Mexico’s Supreme Court dealt a setback to President Vicente Fox’s plan to promote private generation, voting 8-3 in April to reject changes in the country’s electricity laws. The court ruled that the modifications decreed last year by the Fox administration in an executive order are unconstitutional. Nationalists opposed to a growing movement toward private ownership in the country had challenged Fox’s May 2001 decree to promote private power generation development.

Because of budget cuts, the Fox government had ordered the law be changed to increase the amount of spare capacity that the state-owned power utility, the Federal Electricity Commission (CFE), would be able to buy from private plants. However, the court ruled that the changes be annulled because the executive branch had undertaken legislative authority in the decree.

Under Mexico’s so-called “self-supply rules,” private companies may generate electricity for their own use, or they may sell electricity to the CFE. However, only state-controlled utilities may provide public service, including transmission and distribution. The rules apply to cogeneration plants and to industrial partnerships that are formed with the purpose of buying power from a private generator.

Although cogeneration has been privatized since 1992, there has been little investment because the CFE has had a policy to only buy up to 20 MW of excess power capacity from any one plant. It also will only pay the marginal cost for the power. The executive order allowed cogenerators to sell CFE all of their excess power and would have allowed “self-supply” generators to sell up to 50% of their total capacity when it exceeded 40 MW.

The Fox government, which ran on a platform to boost the country’s economy by reforming the business sector and encouraging more privatization, now is working to secure support to reform Mexico’s Constitution, which nationalized the electricity sector in 1960. The changes proposed would allow for the creation of a wholesale electricity market that would allow private generators to compete with state-owned facilities.

However, as Mexico’s economy took a downturn last summer, Fox’s plan ran into stiff opposition and was stopped in the legislature. The plan was reintroduced this spring, but Mexico’s two main opposition parties have so far rejected changes to the charter. No party holds the majority in the Mexican Congress, and the current session ends Tuesday. Congress will reconvene in September, however, the legislative branch is allowed to call an “extraordinary” session to deal with any issues it believes are necessary.

Business owners worry that without private participation, about $7 billion will be pulled out of projects already slated to begin in the power sector, including projects in generation, cogeneration and self-support projects. The Secretariat of Energy, appointed by Fox, has said that the power industry in Mexico will require an investment of about $25 billion through 2006, and without it, the country would have to begin rationing supplies by the middle of the decade. However, opponents to privatization argue that the court’s ruling will now push the government to invest more in energy generation.

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