ENERGY ISSUES IN THE SAN DIEGO-TIJUANA REGION

 

Executive Summary

 

One of the San Diego—Tijuana region’s indispensable lifebloods is energy. It makes homes and businesses comfortable, moves people and goods, operates the machinery of industry and powers the infrastructure that underpins the region’s communities. This pervasive role makes energy a key issue in the binational region’s future. New regulatory regimes in both the Mexico and California should offer new opportunities for the region to coordinate strategies for meeting the future energy needs of its citizens. By combining their purchasing power and rationalizing systems for sourcing energy, regardless of which side of the border it is derived from, the San Diego-Tijuana region should be able to secure the energy required for its development well into the next century.

This executive summary reviews the major findings of a research paper prepared for San Diego Dialogue as a complement to its Forum Fronterizo program. The paper reports on forecasts of future energy demand, analyzes the energy sectors in San Diego and Baja California, and discusses collaborative opportunities for meeting the future energy needs of the region.

San Diego-Tijuana, and, for that matter, the greater California/Baja California border region, lack indigenous or nearby energy resources. Baja California is particularly isolated in terms of energy, because of the isolation of the Baja California power grid from the rest of Mexico. Partially as a result of this isolation and the lack of indigenous supply, both sides of the border experience relatively high costs for electricity and "export" substantial amounts of capital each year to meet requirements for energy.

Recent Accomplishments

Over the last decade San Diego—Tijuana has made substantial progress in developing cooperative strategies to meet the energy needs of the region and to mitigate some of the adverse consequences of energy consumption. For example:

Pending Challenges

Despite this progress, however, substantial challenges remain if the region is to meet its energy needs in the next century. The most recent projections suggest that energy use in the cross-border region will grow substantially in the coming decades, particularly in Baja California. According to a study by the Autonomous University of Baja California (UABC), electricity sales in Baja California are expected to increase by an average of 4.6% per year through 2004. This is more than double what is expected in San Diego County. By 2004, the state’s projected energy demand will outstrip available supply, even if all planned facilities are constructed and brought into operation, by over 185 megawatts. Unfortunately, these shortfalls are being predicted at a time when the Mexican government has limited resources to invest in new power generation capacity. Countrywide, Mexico will require approximately $25 billion worth of investment through 2006 to keep pace with projected demand.

New Regulatory Regimes

Multiple levels of regulation impact the production, transmission and use of energy in the cross-border region. At a bilateral level, NAFTA does not allow for direct private investment in energy "extraction" or in the direct sale of energy products to consumers in Mexico. However it does provide new opportunities for private energy companies in the area of electricity generation. Under NAFTA, foreign companies can acquire, establish and operate electric generation facilities in Mexico. The opening of the Mexican government procurement market for energy will create opportunities for foreign companies to compete with Mexican entities for supply and service contracts with the government.

The opportunities opened through NAFTA have been deepened in recent years through a related set of energy reforms initiated by the Mexican federal government. Several new laws have recently been introduced to open up the Mexican energy sector to private investment. Reforms to the Electrical Power Law and related legislation open the electric sector to private investment in independent power production, self-supply co-generation and small-scale production. The pace of these proposed reforms accelerated in 1999, although the final form of these changes will likely not take shape until after the next Mexican presidential election.

Parallel to these efforts has been the restructuring of California’s electric utility industry. Through these reforms, a significant new element of competition has been introduced into the electric utility sector in the state. The reforms have effectively separated, or "unbundled," the generation of electricity from its transmission and distribution. This reorganization of the electric sector in California will have an important impact on San Diego and could result in increased trade in energy services between San Diego and Baja California. A much more detailed overview of the structure and regulatory environment of the region’s energy sector is provided in the full paper, however the critical point is that the combined effects of these changes means the region must now relate intelligently to energy markets, rather than simply employing production systems.

Opportunities for Collaboration

The growing demand for energy in the region, when coupled with new regulatory regimes developing on both sides of the border, offer a rationale for developing increased cooperation in the energy field between California and Baja California. In particular, by opening power generation to competition and ensuring equal access to the transmission system, the way is open for greater integration of Baja California’s power sector into California’s energy markets.

The following are some of the possibilities opened by these reform efforts:

Recommended Strategies

Meeting the future energy needs of the region will require closer collaboration between the privatized energy market players and local and state agencies still responsible for regulating the energy sector in California and Mexico. Complicating the development of new methods of planning for future energy-related infrastructure is the lack of formal cross-border energy planning, coordination and cooperation. The impediments to creating a healthy energy supply system in the binational region are not mainly technical or financial, but grow out of the absence of forecasting, planning and coordination at the binational and regional level.

Listed below are some suggestions for securing the energy needed by the San Diego-Tijuana region.

A secure supply of reasonably priced energy with a minimum of environmental impact will be needed for the San Diego-Tijuana region if it is to continue to prosper and remain competitive in the global economy. Given the high population growth expected both in San Diego and Tijuana over the next 10 to 20 years, meeting increased demand for energy services will prove to be one of the important challenges facing the region.

In the open market for energy services that is emerging on both sides of the border, final price to consumers will be the most important element in deciding where to purchase energy and the location of the energy source will become less relevant than it is today. Over time, the international border will likely become less of a barrier to energy flows, a consequence of the continued integration of the binational region.