It Is Not One CFE, There Are Many CFEs

Although the current discourse makes an effort to point out that CFE is one and that, therefore, the best thing is for the company to be integrated into a single organism, the reality is that there are many CFEs and that has fundamental implications that can help us go deeper into the current problem in which the Mexican electric sector finds itself.

Certainly, after the energy reform CFE went from being a parastatal entity to a productive company of the State and that allowed the company to divide itself by business segments. Part of these strategies had been established in PEMEX since 2008 and were reinforced in 2013, then they were extended to CFE.

The objective was for CFE to have operational flexibility for the development of its activities, for it to be able to optimize costs, to have an adequate debt ceiling, for subsidies to be gradually eliminated, for its business plan to be the guiding axis of its activities and for regulators to have clear information for the setting of tariffs for the benefit of citizens.

The CFE Law established only one exception: those strategic activities of the nation, those where the government reserves the monopoly, should be carried out through subsidiaries and the rest could be affiliates. In this way, transmission and distribution should be carried out through subsidiaries. Meanwhile, in the affiliates, CFE could associate itself while maintaining more than 50% of the capital stock. In the subsidiaries this was not possible.

From this, six productive generation subsidiary companies were born, as well as CFE Transmission, CFE Distribution and CFE Basic Service Supplier. Also created as affiliates were CFE Qualified, CFEnergía, CFE Capital, CFE International and CFE Legacy Contracts Intermediation.

“The logic is that the businesses of the various faces of CFE are different and, therefore, on many occasions they pursue diametrically opposed objectives. This is a key point.”

Here arises the quid of the question. The logic is that the businesses of the various faces of CFE are different and, therefore, on many occasions they pursue diametrically opposed objectives. This is a key point. While for the six subsidiaries of CFE Generation the most beneficial thing is to sell the greatest amount of energy possible at the highest price, for CFE Basic Supply the most beneficial thing is to have the cheapest energy possible according to how demand behaves.

Or, on the other hand, it is convenient for CFE Generation II, for example, to save its hydroelectric energy for those moments in which the price paid for it is higher and which is set by a thermoelectric plant of CFE Generation IV. Or it is not convenient for CFE Generation III that CFE Generation V offers cheaper energy from the Independent Producers because it will not be dispatched.

Also, while the six subsidiaries of CFE Generation seek to have the cheapest fuel price possible to sustain the hedging contracts with CFE Basic Service Supplier, CFEnergía benefits from selling the fuel at the highest price possible to whoever pays it best.

As for CFE Qualified, it benefits from more industrial users who want to migrate to the electric market, those that represent more than 50% of the sales income of CFE Basic Service Supplier, a situation that would cause the first to increase its income at the expense of the second.

For their part, since CFE Transmission and CFE Distribution have tariffs that cover all their efficient costs without the need to invest, it is convenient for both to increase the costs that can be transferred to the tariffs, convincing the regulator, the CRE then, that they are efficient and that it is convenient for us that they be added as part of the tariffs.

In that logic, CFE Capital would prefer to have in its portfolio low-risk projects with guaranteed returns, easily projectable over time and even better if they are a monopoly, like Transmission, than projects with management, operation, administration, fuel risks and where they have to compete, according to the current model, like electric generation.

As you can observe, it is not one CFE, there are many CFEs with different objectives and with different business logics. The reason for separating them was so that we could observe these differences and know the real and efficient costs of each segment in order to have clear tariffs for the benefit of all consumers.

But that is precisely what the electric reform being discussed these days intends to disappear.

This article was originally published by Energía a Debate.
Date: January 17, 2022
Link: https://energiaadebate.com/no-es-una-cfe-son-muchas-cfe/ [Online]

Energy Inquisition

Mexico is living its full Energy Middle Ages. Of course I am not referring to the fact that we are using candles and whale oil, but if this trend continues, little would be missing for that. Not only because we live in an obscurantism in which official data on energy is hidden or buried in formats difficult to access and where new ideas are rejected, or because a system of energy vassalage is being implemented where we are all vassals, peasants or slaves of CFE; but because, in addition —and hand in hand with these two concepts—, we are in an Energy Inquisition orchestrated from the pulpits of public power and the State company.

For months, the federal government, starting with the president and the Secretariat of Energy, even leaders of the governing party, has taken on the task of winning the battle of the narrative that the electric reform initiative presented by the Head of the Executive himself is good for the people. Every day messages are positioned on television, radio, social networks, press conferences and in all possible media in defense of the initiative.

Also, week after week, some CFE official comes out to defend, either in the media or through press releases, the presidential proposal. In many cases showing the lack of technical knowledge of the electric sector, of the operational and financial management of the company or of legal practice itself.

However, the greatest problem is the very personal task that the direction of CFE and its social communication area have imposed on themselves by launching replies to any criticism or opinion published by experts, analysts, journalists or almost any person in any media outlet.

“…poor is the one who dares to question because he will end up in the virtual bonfire of CFE…”

Like the Spanish Inquisition of the Middle Ages, the selective persecution carried out by CFE is brutal. Week after week they attack without solid arguments, without figures, without graphs and in a personal way anyone who dares to publish some critical thought regarding the areas of opportunity and negative aspects of the initiative. Public lynching does not take long, nor does the bonfire from power to burn the reputation of those who do not retract. The end, as I pointed out, is to win the narrative, whatever the cost.

The worst part, with all the machinery of the self-proclaimed most powerful company in Mexico, is that substantial arguments based on official figures or evidence are not presented, but rather disqualification and personal accusations are resorted to. Arguments sustained in ad hominem, ad baculum and ad populum fallacies wholesale.

If someone writes that the solution to solve climate problems, advance in the energy transition and optimize the country’s electric resources is not hydroelectric plants, CFE’s reply does not present data, but limits itself to branding the opinion as unfounded improvisation.

If someone shows them that the prices of electric energy from private plants are lower than those of CFE itself according to the data of the Energy Regulatory Commission itself, CFE limits itself to attacking the person and calling him a “lobbyist for private companies” and “enemy of the state company.”

Or if someone questions the hidden subsidies that CFE points out so much and of which it has not presented any proof based on the government’s official documents or statistics, they limit themselves to presenting some unsupported figure, pointed out again and again while waiting for it to become true, and accuse, without further proof or foundation, of promoting foreign interests.

The three examples are real and are a sample of a systemic phenomenon that occurs within the state electric company. It is, then, an energy inquisition that only seeks to give a reply without contributing to the discussion and debate, only to promote its particular interest and not that of society, so poor is the one who dares to question because he will end up in the virtual bonfire of CFE, since it now seems that the fundamental right to be protected is not free expression, but persecution.

This article was originally published by Energía a Debate.
Date: November 22, 2021
Link: https://energiaadebate.com/inquisicion-energetica/ [Online]

The PIE. Illegitimate Children of CFE

A curious case is represented, in the Mexican electric sector, by the Independent Energy Producers (PIE). They are private companies that generate energy on behalf and account of CFE as a form of maquila, authorized in the 1992 reform of the Public Electric Energy Service Law, and as a way to allow private participation in generation without precisely violating the public service.

Despite the fact that CFE designed the international bidding bases, established the purchase terms, the minimum operating characteristics, the guaranteed capacity and the energy they had to deliver, the guarantees they should present and, in some cases, selected the sites and even committed itself to bringing the gas to avoid integrated costs, they are disowned as if they were illegitimate children.

“…they are considered illegitimate only because their assets are privately owned.”

The absurdity. “That energy is not CFE’s,” the arguments put forward by the current directors of the company are heard, like saying that the trip in a taxi or Uber is not yours because it is not your automobile. Or, in more energy-related terms, as if the oil extracted by a company with a service contract for PEMEX were not counted as part of the production of the Mexican oil company, only because the operators or the platforms are private.

In their eagerness to win the narrative, CFE directors have pointed out that this energy is not theirs and that CFE only produces 38% of the country’s generation, while the PIE produce 31%. Meanwhile, in this year’s Government Report, CFE recognizes that it controls 84% of the total energy commercialized.

This means that regardless of whether the owner of the plant is CFE or a private party, the energy that is produced belongs to CFE and it is the state company that commercializes said energy. If we add the 38% plus the 31% of the PIE, then CFE controls 69% of the energy; if to that we add another 4% from Long-Term Auctions, the percentage increases to 73%, and if we add other contracts with private companies, the figure reaches the mentioned 84%.

There are only 34 PIE permits and there cannot be more of this type because the model was cancelled starting with the energy reform, with the publication of the Electric Industry Law in 2014. Under the reform there are no different permits for the generation of electricity, but rather, with a generation permit, different purposes can be served.

Of the 34 permits, 28 are combined cycles that operate, mostly, with natural gas and 6 are wind farms located in Oaxaca. The 34 PIE represent altogether an installed capacity of 18 GW, of which 12 permits were granted between 1997 and 2000; 9 from 2001 to 2006; 7 from 2006 to 2012, and 6 after 2012 and until the entry into force of the Electric Industry Law.

Of the PIE, 5 of the 7 granted between 2006 and 2012 were wind farms, which implies that 5 of the 6 wind PIE were granted in said period. The total installed capacity of all of them adds up to 0.6 GW, so they represent less than 3% of the total capacity of the PIE, while the remaining 97% are combined cycles.

The PIE, in addition to being illegitimate unrecognized children, are accused of being leonine mainly because of that 3% of wind PIE. The argument is that they are very expensive for CFE and that the company loses money because of them, this on the basis of two references: the price of the wind farms from auctions and the price of CFE’s wind farms. The first is the lowest price that CFE pays for energy, in such a way that the weighted price of the wind PIE is almost 5 times higher than these.

The other reference point is the price of CFE’s wind farms, over which the PIE would be almost 3 times more expensive than CFE considering that it is the same technology. There is very little information in this regard on how the price of CFE’s wind farms is calculated, but we can explain the difference between the prices of the PIE and those of the long-term auctions.

So, does CFE have losses from operating these unrecognized children? Not really. Thanks to the reform, the different generation units of CFE were separated into subsidiaries. The subsidiary CFE Generation V is the one that exclusively manages all the PIE. That is, it is the legal representative of these plants before CENACE and makes the offers in their name, despite the fact that private parties operate them.

CFE Generation V, the representative of the PIE in the Wholesale Electricity Market, is the only CFE subsidiary dedicated to generation that has not had losses consistently in recent years. The other business unit with that characteristic is CFE Transmission.

That is, then, the story of the children not recognized by CFE who, although they are part of the energy it controls according to its offer function —in the terms established in its own bidding bases and contracts, and which represent profits for it— are considered illegitimate only because their assets are privately owned.

This article was originally published by Energía a Debate.
Date: November 17, 2021
Link: https://energiaadebate.com/los-pie-hijos-ilegitimos-de-cfe/ [Online]