Oct. 12 (Bloomberg) -- Mexico’s government will start to liquidate Luz y Fuerza del Centro this week after President Felipe Calderon said the finances at the nation’s second-largest power supplier were “unsustainable” amid mounting losses.

Calderon said costs “were double the revenue” that the government-owned company generated. “It wasn’t possible to continue this way,” Calderon said last night in a live television address.

The government issued a decree yesterday ordering the liquidation of Luz y Fuerza, according to a notice published in the official gazette. Local media outlets reported that federal police officers seized the power company’s headquarters and other facilities on Oct. 10.

Luz y Fuerza, which has 44,000 workers, provides power to a metropolitan area of 20 million people and several states surrounding Mexico City, transmitting 30 percent of the entire country’s electrical output.

Energy Minister Georgina Kessel Martinez said in a television interview with Milenio TV late last night that taking control of the power distributor was “indispensable.” The company lost an annual 15 billion pesos ($1.1 billion) worth of energy through theft, technical issues and corruption, she said.

Under the government decree, the secretary of energy will have until Oct. 14 to publish the legal conditions to start liquidating Luz y Fuerza.

Transfer of Assets

Comision Federal de Electricidad, Mexico’s largest state power company, known as CFE, will take over operations of Luz y Fuerza, Interior Minister Fernando Gomez Mont said at a press conference yesterday morning announcing the decision.

Luz y Fuerza assets may be transferred to CFE or a new state company may be created, Mexican Finance Minister Agustin Carstens said today in an television interview with Televisa.

Alejandro Encinas, a congressman from the opposition Party of the Democratic Revolution, said he and other legislators would challenge the decree by next week, according to an e- mailed statement.

Between 2003 and 2008, Luz y Fuerza generated sales of 235.7 billion pesos, less than the 443.2 billion pesos in costs, according to Calderon’s decree. By June of 2009, the company’s loss equaled 30.6 percent of the power that it distributed.

Loss

“Almost no other power company in the world shows a percentage of power loss registered by Luz y Fuerza,” the decree said.

The federal government will absorb the pension liabilities from Luz y Fuerza, Labor Minister Javier Lozano said at the press conference yesterday. The government anticipates it will rehire “the maximum number” of Luz y Fuerza workers, Calderon said. The government will assume the company’s pension liabilities and offer fired workers as many as 33 months of pay.

Severance costs for the federal government may total 20 billion pesos, Finance Minister Agustin Carstens said at the press conference.

CFE and Luz y Fuerza are the only companies allowed to sell and distribute power in Mexico. Private companies are allowed to generate power and sell it to the state-owned distributors or export the electricity.

Calderon is seeking to bolster Mexico’s fiscal position amid negative outlooks on sovereign debt from Standard & Poor’s and Fitch Ratings.

The president is increasing taxes and closing three ministries, while also cutting some government spending. On Sept. 8, Calderon sent Congress tax-law changes that would generate 176 billion pesos in additional revenue next year and spending cuts of 218 billion pesos.

To contact the reporter on this story: Carlos M. Rodriguez in Mexico City at carlosmr@bloomberg.net; Emily Schmall in Mexico City at eschmall@bloomberg.net.

Last Updated: October 12, 2009 12:35 EDT