Cablegate: Union and National Electic Company Reach Ageement

VZCZCXRO9817
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2859/01 2671928
ZNR UUUUU ZZH
R 231928Z SEP 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 3350
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
INFO RUEHZA/ARA CENTRAL AMERICAN COLLECTIVE
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RHMFISS/DEPT OF HOMELAND SECURITY WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 002859

SIPDIS

DEPT FOR DRL/AWH AND ILSCR, WHA/MEX, USDOL FOR ILAB

E.O. 12958: N/A
TAGS: ELAB ENRG PGOV SOCI ECON PINR MX
SUBJECT: UNION AND NATIONAL ELECTIC COMPANY REACH AGEEMENT
ON PENSION REFORM

1. Summary: Mexico,s state owned Federal Electricity
Commission (CFE) and the Sole Union of the Electrical Workers
of the Mexican Republic (SUTERM) recently signed a
significant new agreement on pension reform. The agreement
will appreciably reduce the CFE,s mid to long term pension
costs by raising employee contributions and increasing the
age of retirement. Mexican President Calderon praised the
reform as an &historic8 agreement and it has been hailed in
the press as example of responsible unionism. However, it
has been condemned by dissidents within the SUTERM and by the
country,s other union electrical workers; the Mexican
Electrical Workers Union (SME). This reform will undoubtedly
raise individual outlays for some union members but the
SUTERM believes the agreement was necessary in order to
responsibly control the upward spiral in pension cost and
improve the CFE,s long-term financial stability. Mexico is
currently in the process of attempting to reform its energy
sector with the main focus of this effort centered on the
petroleum industry. For its part the SUTERM would prefer
that the electricity industry not be a part of the national
energy debate. This pension reform agreement, which the
SUTERM claims was initiated by the union itself, could be
viewed as attempt to show that it can function effectively
without the need for privatization or some of the other
measures being contemplated to reform the petroleum industry.
End Summary.

THE NATIONAL ELECTRIC COMPANY AND ITS UNION
-------------------------------------------

2. Over 97 percent of all electricity in Mexico is generated
by the state owned Federal Electricity Commission (CFE).
This electricity is both produced and distributed by an
estimated 77,000 employees all of whom are represented by the
larger of the country,s two electric energy unions, the Sole
Union of the Electrical Workers of the Mexican Republic
(SUTERM). SUTERM workers operate in 27 of the country,s 31
states. The CFE and the SUTERM have traditionally had a
cooperative management/labor relationship and have worked
closely together on issues related to productivity and
modernization. Nevertheless, it should be noted that the
SUTERM is formally linked to Mexico,s former ruling party,
the PRI (Institutional Revolutionary Party). The PRI is
Mexico,s second largest opposition party. The National
Action Party (PAN) is now the party in power in Mexico and
has been since 2000. The PAN is now into its second
consecutive six-year presidential administration.

3. To put the SUTERM and CFE in context, it is helpful to
know that Mexico,s remaining states are serviced by the
estimated 40,000 members the country,s other electric energy
union, the Mexican Electrical Workers Union (SME). SME
members work for the government-owned Central Light and Power
Company (LyFC), which distributes CFE generated electricity
to some 24 million people in the Mexico City Federal District
area and the larger part of four neighboring states. The SME
has informal, but nevertheless widely acknowledged, ties to
Mexico,s current main opposition political party, the Party
of the Democratic Revolution (PRD).

THE NEED FOR PENSION REFORM
---------------------------

4. Until August 19 of this year the estimated 77,000 SUTERM
members engaged by the CFE were all covered by a pension plan
that had been fairly standard for workers employed by one of
Mexico,s state-owned enterprises. These pension/retirement
plans allowed for very generous payment benefits, required
little (if anything) in the way of worker co-payment
contributions and often allowed for retirement after a
relatively small number of years of service when compared to
similar jobs in the private sector. Upon retirement SUTERM
workers would be paid 100 percent of their base salary on top
of whatever pension benefits they might be eligible for from
Mexico,s national social security system (IMSS). As a
specific example of the benefits granted to SUTERM workers,
prior to August 19 they were only required to contribute
1.125 percent of their base salary for their own retirement.

MEXICO 00002859 002 OF 003

5. The generous benefits paid to SUTERM members were high
but still currently manageable. The problem for the CFE and,
as a consequence, for the SUTERM as well, was that a number
of projections indicated that by the year 2015
pension/retirement costs would start to become unmanageable
and by 2030 these costs would represent a monumental
financial burden for the Commission. According to one
national newspaper the present retirement costs being paid by
the CFE represent an additional 110 percent over and above
the salary costs for current workers. One estimate
calculated that in the absence of any changes retirement
benefits paid out by the CFE would exceed 251 percent of
salary costs for current workers by the year 2030.

SUTERM TO THE RESCUE
--------------------

6. The above-mentioned cost projections were well known to
the GOM, the CFE and the SUTERM and none of them disputed the
validity of these figures. Consequently, labor, management
and the broader GOM all agreed that the CFE needed to take
corrective action or face financially destabilizing
retirement costs in the relatively near term future. Given
this situation, Victor Fuentes, the national Secretary
General of the SUTERM, told Mission Mexico,s Labor
Counselor, that the union decided it was in its own best
interest be proactive on the issue of pension reform.
Consequently said Fuentes, the SUTERM then took the
initiative and began negotiating with the CFE on possible
reforms of the company,s pension system. During the course
of negotiations that lasted just over a year the SUTERM and
the CFE slowly worked out the terms of what would ultimately
be a significant pension reform agreement.

7. The terms of the agreement between the SUTERM and the CFE
contain a number of important new elements that distinguish
it from the system it will now replace. One of the key items
that enabled the SUTERM to sell the agreement to the union
membership was a condition that the new retirement system
would only apply to workers hired after August 19, 2008 and
not to current employees or retirees. The CFE hires
approximately 1000 - 1500 new employees per year. These new
hires will be enrolled in a pension system that sets up
individual retirement accounts that will be administered by
an independent body. The retirement age for new hires will
be increased by five years over that of currently employed
workers. New hires will have to contribute 5 percent of
their base salary toward their retirement (as compared to the
1.125 for current employees mentioned above); the CFE will
contribute 7.5 percent toward each workers, retirement.
Over the course of the next ten years the costs of these
contributions for the workers and CFE will increase to 6.5
percent and 10 percent respectively. Both current employees
and new hires will be able to receive 100 percent of whatever
pension benefits they might be eligible for from Mexico,s
national social security system (IMSS) of on top of their CFE
provided retirement benefits.

PRAISE AND CRITICISM FOR THE NEW SYSTEM
---------------------------------------

8. Mexican President Felipe Calderon hailed the new pension
reform system negotiated between the SUTERM and the CFE as a
historic agreement. The agreement was broadly praised in the
Mexican press which stated that this was the first time that
a public service union willingly accepted an increase in the
retirement age of its members; as opposed to having such an
increase imposed upon them. The most common descriptions of
the agreement portrayed it as a remarkable example of
responsible unionism. The SUTERM was lauded almost
everywhere and by almost everyone as a union capable of
fairly balancing the interests of its members alongside those
of the general Mexican public. This widespread praise for
the SUTERM notwithstanding, not everyone was pleased with the
new pension reform agreement.

9. A spokesman for Mexico,s other electrical workers union,

MEXICO 00002859 003 OF 003

the SME, described the agreement as a dangerous step
backwards in workers retirement rights. The SME spokesman
was extremely critical of the fact that new workers would
have to pay more for their retirement benefits and he sharply
criticized the idea of an independent body administering the
individual retirement accounts of newly hired employees.
According to the SME the phrase independent body was code for
some form of private sector entity that would charge the
workers for its services and seek to maximize its profits at
the expense of the newly hired employees.
Because of the SME,s informal links with the PRD it would
probably be predisposed to uncritically accept any reform
that had been praised by the PAN government of President
Calderon.

10. The SME,s criticisms were echoed and fully shared by a
dissident labor group among SUTERM members which calls itself
the National Electrical Workers Coordination (CNE). The CNE
views itself as a part of the SUTERM and for the most part
works to gain control of the union from within by winning
internal unions elections. Its success so far has been
limited. Nevertheless, the CNE is clearly the place where
the more left leaning, PRD inclined; members of the SUTERM go
to voice grievances without having to actually leave the
union.

COMMENT
-------

11. Despite the criticisms of the SME and the dissidents
within the SUTERM the general consensus in Mexico is that the
reform agreement was a good thing. Kudos aside, the SUTERM
freely acknowledges that its decision to initiate reform
discussion (assuming that that is in fact what happened) was
mostly a case of acting in one,s own self interest. Mexico
is currently in the process of attempting to reform its
energy sector and thus far the reform discussion has centered
on the national petroleum company, Pemex. Extensive public
discussion has taken place involving political parties, the
press, various and diverse elements of Mexican civil society
and little if any of the participants in this national
conversation have touched on the topic of Mexico,s
electricity industry.

12. For its part the SUTERM would prefer that the energy
debate remain focused on the Mexico,s petroleum. Although
there is no way to know for sure what direction the energy
reform debate will take a real concern for many segments of
Mexican society is that the question of some form of
privatization will eventually be enacted. The SUTERM
believes that Mexico,s electricity sector can and is
reforming itself without, what it sees as, the threat of
privatization. Viewed in that light, its efforts to prompt
reform of the CFE,s pension system was every bit as much a
political act as it was act to improve the national electric
company,s long term financial stability.
Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
GARZA

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