Selling the Public Sector: Latin America Reacts: Mexico: Lights Out for Electric Company Sale?

September 25, 2007

In the 1930s and 40s, General Lázaro Cárdenas made nationalization of economic resources and land reform symbols of Mexican national sovereignty. Independence from the colossus of the North, Cárdenas said, meant prying the hands of U.S. owners from the main levers of the country’s economic life. Just a few decades after the cataclysmic revolution of 1910-20, public ownership of oil was written into the constitution, and then, two decades later the electrical system was nationalized.

Nationalist economic development, however, was overthrown as the bedrock of the country’s economic strategy in the 1970s, when technocrats took power in the Party of the Institutionalized Revolution (PRI) and imposed neoliberal economic reforms. In the last two decades Mexico has become a neoliberal proving ground, as the International Monetary Fund and World Bank used the leverage of foreign debt to require massive changes in economic priorities designed to encourage foreign investment. The heart of those changes has been privatization of Mexican state enterprises. Those put on the auction block include the airlines, ports, railroads, banks, phone system and whole sections of formerly state-owned industries.

Resistance to privatization has often been fierce. Soldiers had to occupy the port of Veracruz at gunpoint in order to privatize it and fire its workforce. Mexico City’s bus drivers fought the selloff of the Route-100 company for three years, including one in which their union leaders were imprisoned. Wildcat strikes hit the railroads when they were sold to Grupo México, and copper miners fought a valiant battle against job reductions when the Cananea mine was bought by the same owners in the late 1990s. While these resistance efforts were defeated, one of the government’s most important privatization schemes has so far been held at bay—the selloff of the electrical system.

In Mexico, two state-owned power companies provide electricity. The Federal Electrical Commission (CFE) brings power to all of the country except Mexico City and part of central Mexico, which is supplied by the Power and Light Company. The first crack at the nationalization of electricity came in 1979, when the technocrats, bent on bringing market reforms to the Mexican economy, began to become the dominant force in the federal government. In cooperation with Dow Chemical President John Connally, they envisioned a “North American Energy Project“ that would connect the electrical grids of Mexico, the United States and Canada. George Bush Sr. later supported the idea.

Popular opposition prevented the inclusion of the electrical and oil industries in negotiations over the North American Free Trade Agreement. In 1992, however, President Carlos Salinas announced that private companies, including foreign ones, could build and operate plants in Mexico so long as they consumed or exported all the energy they produced, or sold it to CFE. Almost all new construction of power plants by CFE and the Power and Light Company was halted after 1992. Meanwhile, private plant construction surged ahead. Twenty-six foreign companies—including Enron and other U.S. companies involved in California’s calamitous power deregulation plan—have been granted licenses for plant construction.

Controversy over the rapid growth of private power generation in Mexico boiled over last year, as President Vicente Fox introduced legislation to privatize the electrical system. A former Coca-Cola executive, Fox is allied with the industrialists of Monterrey and their U.S. energy partners. Fox’s direction has the blessing of the World Bank and the IMF and is supported by President George Bush.

It is an impressive transnational constellation of political power. In the United States, in state after state, similar corporate forces have steamrolled over ratepayers, unions and regulators, in a successful effort to open power generation to the free market. Mexico, however, has something that the United States doesn’t, something that so far has been able to stop these proposals in their tracks—the Mexican Electrical Workers Union, the SME, which represents workers at the Power and Light Company and is one of the country’s oldest and most democratic labor organizations. At the end of September, the union and its allies brought 50,000 people into Mexico City’s main square, the Zocalo, in protest over Fox’s privatization plans. The union vowed to distribute 10 million leaflets nationwide urging opposition.

It wasn’t the first confrontation between the union and the forces of neoliberal reform. Fox’s predecessor, Ernesto Zedillo, had also proposed privatizing electricity in 1999. The union formed the National Front of Resistance to the Privatization of the Electrical Industry, collected 2.3 million signatures on petitions in three weeks, and brought a million angry capitalinos into the streets. Zedillo was defeated, the first time a privatization initiative in Mexico had not succeeded.

The SME warned that the Fox plan would bring about the immediate bankruptcy of both companies—a hauntingly familiar prediction to Californians, where in the wake of deregulation, Pacific Gas & Electric declared bankruptcy in April 2001. As in California, Mexico’s small users would have to shoulder all of the expenses of maintaining the transmission grid and the distribution system, while the existing power companies would lose most of their revenue. The leftist Party of the Democratic Revolution (PRD) predicted the CFE would lose 60 billion of its current 100-billion-peso income. Adding fuel to the fire, Fox proposed to provide incentives to private companies to build generating plants, financing them by using the national pension fund, Mexico’s equivalent to Social Security.

The CFE runs in the black, and is widely considered both honest and efficient. The Power and Light Company, which has to contend with Mexico City’s old infrastructure, is more strapped for cash. But the SME argues that the government subsidizes large users, while cuts in the Power and Light Company’s budget have undermined modernization of equipment. The SME also accuses the government of draining its resources by forcing it to buy power from CFE, whose prices have increased 298 percent over the last decade.

The most predictable result of privatization, opponents claim, is that both national companies would be sold off once they went broke, or would be replaced in the market by foreign-owned ones. New owners would increase profits by raising rates for small customers, while cutting wages, laying off workers, tearing up union contracts and holding down expenses on maintenance. These are not just doomsday predictions—they describe the bitter experience at Mexico’s railroads, copper mines, airlines and other state-owned businesses.

For Mexicans, national ownership of electricity is not just a matter of rates and jobs, but a symbol of Mexico’s independence from the United States, especially economic independence. In 1960, the foreign owners of Mexico’s then-private power system wanted a big rate hike. They threatened to stop investing in bringing lines into rural areas and in building new generating capacity to pressure the government. But President Gustavo Díaz Ordaz nationalized them instead. Díaz’ action was very popular, and in line with the earlier nationalization of oil. “We don’t just look at this as workers, but as Mexicans,” Ramon Pacheco, secretary for external relations of the Mexican Electrical Workers Union, says about the privatization plan. “Yes, we’d lose our contract and jobs, and the company would go bankrupt. But this is about more than that—it’s about the direction our country is taking.”

And if the proposals for privatizing Mexico’s electrical system bear an eerie resemblance to California’s disastrous experiment in deregulation, it should come as no surprise. They share some of the same authors. In fact, as Jeffrey Skilling and Ken Lay were setting up shadow corporations to hide Enron’s huge U.S. losses in 2001, other Enron executives found time to hobnob with Mexican politicians and design projects in cooperation with that country’s industrial elite.

Enron created 64 subsidiaries to operate in the Mexican power market, headquartering most of them in Caribbean tax havens. The company already operates water systems in Quintana Roo state, and its executives advised Fox on energy policy during his transition to the presidency. Following the election, the power axis connecting the big industrialists of Monterrey, some of Mexico’s most powerful private businessmen, with their counterparts across the Rio Grande in Texas, paid off for the Texans. On April 4, 2002, Enron Energía Industrial de México received a license from Mexico’s Electricity Regulatory Commission to build a 245 megawatt plant in partnership with Vidrería Monterrey and Vidriera Guadalajara (two big glassmakers), Grupo IMSA (a steel and autoparts giant), Industrias Whirlpool and other big Mexican companies.

Other familiar players in the California debacle are also building plants. Bechtel Enterprises, the multinational engineering giant based in San Francisco, partnered with Shell Generating Ltd. to set up a company, InterGen Aztec Energy, to build a plant near Mexicali, generating 750 megawatts. Two-thirds of the power will be sold in Mexico, and a third exported to California. Sempra Energy Resources, a San Diego generator that figured in the state’s power meltdown last year, is building another power station near Mexicali. Its 600 megawatts will all be sent to the United States and the gas for its boilers will come from the United States in a Sempra-built pipeline, making the plant the first true energy maquiladora.

California’s experience prompted San Diego Congressman Bob Filner to travel to Mexico City last July to denounce the Mexican plans. Filner was especially critical of the Sempra and InterGen border plants, which are expected to produce 3000 tons of air pollution annually. Although U.S. air quality controls won’t apply to them, residents of California’s Imperial Valley a few miles north will wind up breathing the plants’ effluents. “These are the same companies that robbed and defrauded people in the United States,” he told the daily La Jornada. “The question, therefore, is why should Mexicans trust them not to do the same here?”

Carl Wood, a member of the California Public Utilities Commission, warned of another danger: the swings of the market could bring about manipulated shortages and periods of extremely high prices, as they did in California. “Mexican industry might not be able to absorb those price increases, nor raise prices on its own products in the world market,” he explained. “Price spikes in electricity might therefore cause industrial activity to stall.” He called the U.S. companies behind the proposal “the same old gang of thieves.”

One of Fox’s principal arguments for his privatization plan is that the constitution needs to be changed to legalize what already exists on the ground. Energy Secretary Luis Tellez says Mexico needs to add 22,000 megawatts to its present 35,000 watt capacity, and that only foreign investors will come up with the necessary $50 billion. But Jesús Navarrete, head of the movement opposing privatization in SUTERM, the CFE union, is among those who point out that cogeneration between the CFE and the government oil monopoly PEMEX alone could generate 9,000 new megawatts.

“The industry could be self-financing if it weren’t for the government’s policy of disinvestment,” says José Luis Hernández of the SME. “What they really want to do is enrich some of their favorites by selling it off at deflated prices.” And further down that road is the other crown jewel, heretofore untouchable because nationalist feelings remain high. Most observers believe it’s only a matter of time before PEMEX is itself sold off.

A knowledgeable authority on the U.S. side of the border agrees. California Public Utilities Commission’s Wood says, “It’s crazy for Mexico to be doing this. Mexico is blessed with lots of energy resources. But this proposal accomodates the needs of the large consumers without meeting those of the public, and sticks the cost of old technology with consumers. That was always the root of California’s deregulation problems.”

Nevertheless, Fox’s arguments swayed not only his own party, the conservative National Action Party (PAN), but also the leaders of the PRI, which governed Mexico for 71 years before Fox’s election. Presidents Díaz and Cárdenas, who nationalized electricity and oil, were PRI stalwarts. The aboutface by the party’s present leaders not only stood that history on its head, but also defied positions it defended earlier this year.

In May, the Mexican congress passed a resolution opposing any changes in the constitution to make privatization possible, and the PRI itself took a similar position in its own national meeting. But after Fox invited PRI leaders Roberto Madrazo and Elba Esther Gordillo to the presidential residence of Los Pinos for a late night snack and talk, they were only too happy to announce they’d give his proposal serious consideration. The PRI has 40 percent of the votes in the Chamber of Deputies and the Senate, and Fox’s PAN another 40 percent. If Madrazo and Gordillo can hold their members, Fox’s scheme has more than the required two-thirds majority.

But that’s a big if. Some of the PRI’s most conservative but nationalist leaders, including its former chair Manuel Bartlett, have organized vocal opposition. “Look at the energy chaos in California,” he declared. “Do they want to sell the American failure to us?” Bartlett introduced an alternative bill to Fox’s that would ban any increase in the 10 percent of current generation that is presently done by private companies.

Whether Mexicans find the political strength to reject the proposal is a question bound up with the changes in the country’s labor movement. The labor landscape began to change when former President Ernesto Zedillo announced plans to put the electrical system up for sale after his election eight years ago. At the same time, the slow disintegration of the old union structure, which refused to mount any defense against neoliberal government policies, created a political opening for currents of resistance. As an alternative, a new union federation, the National Union of Workers (UNT), was formed in 1998, and declared open opposition to the economic reforms.

One of the most important structural and political changes implemented by the new federation was scrapping the old requirement that workers belong to the governing party in order to hold their jobs and maintain their union membership. While the electrical workers’ SME, which never had such a rule, didn’t join this new federation, the formation of the UNT helped to create an atmosphere in which opposition gained strength and legitimacy.

The other electrical workers’ union, SUTERM, led the movement to democratize the country’s unions two decades ago. The government seized control of SUTERM, however, and its latest leader now also heads the main government-affiliated labor federation, the Congreso de Trabajo. But in 1999, splits began to develop in SUTERM, and last May, 3000 SUTERM members defied their national leaders and marched in the capitol, openly allying themselves with the SME. Another demonstration in August brought out 5,000, and a national coordinating committee was set up, representing 15,000 workers.

Meanwhile, the SME set up its National Front of Resistance. The battle over privatization was internationalized when it hosted a conference in Mexico City which featured delegations from many Latin American countries. To defeat Fox, an alliance of the SME, the UNT, the leftist PRD and nationalist elements in the PRI have all vowed to cooperate in mass protest. The political temperature will get very hot before the vote is taken in 2003, since it has become a referendum on the direction for Mexico’s economic development.

“We have seen the consequences of deregulation in the electrical sector in the state of California which has been detrimental to the interests of the electrical workers and of the population,” says a statement signed by leaders of both Mexican electrical unions. “In Mexico, the people rightly think that the electrical industry and the petroleum industry should be public property and that such public property is the fundamental basis for their nation’s existence and of their national sovereignty.”

David Bacon,, is a West Coast-based writer and photojournalist. His forthcoming book The Children of NAFTA examines the last decade of cross-border organizing. It will be published by University of California Press this fall.

Tags: privatization, Mexico, electric company, SME, union, politics, neoliberalism

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