New era for energy SOEs

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Energy markets worldwide are undergoing constant regulatory revision driven by changes in technology: the growing presence of renewables and IT advances in network management. The old world of vertically integrated utilities with geographically fixed markets is rapidly vanishing. Deregulation in developing countries is also morphing into something new, and the old private-public dichotomy is being replaced by a marketplace where scaled-down state-owned enterprises (SOEs) compete side-by-side with private entrepreneurs. The presence of SOEs is important to the shape energy markets can take in developing countries and the long-term success of new investment and technologies.

Insider’s advantage

The first thing that comes to mind when private companies compete with SOEs in developing countries is that the latter have an unfair insider’s advantage. SOEs have access to and influence on policy-makers, have existing assets and infrastructure from which to grow, and operate with longer-term horizons than private firms, which releases them from the pressures of turning an immediate profit. SOEs that used to have a monopoly over energy often remain dominant players despite regulation that aims to create a competitive marketplace, making it difficult for newcomers to break into the system.

The Mexican utility, CFE, is a case in point. It lost its monopoly over the electricity system with the reforms, but the regulatory authorities have been slow in enforcing the breakup of the utility as mandated by the reform legislation. The rules for this process were finally passed in January of this year, and on March 29, the government published the roster of new companies for each of the functions previously performed by CFE, 9 in total: CFE Generation I-VI, CFE Transmission, CFE Distribution, and CFE Basic Procurement. Another, affiliated, company was created to handle the contracts that CFE has with private producers. The rules abound in instructions to ensure competition; for example, item 2.2.2 (c) says that CFE’s multiple generating companies are not allowed to coordinate their market strategies, in other words, form a cartel. But the devil is in the details, and firms interested in participating in the Mexican market are rightfully wary of the difficulties they may encounter once they begin to operate in a system where the biggest competitor is also the owner of the transmission and distribution lines.

 

If you can’t beat them, join them

But SOEs are not always market-dominant, and can become allies to private companies seeking to enter new markets. This model is taking root in Argentina and Mexico, where provincial/state governments have created promotion and investment vehicles to take advantage of resources located within their borders.

The investment agency of the province of Neuquén (ADINQN), for example, will be participating in the upcoming auction for renewable energy in Argentina. The agency is planning on offering 300 MW of wind power at the auction. But they don´t want to go it alone; they are looking for partners. This is an investment model that the province pursued in the past for hydrocarbon development. Through its company Gas & Petróleo de Neuquén the provincial government offered exploration and production concessions in exchange for a percentage of the project. The regulatory framework that allowed the provinces to administrate hydrocarbon exploration as they pleased is no longer in place, but provincial autonomy is still high. In the case of the upcoming renewable energy auction, ADINQN is offering feasibility studies, land rights, environmental permits, and authorization from the system operator, CAMMESA, in exchange for a share of the project.

State-owned companies at the sub-national level are also used as vehicles for the states or provinces to compete among themselves to attract investment, and this can be beneficial to private investors. Even before the energy reforms, the 10 oil producing states of Mexico competed for investment from Pemex. In 2009, they all jockeyed for the construction of the new refinery that ended up in Tula, Hidalgo. With the reforms, some states in Mexico, like Coahuila, Nuevo León, and Tamaulipas, have created  state agencies with various degrees of public and private participation to attract companies to their states. The most popular format seems to be the cluster, composed of private companies as well as institutions of higher learning and local government representatives, patterned after the aerospace cluster of Querétaro. Other cluster initiatives include the Clúster del Corredor Transístmico, which seeks to promote investment opportunities in oil and petrochemicals in the corridor connecting Salina Cruz, Oaxaca, to Coatzacoalcos, Veracruz, and the Clúster Petrolero del Sureste y Golfo de México, which seeks to assist energy companies, in particular national ones, operating in Tamaulipas, Veracruz, Tabasco, Campeche and Chiapas (Opportimes.com).

Even if these organizations give preference to local companies, the need for capital and technological know-how always creates opportunities for foreign investors. Even under conditions of deregulation and reduction in the participation of the state, state actors continue to be important in Latin America and are more useful as partners than competitors.

 

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