant, construction period, thermal e$ciency, load factor, fuel cost, discount rate and PPA price. Table 3 shows technical and economical data of two combined cycles plants of di!erent sizes that we consider representatives of private projects developed and planed up to now in Mexico and we use to calculate the unit costs of generation. To calculate the unit net pro"t of the private investment, we consider a "gure of 2.5 USA 1997c//kWh to represent PPA prices applied in Mexico. With these guaranties the private investors are covered principally from the historical low self-"nancing of CFE, big local money devaluation and abrogation of the energy purchase contracts. This is one of the lowest PPA prices achieved in the bidding of IPP projects in Mexico.
J. Islas, U. JeroH nimo / Energy Policy 29 (2001) 965}973 Table 3 Economic and technical assumptions for analysing the unit costs of generation and the internal rate of return (IRR) of private projects in Mexico
Table 4 Results of sensitivity analysis at 10% of parameter variations Parameter
Power plants (combined cycle gas turbines) Net capacity (MW) Investment cost (US$ 1997/kW) Economic lifetime (years) Load factor Thermal e$ciency (%) O&M (USA $1997/MWh) Discount rate (%) Levelized gas price (USA 1997$/1000 ft) PPA price (USA 1997/kWh)
1;268 528.92 25 0.90 56.03 3.18 10.0 2.6
1;532 447.52 25 0.90 56.03 2.17 10.0 2.6
2.5
2.5
COPAR, CFE, 1997 and own data.
With these data and using the levelized cost method we obtain the unit cost of generation and the IRR for private investments. For the 268 MW project the unit cost of generation and the IRR are 2.45 USc//kWh and 10.75%, respectively. These "gures are better for the 532 MW project which have 2.25 USc// kWh and 17.42%, respectively. These results indicate that plant scale is very important in unit generation cost and in project pro"tability. In addition, these results clearly explain the present trend in plant scale selection (around 450 MW) in the CFE bids for combined cycles with private investment. Finally, our results con"rm that it is possible to obtain low unit generating costs and high IRR from private investments, particularly for the equity of the private consortium, in the electricity generation in Mexico.
6. Sensitivity analyses Table 4 shows the results of a sensitivity analysis of the unit generating cost and the IRR of private investments in Mexico considering a 10% variation of the parameters evaluated. According to these results the unit generation cost and IRR sensitivities in relation to the economic life of the plant are small. For the load factor and thermal e$ciency the results show that unit generation cost and the IRR have signi"cant sensitivities. Finally, natural gas prices (Fig. 2), discount rate and PPA prices (Fig. 3) are the most important factors in the sensitivity analysis. The latest results explain the interest that private consortia have in obtaining higher PPA prices. It also shows
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Lifetime Load factor Thermal e$ciency Fuel price Discount rate PPA price
Sensitivity Cost (USA 1997/kWh)
IRR (%)
$0.035 $0.077 $0.136 $0.146 $0.179 *
$1.0 $2.6 $4.2 $4.9 * $6.5
JeroH nimo (1999).
the importance of the bidding process in stimulating competition to balance the private demand for higher PPA prices (Fig. 4). The sensitivity analysis in relation to natural gas prices re#ects the importance of the long-term gas supply contracts and the necessity of low gas prices to achieve lower generating unit costs and higher IRR. On the other hand, our results show that with a 10% increase of natural gas prices (no expected) the IRR would fall abruptly (from 17.42% to 12.52% in the 532 MW combined cycle case). This is an important result because it shows that in the present context where the combined cycle is the more competitive technology, the private investors could reduce their investments in the generation when they anticipate an important increase in natural gas price. On the other hand an increase of natural gas price means, through the PPA price formula, CFE strong demand for higher electricity tari!s or rapid degradation in CFE self-"nancing. Since we know that the natural gas prices in Mexico are linked to the natural gas prices in the Houston Ship Channel in Texas by a net back rule, and since there is high volatility in natural gas prices in this market, we can anticipate problems in the private investment expectations, or in the electricity tari!s, or in the CFE self"nancing. The sensitivity analysis of the discount rate shows a rapid degradation of the unit costs of generation when this parameter increase. This con"rms the importance of the perception of risks for private investment in Mexico. High perception of risks means higher discount rates, higher unit costs and higher PPA prices or demand for government supports letters. Contrary to this, when the perception of risks goes down the BLT and IPP generating costs (and the reward) and the PPA prices go down.
7. The electricity sector 5nancial viability For a "nancial structure of 80% loan, 20% equity and a 9% interest rate on loans, which is frequently used to "nance an IPP project in Mexico, the "gure of 10.75% means an IRR of 17.75% for the equity of the private consortium.
Is the new "nancial pattern a success in increasing the "nancial capacity of the sector? The answer is positive even if the pattern is still weak in some parts, as we will
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Fig. 3. Sensitivity analysis in relation to the fuel price. Source: JeroH nimo (1999).
As far as transmission is concerned, we also notice an important increase in private investment through BLT projects (SE, 1998). In between 1998 and 2007 this investment will reach USA 1997$ 3864 millions which means 39% of the total new investment in transmission. In between 1998 and 2007 the new private investments will be USA 1997$ 14 672 millions and will represent 42% of the total investment in the electricity sector. Globally in between 1989 and 2007 the total private investment in the electricity sector will reach USA 1997$ 18 567 millions.
8. CFE self-5nancing: the weak point of the 5nancing pattern Fig. 4. Sensitivity in relation to the PPA price. Source: JeroH nimo (1999).
see later. At present the capacity coming from private investments (BLTs and IPPs) is 6.2 GW which represents 17.8% of the total installed capacity in 1998. From this total BLT projects represent 2.1 GW while IPP projects represent 4.1 GW . The total private investment represented in this new electricity capacity has increased to USA 1997$ 3895 millions among which USA 1997$ 2357 millions are from IPP investments. In the following years, the CFE bids for 14.8 GW of additional capacity until 2007 through BLT and IPP projects means 2.4 times more electricity capacity than is "nanced by private investments today. These investments will represent USA 1997$ 10 808 millions. When this expansion plan is completed, the total private investment in generation plants since 1989 through BLT projects and IPPs, will represent about 21 GW (or 60% of the installed capacity in 1998) and USA 1997$ 14 703 millions.
Many factors explain the success of these projects in obtaining private investments in this sector. However according to our risks and pro"tability analysis, the two most important factors are: the favourable structure in the allocation of risks for the private investors and the possibility to obtain high IRRs. However, the success of this "nancial pattern is relative and shows weaknesses that have to be corrected as soon as possible so the "nancial pattern can be viable in the medium and long term. The Achilles' heel of the present "nancial model is in the CFE self-"nancing. Self-"nancing means the CFE capacity to obtain "nancial resources (without "nancial transfers from the federal budget other than subsidies) to ful"l BLT and IPP contract compromises and to "nance between 1998 and 2007 most of the USA 1997$ 20386 millions that state-owned utilities will invest for the expansion and modernization of the electricity sector (SE, 1998). According to the Energy Ministry (SE, 1998) from 1998 to 2005 CFE will have to pay yearly USA 1997$ 616 millions in leasing agreements in the BLT projects. In 2006 and 2007 this amount will reduce to USA 1997$ 109
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millions yearly. Moreover, in the next years the cash #ow of the CFE has to integrate the "nancial compromises with the IPPs. Finally, between 2000 and 2007 the CFE investment in the electricity sector will reach more than USA 1997 $ 2000 millions yearly. In order to cope with these "nancial requirements, CFE will have to strongly improve its self-"nancing capacity, particularly through its annual "nancial surplus that reached only USA 1997$ 327.81 millions in 1996}1997 (CFE, 1997).
9. Main options to resolve the 5nancing problem In the beginning of 1999 the Zedillo government (Libro blanco, 1999) presented proposals to adopt a structural change similar to the British model that considers the privatization of the assets of the stateowned utilities except the transmission assets, the dispatching and the nuclear and geothermal plants. This controversial initiative was not voted by the Congress which was divided by the approach of the presidential elections and the political repercussions that contained this initiative. At present these proposals appear to be abandoned, instead of them three main options, that we discuss in the following paragraphs, are considered.
10. The improvement of the present 5nancial pattern A "rst option is improving the present "nancial pattern, particularly through an major increase in the self"nancing of CFE. Reaching this goal depends on the following considerations. Tariws and regulation: The MFPC does regulate tari!s. The lack of transparency in the determination of tari!s and their manipulation to achieve other macroeconomic goals is one of the main reasons of private investors demand government guaranties. The transfer of electrical tari! regulation to the Energy Regulatory Commission is, from this viewpoint, a necessary step in obtaining transparent and adequate tari!s in order to establish an appropriate self-"nancing of CFE which will enable it to cope with its contract compromises. Subsidy policy and xscal policy: The "rst task is to eliminate the subsidies to the industrial and service sectors. At present, that is an easy goal because the subsidies to the tari!s of these sectors are low, 9% and 4%, respectively. The domestic and agricultural tari!s are subsidized on average 60% and 70%, respectively. These last subsidies mean most of the federal government budget transfer for USA 1997$ 2580 millions (CFE, 1997) to the electrical sector in 1997. However, CFE "scal policy is applied through the tax called aprovechamiento.
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In 1997 this tax generates for the federal government USA 1997 $ 2987 millions, that is to say more than the subsidies given to the electricity sector. This "scal policy has important and negative e!ects on CFE self-"nancing. If the federal government desires improved CFE self"nancing and which will make the present electricity sector "nancial pattern working correctly, it is necessary to revise the "scal policy, particularly when we know that the applied tax to CFE is 600% higher than the 1.5% rate of tax applied to private companies assets. Finally, the strict application of subsidies only to social sectors that seriously need it would save a considerable money that could enable a drop in the "scal policy applied to CFE. CFE entrepreneurial autonomy: CFE has never worked with a real entrepreneurial strategy. The CFE has always been an instrument to control the macro-economic in#ation by means of tari!s, to distribute the income through subsidized tari!s, or to achieved political goals of the government. Also, CFE was always subject to political interference and government involvement in day to day a!airs. All these factors are unrelated to providing electricity service, and explain an important part of the historically low CFE self-"nancing. In consequence, an important step to increase the CFE self-"nancing, is to achieve the commercial and entrepreneurial autonomy of CFE. Power Purchase Agreement Price: If the average PPA prices are less than the CFE generation average cost (3.0 USA 1997/kWh in 1997), the IPP private investments are viable and "nanceable because electricity tari!s will cover the "nancial agreements with private investors. To obtain lower PPA prices, it is important to continue the transformation of the bidding process to a truly competitive bidding processes. Electricity losses: There are important electricity losses in transmission and the distribution segments. In this last one, losses reach 10% of the electricity that is sold. These losses are a real opportunity for the Mexican electricity system to increase "nancial surplus. From this viewpoint the application of BLT projects and the investment of CFE's own resources in the transmission network is a necessary and urgent task. Development of large scale CHPPs market: This market represents a potential of 14 GW and an important electricity surplus generation that cogenerators can sell to CFE. To encourage the development of this market it is necessary to set up both adequate purchase prices and regulation. An additional result of this can be also to stimulate the production of large electricity surpluses from PSS. The following two options have as a main premise the non-privatization of the state-owned utilities assets. Today this premise has been accepted by the President Fox government in order to reform the electricity sector in Mexico.
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11. The opening of generation and supply segments with the preservation of the vertically integrated state-owned utilities This option (Islas, 1999) considers the opening of the generation and supply segments to private capital as a necessity to increase the "nancial capacity of the Mexican electricity sector. This option allowes a direct transactions between customers, private suppliers and private generators, and an open access of the state-owned electricity network. Three other important components in this option are the preservation of the present stateowned utilites and of their vertical integration, the setting up of long term contracts between customers, private suppliers and private generators, and "nally, an increase in the CFE self "nancing through the improving the parameters discussed above in tari! levels, regulation, subsidy policy, CFE "scal policy, CFE entrepreneurial autonomy, PPA price and reduction of electricity losses. 12. The President Fox economic transition team proposals Another important option are the proposals of the President Fox Economic Transition Team (Equipo de TransicioH n EconoH mica, 2000) which will presumably be presented o"cially as a presidential initiative in the Congress. As in the former option these proposals maintain the premise of non-privatization of the state owned utilites assets. These proposals also require both the opening of the generation and supply segments to private capital and the open acces to the electrical network. Moreover they include the incorporation of an independent statedowned company to operate both a power pool and the electrical transmition system. In this option CFE will be transformed into an integrated holding company of CFE distribution companies, CFE transmision company, CFE fossil fuel-"red power plants, CFE hydroelectricity and geothermal plants, CFE nuclear plants and the IPPs division of CFE. Along with this option there will be structural change with a subsidies rationalization and a stronger regulator. Also the setting up of an adequate tari!s structure will help both to sustain the development of the electrical sector and to transfer to the customer the bene"t of higher e$ciency in the sector. Finally, in this option in the long term, concessionary companies will carry out the operation, maintenance and the construction of the distribution networks. 13. The political context A deep structural change in the Mexican electricity sector requires necessarily the modi"cation of the Mexican Constitution whereas a minor structural change requires only modi"cations to the secondary laws,
particularly the Electric Power Public Service Law. This is is very important because changing the Constitution requires (RodrmH guez, 2000) the approval of 2/3 of the Mexican Congress and a simple majority in each local Congress of the 32 States of the Republic. Whereas changes in the secondary laws need only the approval of a simple majority of the Congress. The political alliance (PAN and PVM) that supported Vicente Fox in the presidential elections, represents today in the Mexican Congress 39% of the Chamber of Senators and 44.8% of the Chamber of Representatives. This means that the presidential initiative to reform the electricity sector could be substantially modi"ed or abandonned in favor of other proposals that could generate a political consensus in the Mexican Congress. In this context the strategy for the Presidential initiative in terms of legal requirements to achieve the structural change in the electricity sector will be an important element of the success or failure of the Fox government proposals. As we have seen the solution of the "nancing problem of the Mexican electricity sector mainly depends on Congress's decision about the modi"cation of the Constitution or of the secondary laws. That is why today it is di$cult to know with certainty what is going to happen with the Mexican electricity "nancing problem.
14. Conclusion The electricity sector "nancial pattern established after the 1992 energy reform has been very successful in bringing in private investments in the generation and transmission segments. This success is due to a favourable allocation of risks to the private investors and the possibility to obtain high IRRs. However CFE low self-"nancing is the weak point of this pattern in the medium and long term. Given the inability of the State to transfer funds to the electrical sector, at present it is very di$cult to see how CFE can ful"ll its contractual promises and invest its own resources in the development of the sector. In this paper we present the main options under discussion to resolve the "nancing problem in Mexico. One considers the amelioration of the present "nancing pattern through modi"cations in tari! regulation, subsidy and "scal policies, bidding process, CFE entrepreneurial autonomy and development of large scale CHPPs and electricity surplus market. The others two options try to increase the "nancial capacity through a structural change that opens the supply and generation segment to private capital and sets up an open access to the CFE electricity network. Nevertheless, there are important di!erences between these two options. One considers as important elements the preservation of state-owned utilities with vertical integration, long term contracts, and the same modi"cations discussed to increase the
J. Islas, U. JeroH nimo / Energy Policy 29 (2001) 965}973
CFE self-"nancing. Meanwhile the other, the Fox government proposals, mention the transformation of CFE into a holding of state-owned utilities, a state-owned company to operate both a spot market and an independent system operator, a subsidies rationalization, a strong regulator and an adequate tari! structure. As none of the three main political parties in the Congress has a majority su"cient to make changes in the Constitution or in the secondary laws to bring about changes in the electricity sector, it is not possible to know in which direction the Mexican electricity sector will evolve to solve the "nancing problem. The non-privatization of CFE and LyFC assets is today the only political restriction accepted by all the political actors including the Fox government, but this important political departure point, even if it determines the structural change possibilities, is not enough to de"ne what will happen with the electricity sector in Mexico. The strategy of the Presidential initiative in terms of legal requirements to achieve its proposals for structural change in the electricity sector and the conformation of alliances between political parties in the Congress will be two important elements that will de"ne the "nal solution to resolve the "nancing problem of the Mexican electrical sector and its organizational evolution. Acknowledgements We thank the DGAPA-UNAM for "nancial support through project IN303400. References Blaylock, B., 1997. El proyecto de Samalayuca II: Una Nueva GeneracioH n de Estructura de Financiamiento en MeH xico. Potencia (13), September-October, pp. 40}43.
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