Energy reform in Mexico: Imperfect unbundling in the electricity sector

Mexico is in the midst of enacting new energy market reform. After one year of presidential proposals, 21 laws were enacted in August, 2014. The analysis shows inconsistencies and lacunae in defining an open electricity market. According to the proposed reform, incumbent Comisión Federal de Electricidad (CFE) will keep transmission and distribution vertically integrated with newly created subsidiaries subject to third-party subcontracting, while private generation participants will compete in a wholesale market operated by Centro Nacional de Control de Energía (CENACE). Following an institutional economics approach and a framework to account for transition and coordination issues, the problem of misaligned incentives is analyzed along two governance dimensions: regulatory failure and market foreclosure. The research predicts negative effects of energy reform on grid investments and government coordination in Mexico.