The End of Luz y Fuerza: Recap, Analysis, and Ramifications

Event

On the night of October 11th, the federal police surrounded the headquarters and power plants of Luz y Fuerza del Centro (LFC), the decentralized supplier of electricity. The move was part of a takeover plan ahead of the Oct 12th announcement regarding the elimination of the state-owned electricity company.

The reason for a surprise takeover by federal police was to prevent any resentful workers from barricading inside the building in an effort to resist the decision. More importantly, it prevented unionized workers from interrupting service, as they had often recurred to this threat in order to negotiate their yearly salary increases. The takeover was strategically planned to catch LFC workers unprepared as they celebrated Mexico’s soccer victory over El Salvador, which granted the national team its pass to the 2010 World Cup in South Africa.

Subsequently, President Calderon published a decree in the official journal listing the considerations behind the decision to close down LFC. The Executive’s decree provided a summary of the company’s economic inefficiencies, managerial discrepancies, and failure of the union to abide by the series of agreements signed with the government to improve its competitiveness. The latter constituted the legal case against Luz y Fuerza:

“The Law of State-Enterprises establishes a cause for extinction of a decentralized agency created by the federal government, if this agency stops fulfilling the goals for which it was created, or its functioning is no longer viable from the point of view of the national economy and the public interest.”

In conclusion, the decree stated the effects of the global financial crisis have left the Mexican government with few options to avoid a further deterioration of public finances, and it was imperative for the government to make the right decisions to ensure an efficient use of public resources.

Needless to say, the decision to close down LFC was repudiated by the Sindicato Mexicano de Electricistas (SME), the company’s union. Martin Esparza, the union’s de facto leader, immediately began organizing a resistance movement while exploring other alternatives to challenge the Executive’s decision and exert pressure on the government of Felipe Calderon.

On October 13th, the Ministry of Energy confirmed it would be the Federal Electricity Commission (CFE), also a state-owned enterprise (SOE), that will take over the operations of Luz y Fuerza in Mexico City and other serviceable zones.

Significance

The closing down of Luz y Fuerza is no doubt one of the boldest if not most difficult political decisions taken by President Calderon during his term. Successive administrations have failed to reform LFC, given the threat of a frontal clash with its powerful union and the political and economic ramifications.

For more than two decades, LFC was Mexico’s worst performing state-owned company. While the CFE has become a world-class electricity company, LFC increasingly deteriorated. In spite of this, LFC was able to maintain one of the most advantageous collective contracts, given the constant danger of a clash with the union and the possibility of interrupted service.

Regardless of any political benefits for President Calderon, the decision opens a battle front of social discontent which could instigate political instability.

Early Timing

Although there were rumors about the closing down of LFC a few weeks before it actually happened, these had been dismissed by the union’s leadership as a government strategy to induce fear among the SME, as it was believed the government of Felipe Calderon would not dare to take such action given its background of yielding to unions. As such, the decision to take over the headquarters was received as a big surprise nationwide.

Background

Although the Calderon administration had been seriously considering the elimination of LFC since 2007, the decision had been delayed due to a number of political considerations. But the recent deterioration of public finances further increased pressure to advance such decision. Also there were recent developments within LFC which prompted the takeover of the state-owned company.

On June 16th, the SME held internal elections to renew its leadership. The incumbent, Martin Esparza, competed against Alejandro Muñoz. The election results showed Esparza winning over his opponent by only 352 votes (out of total of list of 55,000 voters). However, the electoral process was plagued with the typical irregularities that characterized Mexican elections in the past (i.e. buying of votes, double voting, etc.).

When the Ministry of Labor refused to grant recognition to Martin Esparza as the Secretary General—a legal prerequisite to operate as leader of the union—on the grounds of a tainted election, Esparza began threatening the government with a series of radical protests. Subsequently, on September 3rd, the leader along with some 4,000 of his followers blocked a highly transited highway for eight hours and threatened to take over offices of the Labor Ministry.

As the deadline for the government to make a final decision regarding Esparza’s case (before going to the tribunals) expired on October 5th, the situation intensified with Esparza threatening to interrupt service should the government not recognize his victory. As it became more evident that the government was not willing to negotiate with Esparza, the latter tried to negotiate his re-appointment directly with the Presidential office, but negotiations failed.

The Broader Context

The arguments to close down Luz y Fuerza were overwhelming. For a long time, the company had been operating in technical bankruptcy with no improvement. The following provides a series of excerpts from the Executive’s decree regarding the circumstances leading to the government’s decision, plus some additional statistics.

· The costs of LFC almost doubled the earnings. From 2003 to 2008, LFC claimed earnings from electrical services at MX$235,738 million; while the company’s costs during the same period ascended to MX$433,290 million. During this period, government transfers to the SOE doubled reaching nearly MX$40,000 million.

· Upon its closing, LFC registered a labor liability of MX$240,000 million going to salaries and pensions, of which only $80,000 million is corresponding to active workers and MX$160,000 million to retirees.

· The results reported by LFC were far inferior compared to other international enterprises providing the same services, including the CFE. One of the most appalling trends is the excessive percentage of power losses, almost three times higher than what is registered by the CFE. In June 2009, for instance, the company registered a loss of energy at 30.6%, while the CFE only registered 10.9%. Almost no similar company in the world registers such a high percentage of losses.

· During 2008, the company lost about 32.5% of the energy it produces and buys to sell to customers. The estimated value of such a loss reached almost MX$25,000 million, that is 52% of total earnings from sales throughout 2008.

· The unitary costs of the infrastructure projects carried out by LFC were 176% higher than those of the CFE.

· The company’s negligence to address increasing demands for service had been a factor negatively affecting business investments. According to President Calderon, the latter resulted in 100,000 jobs not being created, and up to 1.0% less GDP growth in 2008.

On the political side…

Behind the economic deterioration of the company lies the systematic corruption of its union. Once considered to be among the most respected state unions, the SME became a highly paternalistic and corrupt entity. By recruiting an increasing number of affiliates (more than 42,000 by 2009), the SME also became extremely powerful.

Every year the SME threatened to go on a strike if the government did not meet its petitions for salary raises. Notably, in 2008 the SME greatly increased its demands in exchange for its passiveness during the discussion of the energy reform, for which the government had to give a few unprecedented concessions.

The inherent danger of the annual strike was interruption of service in Mexico City and parts of the states of Mexico, Morelos, Hidalgo, Puebla, and Michoacan. For this reason, the federal government had to prepare emergency contingents from the CFE to supply electricity in case of an interruption.

Economic Considerations

Big Compensation: Will it be enough?

In order to expedite the severance process and persuade workers to voluntarily retire (as opposed to filing a massive lawsuit), the government is offering an attractive retirement bonus on top of the established indemnity to which workers are entitled. This equals up to an additional 80%, depending on the rank and seniority of the worker. The catch is that workers who accept such a plan will have until November 14th to deposit their bonuses. Of course, if the bonus is deposited, then the worker will not be able to make any further claims against the government.

Economic Impact

According to preliminary statements, the elimination of Luz y Fuerza will allow the federal government to channel MX$42,000 million from its projected expenditures toward combating poverty via the expansion of the government’s emblematic program, “Oportunidades.”

Of course, this is recognized as a political strategy to legitimize the Executive’s decision. However, because the PRI has objected to a similar idea of increasing transfers to the poor in the Executive’s budgetary package, the party might object to the latter. In any case, this action would strengthen the party’s position against the 2.0% anti-poverty tax.

Finally, it is unclear why the government is counting on all of the MX$42,000 million to be used for the stated purposes, as it would be logical that a percentage should be channeled to pay compensations and pensions at LFC. Another share should go to the CFE which will take over the operations of LFC, for which purpose it will actually rehire at least 10,000 workers.

Reactions

The decision to close down LFC was applauded by the private sector at large, and by citizens in Mexico City and other areas relying on the company’s deficient service.At the political level, however, President Calderon’s decision received mixed reviews and suspicions about ulterior motives.

A great number of leaders from different sectors expressed concern that the Executive did not accompany his decision with a formal negotiation process that included a rehiring program to avoid the massive firing of people, and as such the decision reflected a great deal of authoritarianism from the federal government. Another common ground of criticism was that the decision was political in nature: the consequence of antagonism between the SME and the government of Felipe Calderon. It was noted that Calderon has done nothing against equally vicious state unions such as the SNTE and PEMEX’s.

The PAN came together to support the Executive’s decision, emphasizing the financial and operational aspects behind it. Yet, for political reasons, the party adopted a lower profile on the subject, understandably to avoid any polarization in the political environment.

PRI: Wavering Support

Although it is implicitly understood the PRI supports the Executive’s decision to eliminate Luz y Fuerza, the party has not shown full support with only a few statements from its governors approving the decision.

Nevertheless, this behavior should be analyzed in the context of the party’s close relationship with PEMEX’s trade union. The party might have opted to remain on the sidelines of the conflict as a strategy to prevent other unions from showing support toward the SME. It might also be true that the PRI is waiting for the situation to become clear in order to state its position and the extent to which it will publicly support the Executive’s decision. If necessary, the PRI will try to sell its support dearly to President Calderon, particularly at a time when parties are discussing the distribution of resources in the federal budget.

Political Left

Within the PRD the decision generated different reactions. The pragmatists criticized the authoritarianism of the federal government and the arbitrary decision to eliminate the SME. Notably, Mexico City Mayor Marcelo Ebrard stated that the method chosen by President Calderon would carry a great deal of political problems.

PRD President Jesus Ortega announced he will gather the necessary signatures in Congress (125 of the 500 seats) to promote an objection against the Executive’s decision, as he claims the process was faulted and violates the Constitution. However, neither Ortega, Ebrard, or Alejandro Encinas (the PRD’s leader in the Lower Louse) have questioned the official arguments behind the decision of closing down LFC.

Lopez Obrador: finding a new issue to battle Calderon

On the other side of the spectrum, Lopez Obrador and his loyalists immediately protested the decision claiming that it was an assault against organized labor and the prelude to a privatization process in the electricity sector.

Clearly, AMLO’s rhetoric aims at polarizing the political environment as a means to directly confront the government of Felipe Calderon. Since the closing of Luz y Fuerza, Lopez Obrador has stated that he will maintain a defense of the interests of the SME and he will not permit the elimination of LFC or the privatization of the sector. He has offered to put his movement at the service of the SME, although his strength is at its lowest point since the disputed 2006 Presidential election.

AMLO’s support of the SME is not coincidental. For years now Lopez Obrador has endorsed the SME in hopes the rebellious union would join him as clash group against Felipe Calderon. However, until now the SME has not shown any real interest in AMLO’s movement, particularly because it still expects to reach an agreement with the government. Perhaps if unsuccessful relying on other mediators, the SME will recur to Lopez Obrador, but definitely as a last resource.

Recent Developments

Sabotage

Since the announcement of the Executive’s decision, there have been a series of acts of sabotage, sometimes leaving entire neighborhoods without electricity for more than 15 hours. These have been isolated incidents and seem to be on the decline. The federal government has played down its occurrence to avoid getting caught in war of accusations with the leadership of the SME.

Protests

On October 15th, after days of preparation, the SME launched its first formal protest against the Executive’s decision. The march, which gathered between 150,000 and 200,000 people, was a important display of political power. It gathered the support of other dissenting unions such as STUNAM (National Autonomous University), students from different public universities, and the followers of Lopez Obrador.

Although the protest remained peaceful, the SME leadership demanded the government to rescind its decision, withdraw the federal police from LFC, and restore the workers to their posts. It also announced the SME will start a legal process through the filing of individual and collective injunctions; but it will take the case to labor organizations to claim that their collective contract is still valid.

Government’s Response

Acknowledging the strength of the large protest, the government of Felipe Calderon decided to open a dialogue with the SME through the Ministry of the Interior. It also accepted the mediation of Mexico City’s Mayor Marcelo Ebrard. However, the government stated it would not go back in its decision. Notably, Labor Minister Javier Lozano stated the dialogue with the SME was not tantamount to negotiation.

During the first meeting held on October 16th, SME leader Samuel Esparza focused on the rehiring of the union’s workers. The government indicated that in order to explore any rehiring options, LFC workers would have to proceed with their retirements. It is important to note that the meeting was not attended by the Interior Minister Fernando Gomez Mont, nor by Mexico City’s Mayor Marcelo Ebrard, but their delegates were present. Of course, the latter’s absence diminished the status of the meeting. Finally, despite the failed negotiations, the SME agreed to hold subsequent meetings.

Preliminary considerations

Beyond the economic and policy considerations of closing down the state-owned company, the political logic of taking this course is to put an end to the SME, one of the most vicious state unions. Hence the move is first and foremost a political message. Yet, this doesn’t necessarily mean Calderon will take action against equally harmful state unions.

Of course, the President had to assess a great number of political considerations, particularly the support or resistance that he would inevitably encounter on the way.  One of the most important factors behind Calderon’s determination to proceed was the overwhelming discontent with the service of Luz y Fuerza, particularly within Mexico City. As such, it is foreseeable that if protests increase in the next weeks, the government might benefit from citizens marching to display support for the Executive’s decision.

A lost fight for Lopez Obrador; PRD to pay the price

Since the closing of Luz y Fuerza, Lopez Obrador has stated that he will maintain a defense of the SME. Nevertheless, this is a highly unpopular cause to defend, and it might end up further damaging his image with the electorate, particularly if there any bursts of radicalism and violence that might result from upcoming protests.

In the end, the PRD will be paying the price of radicalism via their association with AMLO. As such, the longer the SME maintains its resistance, the more harm the party will suffer. In this view, the elimination of Luz y Fuerza might even renew internal frictions: with the pragmatic factions wanting to remain on the sidelines and the radicals (i.e. AMLO loyalists) trying to protect the fate of the SME.

Outlook

Since it has become clear for all political actors that the closing down of LFC is definite, the current negotiations will focus on the rehiring process with the SME trying to increase the number of workers to have this privilege. The union is also pushing the Calderon administration to commit to a program so that laid-off workers (potentially estimated at 30,000) are re-absorbed by the federal government.

Political Risk

Since the takeover of LFC headquarters, there have been concerns its closing down could result in radical groups carrying out acts of sabotage indefinitely against the power plants and infrastructure previously controlled by LFC. Recent developments indicate the SME understands that such behavior will only damage the cause of its movement, particularly after the union has advanced it will try to contest the Executive’s decision in Supreme Court. However, the possibility of sabotage or outbreaks of violence should not be entirely dismissed.

Regardless, large protests are likely to continue in the following weeks. The extent to which the upcoming protests could become a threat to national political stability will depend on how much political support the SME obtains in the following weeks.

Another important factor is the number of workers who accept their bonuses—thus implicitly accepting the arrangement proposed by the government. As this report is being written, less than 3,000 workers have voluntarily requested their retirement bonuses. However, this number could experience a dramatic increase in several days, particularly among the youngest workers who simply want to move on and those older workers who were going to retire inevitably.

Finally, political stability will depend on how strongly the PRI and its leaders support the government of Felipe Calderon, hence to shield it from political damage.

Other Considerations

CFE: Starting From Scratch

After securing operations to guarantee electricity supply, the CFE has progressively taken over the rest of the infrastructure at LFC. However, because the CFE will be finding the company in such a poor condition, it will have to start a great deal of things from scratch. Similarly, it will take a long time for service to improve.

Before the takeover, the CFE was the dominant player in the power sector, controlling about two-thirds of installed generating capacity at the national level. The recent decision effectively grants the CFE an absolute monopoly on electricity transmission and distribution nationwide.

The main challenge for the CFE’s operations is to eradicate the corrupt practices that reigned within Luz y Fuerza for decades. Obviously, the rehiring of retired workers who were part of LFC represents a risk and must be handled very carefully.

Final Thoughts

The outcome of this process is extremely relevant as it will determine the ability of the government to deal with other structural problems whose solution has been blocked by vested interests and political considerations. If carried out successfully, the closing down of LFC could give way to a renewed cycle of structural reforms, potentially bolstering the political authority and credibility of President Calderon as a reformer, but also establishing a new balance between the government and state unions.

Regardless, the route taken by the government will result in pressure from the private sector and other political actors to do the same with more state-owned enterprises which are equally inefficient as LFC, and which have equally vicious unions—notably PEMEX.

In the end, if this process is not accompanied by similar decisions to reduce the influence of state unions in other strategic areas of the economy, such as education and energy, then the elimination of LFC will represent an arbitrary decision in the Calderon administration.

Looking forward, the government’s main challenge is to diminish the political discontent resulting from the elimination of LFC (i.e. increased marches, roads blocks, demonstrations at government buildings). Yet these are likely to remain for a long time, just as it happened after the passing of the Pension Law.