Mexico launches reform to put state in charge of power market

The reform announced by President Andres Manuel Lopez Obrador foresees giving the Comision Federal de Electricidad (CFE) over half of the power market and putting it in charge of setting terms for private generators.

According to a copy seen by Reuters, the bill Lopez Obrador sent to Congress on Thursday would also reserve future lithium extraction for the state and do away with energy regulators, grouping their functions under the Energy Ministry and the CFE.

Though Lopez Obrador had hinted at much of the bill's content, its elimination of nominally independent regulators even drew criticism from some of his erstwhile loyalists.

"The disappearance of the National Hydrocarbons Commission is a step back for the regulation of the energy sector," said Martha Barcena, Lopez Obrador's former ambassador to the United States, referring to the oil industry regulator.

Lopez Obrador said giving the CFE 54% of the power market would keep prices low for consumers and end preferential treatment for private firms, which he argues has been excessive.

"We are trying to compensate for the damage caused by the so-called energy reform," he told a news conference, referring to the previous administration's 2013-14 opening of the energy market to private capital.

The law currently gives preference to dispatching the lowest-cost power onto the grid, which is often produced by private companies. Lopez Obrador has spent much of his term trying to overhaul the energy sector in favor of the CFE and state oil and gas company Petroleos Mexicanos (Pemex).

Doing so has helped Pemex unload fuel oil it produces onto the CFE, which it can use for burning in power stations. But tighter sulfur content rules has restricted the market for fuel oil, posing a problem for the heavily-indebted Pemex.

Aside from eliminating the CNH, the law also foresees getting rid of the Energy Regulatory Commission (CRE). The two were created years ago to be impartial market regulators.

LITHIUM

Although Mexico does not yet produce lithium, Lopez Obrador said eight existing concessions for extracting the metal would remain in private hands if companies can develop the industry.

Bacanora Lithium, which holds concessions in northern Mexico, says it is getting close.

"They must prove they have done exploration work and have the capacity to invest and extract lithium," Lopez Obrador said.

The company has said it aims to begin production in 2023 and ramp up to 35,000 tonnes of lithium carbonate annually.

Lopez Obrador's ruling National Regeneration Movement (MORENA) and its allies lack the two-thirds majority in Congress required to pass constitutional changes, and some analysts are skeptical that he can achieve it.

The president has talked about getting votes in Congress from the opposition Institutional Revolutionary Party (PRI), a group which pushed through some of the very legislation he wants to undo and which he has relentlessly attacked as corrupt.

Some party insiders say that at least some PRI lawmakers may prove amenable.

Gabriela Siller, a Banco Base analyst, said the bill's provision giving CFE the power to cancel contracts with electricity providers could amount to a "self-inflicted wound" as power demand rises in tandem with economic recovery.

The bill could also raise costs for users, put pressure on public finances and squeeze investment, she said.

Mexico's main business lobby said approval of the reform would "mark a point of no return," generating irreversible damage to the rule of law, the environment and to the competitiveness of the country.

"The imposition of this reform would imply that the most modern, clean and efficient plants of the private sector stop operating, violating the international treaties of which Mexico is part," the Business Coordinating Council said in statement.

The American Petroleum Institute, a top U.S. oil lobby, had already raised concerns about Lopez Obrador's energy policies, arguing they undermined investor confidence and violated Mexico's trade commitments.