“I think people are in for a very big surprise if they allow the Mexican government to monopolize the electricity sector; it’s simply not going to do Mexicans any favors in terms of efficiency, competition, low prices, or capital investment,” Tony Payan, Director of the Center for the United States and Mexico at Rice University’s Baker Institute for Public Policy, told NGI’s Mexico GPI.
“This administration is backpedaling on efforts to phase out subsidies or increase market investment and market competition in the sector, and I think consumers will pay the price for that,” he added
Payan is the Françoise and Edward Djerejian Fellow for Mexico Studies and director of the Center for the United States and Mexico at Rice University’s Baker Institute for Public Policy, a position he has held since 2012. He is also a professor of social sciences at the Universidad Autónoma de Ciudad Juárez in Ciudad Juárez, Chihuahua, Mexico and, from 2001-2015, he was a professor of political science at The University of Texas at El Paso (UTEP).
An author of several books and articles about the U.S.-Mexico relationship, Payan’s research focuses primarily on border studies and the dynamics of the bilateral ties between the two nations. He has written extensively about the Mexican energy industry and rule of law and is also a member of the Greater Houston Partnership’s Immigration Task Force and the Mexico Energy Task Force.
Payan earned a B.A. in philosophy and classical languages from the University of Dallas and an MBA from the University of Dallas Graduate School of Management. He received a doctorate degree in international relations from Georgetown University in 2001.
Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, offers the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market. Payan is the 72nd expert to participate in the series.
NGI: We recently published some of your comments about the Mexican electricity reform proposal and how it could impact citizens if approved. How do you think the electricity proposal, if passed, could impact Mexican citizens?
Payan: I think there are some basic market principles at work here. If you concentrate all electricity production, distribution, and retail and put them in the hands of a single state-run utility, I think there is plenty of historical evidence to show that a government will simply not have the kind of capital that is required in such a capital intensive industry. You have to invest in major infrastructure. You have to invest in major distribution networks. You have to invest in a retail-level system. There is significant capital required in the administration of a whole industry like the electricity sector, and I don’t think the Mexican government is in any position to invest the kinds of billions of dollars that are required to benefit consumers—domestic or industrial.
That just means something very simple. It means that the sector is going to become very concentrated, it will have zero competition, low investment, and it is going to ultimately be more expensive for consumers than if you simply handed out permits for various companies to produce and invest and distribute extensively and regulate the sector efficiently. If you introduce competition in the market, there’s obviously going to be a race to lower prices and to become more and more efficient and more competitive. No such incentives will be at play if Comisión Federal de Electricidad (CFE) becomes the sole electricity utility provider, producer and distributor of electricity services.
Worse, I really think energy prices are going to be higher because the Mexican government simply doesn’t have the capital to invest in all of the areas where finances are needed and will have to raise the capital. And where do you raise the capital from? From your captive consumers. To do so, you raise the electricity prices. And I think that people are in for a very big surprise if they allow the Mexican government to monopolize the electricity sector; it’s simply not going to do Mexicans any favors in terms of efficiency, competition, low prices, or capital investment. And if you do not want to raise prices, you will have to subsidize, and anyway the taxpayer, who is also the consumer, will pay.
Obviously, the state has a role. The state has to ensure that there is competition, that consumers aren’t abused and that prices aren’t fixed, that companies invest in the latest technology, that there is regard for the environment, etc. So, there’s a role for the government in the industry. But for the government to act as the producer, distributor, regulator, investor, consumer advocate, and all of the other roles the government is attempting to be, that’s a model that’s already been tried and failed. It’s a model tried in the 20th century and we’re almost a quarter of the way through the 21st century. Trying to bring back the previous model will not work for the world of today.
NGI: I saw some of your recent comments comparing gasoline prices in the U.S. and Mexico, where the average prices are currently much higher.
Payan: I think what Mexicans are currently seeing is the unhealthy dynamic I described above in gasoline prices. We can expect to see something like that in electricity prices. What’s happening with gasoline? As the government tries to crack down on gasoline import permits and as it tries to refine more at home and to re-monopolize the gasoline sector, prices are going nowhere but up—despite promises to the contrary. The Mexican government is having to subsidize gasoline prices again, but we know that consumers pay one way or the other—at the pump or through their taxes in the form of subsidies.
If the Mexican government were to push this electricity reform through and then considered it necessary to subsidize electricity prices the way they’re subsidizing gasoline prices, then what’s going to happen: Mexican consumers are going to pay. As I said, maybe they won’t see it on the bill every two months, but they will certainly see it in the form of a subsidy that will eat away at a federal budget at the expense of investing in infrastructure, in education, in health care, in other social development initiatives that do people quite a lot of good.
I think the Mexican government under López Obrador just doesn’t understand those basic market principles. They do not seem to know anything about economics. Worse, they don’t seem to want to know anything about economics. They seem stuck in the 1970s, and this is the one thing that I criticize. That is why I said that Mexicans are currently paying a lot more for gasoline than consumers in the U.S. Previous administrations knew and understood this, and sought to phase out gasoline subsidies and introduce competition. This administration is backpedaling on those efforts to phase out subsidies or increase market investment and competition in the sector.
NGI: In the first weeks of the year, there’s a new memo that has circulated within the U.S. government — this one from the U.S. Senate Finance Committee — that outlines concerns with the current Mexican energy industry policies, how they are detrimental to private competition and how it potentially affects the USMCA trade agreement. Do you think that at some point the tensions that are building between the U.S.-Mexico energy sectors will become a priority for the U.S. government to address?
Payan: I sense that the U.S. government is, to a large extent, adrift when it comes to a solid, multilayered foreign policy towards Mexico. There are little fires everywhere: Security, trade, energy, the border, Covid-19, the investment climate and disputes.
I think one of the issues here is that there is a strong series of letters coming out of Congress or coming out of the industry, both protesting some of the current policy decisions in Mexico. But that is what they are, letters. Not much more. Within the industry, I understand these concerns are best addressed more privately and more directly, instead of using public or open political pressure as a tactic.
But there is little coordination with White House efforts. In my view, there ought to be very technical commissions, trilateral and bilateral, to resolve all these kinds of issues and to ensure that Mexico’s market practices do not de-align very much with those of the U.S. and Canada. I sense there are no such efforts—at least not effective efforts. The U.S. and Canada, for example, just solved the issue of dairy and I think they’re working on other issues that involve wood and lumber. Both sides apparently had some disputes and they’ve been able to solve them very technically so.
In other words, these are technical issues. Mexico’s complaint on automobiles, for example, is a technical issue. And to solve them, they should sit down, get the smartest people, the smartest lawyers, and the smartest economists on the issue together to discuss and resolve their disagreements. In contrast, the public letters of protest flying around and even displays of bravado, in my opinion, are purely political grandstanding and solve nothing. All they do is add fuel to what is already a fragmented, difficult relationship.
The U.S. Congress doesn’t seem to understand that. It will never understand that. And I think the Biden administration also doesn’t understand that these sorts of sporadic efforts aren’t achieving anything. While they stir up some noise, they really accomplish nothing. Nothing useful will come out of this dynamic until both governments decide to get in a room, discuss what the treaty says, figure out how to interpret it, and figure out how both sides can work to solve this. Instead, they’re going into filing lawsuits and lobbying and firing off these political salvos in the forms of letters and protests, which don’t go anywhere and aren’t going to solve any issues.
To be sure, the complaints on both sides are legitimate. The Mexicans’ complaints about the automotive industry are legitimate, as well as the U.S. complaints on energy and investment protection. But political grandstanding doesn’t really solve anything.
One potentially hopeful thing that I see is that the López Obrador administration is further and further in disarray by the day. The government is grappling with all kinds of crises that they don’t know how to solve. It seems that perhaps, because the administration is so distracted and focused on putting out all kinds of fires, they might just run the clock out on the next two and a half years until an incoming administration enters and maybe they’ll have a different vision. That’s unfortunately the same scenario in the United States at this point.
NGI: Given that you’re based in Texas: If you’re a private energy company and you’re in Texas and have existing contracts with Mexico or the CFE or Pemex that are in jeopardy of being dissolved or modified, what sort of options do you have right now?
Payan: I met with a Mexican official a few months ago and I told him that energy companies, in particular in Houston, were calling me and the Baker Institute to ask that same question. They were asking: What can we do?
I tried to explain the perspective and the concerns of Texas energy companies to this government official and, to my surprise, he said: “Well, they can always sue us.” And I think that response really captures the attitude of the Mexican government today. They’re going to try to continue to push through their public policy agenda and push all of these companies out of Mexico and then let them sue. That’s going to be a great loss for everyone for a couple of reasons.
Number one is that Mexico will lose any investor interest. It’s going to throw a cold bucket of water on anyone’s intentions to invest in Mexico. And the capital will dry up. Not just in energy, but in other sectors where Mexico could really use more investment capital.
And the second thing is that it’s going to be a big loss for these companies. Even if they do sue Mexico for breaking an existing contract or any other reason, it’s going to take a lot of money and time. It will be years before some of these lawsuits are resolved and, when they finally are, the López Obrador administration will be long gone. But López Obrador may be betting on just that. Or maybe the hope is that some of these companies will just walk away. For companies it’s also unfortunate because they are in the business of developing their investments. They’re not in the business of filing lawsuits.
But, given the response I received from this Mexican government official, I don’t get the impression this administration is planning to back down.
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