Mexican state-owned electric utility Comision Federal de Electricidad (CFE), long plagued by operational inefficiencies and financial losses, showed few signs of turning things around in 2018, according to a report by the government’s auditing body, the Auditoría Superior de la Federación (ASF).

In its annual report presented to members of the Mexican congress on Oct. 31, the ASF painted a grim picture of the state of operations within the CFE during 2018, highlighting a myriad of problems detected during the final year of the administration of former President Enrique Peña Nieto. The ASF conducted 18 individual audits of the CFE’s operations, including probes of the company’s subsidiaries and affiliates, many which were created as a result of the country’s 2014 energy reform. 

The conclusions reveal a company in disarray and decline, providing a clearer snapshot of the challenge facing the current administration of President Andrés Manuel López Obrador, who has vowed to “rescue” the state utility from further deterioration.

“The company continued destroying the economic value of its operations by an amount of 138 billion pesos ($7.2 billion) in 2018, 7.6% more than the amount registered in 2017,” the ASF concluded in its audit of the parent company’s performance.

The ASF made recommendations to the Board of Directors and CFE’s CEO Manuel Bartlett to “define, establish, monitor and supervise the fulfillment of objectives, strategies, programs and priority and urgent projects” to “reverse the deterioration of the CFE, with an objective to, in the mid-term, improve the company’s operative and financial situation,” according to the report.

The audit was carried out by the ASF to determine if the CFE achieved its objective to generate economic value and profit for Mexico. The ASF reviewed several areas of the CFE historically known to produce losses -- including electricity generation costs, inadequate infrastructure and generation plants – and concluded that “there is no evidence that the company has agreed upon or established corrective measures to provide response to the intensity of the problems presented during 2017-2018 by the CFE or its subsidiaries.”

One particular area of weakness within the CFE, as highlighted by the ASF, was the high costs of electricity production at the company’s generation plants, known as EPS. The costs of electricity generation at the plants “weren’t competitive, due to deficiencies in maintenance, modernization and optimization, which led to a 2.3% decline in electricity generated by the CFE in 2018, compared to a year earlier,” the audit said. 

Electricity theft, which López Obrador and Bartlett have promised to reduce in the current administration, also added to the company’s woes and financial losses, increasing 4.7% in 2018 versus the previous year.

Natural Gas Transportation Model Solid?

One individual audit by the ASF examined the CFE’s performance regarding the transportation and supply of natural gas, as well as contracts signed with private companies from 1997-2017. In his first year in office, President López Obrador repeatedly deemed natural gas pipeline contracts signed with private companies during the previous administration as “unfair” and called for improved terms, which were successfully renegotiated in late August and September.

The ASF audit reviewed 24 natural gas pipeline contracts awarded by the CFE during 1997-2017, most which followed a take-or-pay model in which a private company constructs, operates and owns the pipeline and the CFE commits to buy capacity on it, whether in use or not.

The audit concluded that “the natural gas transportation and supply strategy presented deficiencies in planning, programming, regulation implementation and supervision, both by the Energy Ministry and CFE,” the report said. “The objectives and projected goals were not met, which has generated important costs for the CFE and the state that aren’t recoverable.”

The ASF listed the deficiencies discovered in the audit, claiming that the CFE auctions for the pipelines -- before and after the energy reform -- weren’t sufficient or adequate. It also found that in 2018, “the CFE only utilized 16.6% of the reserved capacity on the 17 natural gas pipelines in operation.” As a result, the CFE paid a fee of more than 10.5 billion pesos ($548 million) for the more than 83% of capacity on the pipelines that wasn’t used.

In its conclusion, the ASF recommended that the CFE improve efficiency and “reduce its risk of paying for transportation service that isn’t being utilized and optimize all of the reserved capacity on the natural gas pipelines in operation.”

“The capacity of the pipelines continues to be underutilized which will generate unrecoverable costs for the CFE,” the audit found. “There is an urgency to strengthen the natural gas transportation and supply strategy.”