Publish in Perspectives - Thursday, March 28, 2019
Guillermo García Alcocer, the head of Mexican energy regulator CRE. (Photo: CRE)
Experts fear Mexico’s energy regulators will lose clout under AMLO.
BY ENERGY ADVISOR
Mexican President Andrés Manuel López Obrador last month accused Guillermo García Alcocer, the head of Mexican energy regulator CRE, of conflicts of interest and called on him to step down amid an investigation into the regulator’s alleged involvement in a money laundering case. The allegations against García Alcocer, who denies wrongdoing, come at a tumultuous time for the regulator, after four commissioners left in less than two months and López Obrador slashed its budget for this year by 30 percent. What is the probe about? What can be expected of the CRE under López Obrador’s administration, and how has the cut in funding affected the regulator’s functions? Is the agitation between the government and the CRE rattling investors?
Christian Wagner, political analyst at global risk analytics firm Verisk Maplecroft: The probe is looking into García Alcocer because of his brother-in-law’s activities as an executive and stakeholder in several electricity and gas companies, and allegations that the brother-in-law was involved in tax evasion and money laundering. García Alcocer disclosed the relationship in his conflict of interest declaration before he took up his post in 2016 and recused himself from any decisions involving those companies. The government’s accusations came after García Alcocer criticized AMLO’s proposed candidates for CRE commissioners, given their lack of sector expertise, their political party connections and their weak interviews before the Senate, in which they lacked knowledge about the CRE’s activities. Overall, we expect the regulators to be gradually sidelined from major decisions and to gradually lose independence as AMLO replaces commissioners. After the loss of the four commissioners, the CRE has lacked the quorum needed to hold sessions and approve permits. The budget cuts have also obliged the CRE to cut 54 senior positions.
Moving forward, several appointments will give AMLO a majority on the CRE board, as well as greater influence on the board of the National Hydrocarbons Commission (CNH), thereby increasing the risk of politicized decision-making. Given Mexico’s notorious corruption challenges, the professionalism and transparency of the CNH-led auction rounds to assign upstream blocks received international acclaim. The independent regulators have been a key factor in the success of Mexico’s liberalizing energy reform to date. AMLO, however, considers them superfluous—believing that the government should act as overseer. He has also criticized them for having a ‘privatization’ mentality. Even before AMLO took office, Morena deputies proposed that both regulators be absorbed into the energy ministry via legislative reform; it was shelved after significant criticism from the private sector. An absence of independent and technically competent regulators would be a key concern for international energy companies operating or interested in the Mexican market. For them, the lack of independent regulators would have to be factored into their operating risk calculations and almost certainly would include higher outlays on measures to avoid corruption and potential reputational damage through any association, even indirect, with public-sector corruption.
Fluvio Ruíz Alarcón, Mexican oil sector analyst: The president’s remarks against the head of the CRE, are a reflection of the new administration’s belief that the regulator has had an overly aggressive attitude against Pemex since the promulgation of the secondary legislation of the energy reform. With some nuances, I myself have shared this questioning, especially since the CRE has issued resolutions that contradict one of the principles established by Scott Hempling, considered one of the great regulation theorists, who said the establishment of free-market conditions at all costs cannot be viewed as regulatory bodies’ only function. The stubbornness of the CRE in advancing and loosening the (still non-existent) free gasoline market is an example of this. However, these CRE positions were in line with—as the law establishes—the previous administration’s energy policy.
Given the turn in direction of such a policy, what the new administration requires is a regulatory body that is technically, legally and politically strong. Otherwise, given the scope of its responsibility and without legal changes to reverse those established by the energy reform, the CRE could end up being a simple administrative shell, unable to be an effective form of support for the energy policy of the new government—for the benefit of private interests and the detriment of collective interest.
David Shields, independent energy consultant based in Mexico City: Mexico’s energy industry is going through a delicate period in which politics and nationalist ideology are being given priority over business and competitive energy markets. This is clear in the day-to-day discourse of President Andrés Manuel López Obrador, who has a discouraging message for investors almost every time he speaks on the subject. He never misses and opportunity to berate ‘neoliberalism’ and recent open-market energy reforms, and he has put oil bidding rounds and electricity auctions on hold. Tenders for key projects, such as major transmission lines, have been canceled at the same time as he tries to halt deterioration at the state-run energy companies. The president’s attempts to undermine and control the energy regulators are part of this picture. His harassment of García Alcocer is a personal vendetta, because García Alcocer refused to resign from his position and has criticized new energy policy and, in particular, the candidates being proposed as future commissioners at the CRE, who lack experience in electricity and in complex energy markets. Accusations against García Alcocer are mostly aimed at family members and are very minor. This has caused outrage as no action has been taken against people suspected of major corruption at Pemex in recent years. AMLO’s economic advisors publicly assure that private investment in energy remains welcome and that bidding rounds and auctions will resume soon, once results and procedures have been reviewed. But it is the president himself who is running this show, and he has no reassuring words at all.
Gonzalo Monroy, managing director of GMEC in Mexico City: President Andrés Manuel López Obrador’s decision to criticize and ostracize CRE President Guillermo García Alcocer is an escalation of the overall capture of all regulators and entities of the government to consolidate political power.
A budget cut for the CRE in 2019, which led to the dismissal of more than 250 temporary and career employees at the regulator, preceded AMLO’s decision. With the resignation of three commissioners, and another whose term expired, the CRE has become nullified, as it does not have a quorum to proceed. As such, permits have become an issue for existing and potential players in the market.
One of the most worrying signals about the decision to diminish the role of the CRE is that the whole notion of a fair, level playing field for all participants in the energy sector is at risk. The narrative that AMLO and his officials push is not to encourage market participation but rather to strengthen the importance, role and participation of stateowned entities, be they CFE or Pemex. It is fair to say that AMLO sees the regulator not as a guardian of the public interest, but rather as an obstacle to the state-owned companies’ market preeminence.
Dwight Dyer, independent consultant on political, regulatory and security risk for Mexico’s energy sector: The confrontation between president López Obrador and CRE President Guillermo García Alcocer actualized to near certainty a serious political risk for private sector companies in the Mexican energy industry. The consequences of this episode branch out into the institutional, legal and business arenas. García Alcocer’s statement regarding the inadequate balance in substantive specialization of López Obrador’s candidates for CRE commissioners—heavy on hydrocarbons, lacking on electricity—was pertinent on technical grounds and politically innocuous. The vehemence with which the administration launched administrative and tax-related investigations into García Alcocer’s purported conflict of interest revealed the president’s instinctive intolerance of regulatory agencies’ institutional autonomy. When the Senate confirms López Obrador’s evidently inapt candidates, CRE’s executive board will suffer from poor technical expertise and acute political bias, most likely leading to contentious, divided decisions. One can only hope that García Alcocer can convince new commissioners to guarantee regulatory support for competitive energy markets. Should the new commissioners band together, CRE’s decisions may end running counter to current legislation.
Private-sector companies would then be able to challenge them in the courts. The opportunities for building a world-class energy industry are still there, but progress will require patience and true grit. Energy companies are no strangers to political risk, yet Mexico had made strides to mitigate it. Alas, no longer.