Mexico takes aim at capital's bloated power company

* Subsidies to capital's utility equal army budget

* Frequent outages, high costs bedevil industry

* Militant union opposed to change

By Robert Campbell

MEXICO CITY, Sept 24 (Reuters) - Mexican President Felipe Calderon is calling for an overhaul of the creaking state-owned power company that serves the capital region, a move welcomed by industry but which could trigger labor strife.

The president, a former energy minister, has singled out Central Light and Power (LFC) several times in recent weeks as a prime example of what is wrong in Mexico's public sector.

"We have to solve the problem of LFC," Calderon said in a radio interview earlier this month. "Time is running out and we have to make deep and substantial changes in the way the company is run, including in the management."

The Mexican government has not laid out concrete plans to restructure LFC, but Calderon himself has said all state companies need to improve their financial performance.

The head of state oil company Pemex [PEMX.UL] was fired earlier in September amid frustration with the company's poor performance.

Federally run LFC is the monopoly distributor in the capital and parts of four states around Mexico City.

The company's operating losses represent a growing fiscal burden, especially as Calderon's government pushes for an austere budget that will raise energy costs and taxes next year to offset lower oil production.

The government budgeted 42 billion pesos ($3.1 billion) to cover LFC's losses in 2009, nearly as much as was allocated to the army, which is locked in a brutal war with Mexico's drug cartels.

LFC's cost base is swelled by a huge work force, a generous retirement scheme and rampant electricity losses due to theft and technical problems. And despite regulated electricity tariffs, Mexican businesses pay some of the highest power rates in Latin America, according to the World Bank.

MILITANT UNION

Energy ministry officials grumble privately that LFC's union has reneged on its commitments under a March 2008 accord to boost productivity and have identified it as the main stumbling block to improving the company's performance.

The Mexican Electrical Workers Union has long resisted efforts to boost efficiency and defended employment levels.

Union members snarled traffic in Mexico City earlier this month when they blocked part of a major highway in a protest. Union leaders warned of more protests if the government attempts job cuts at LFC.

However, LFC's customers would welcome anything that improved the company's poor service. Clients suffer from frequent power interruptions and changes in voltage levels. Many customers' accounts are still kept in paper files and delays in resolving billing problems are frequent.

"It is really intolerable that industry is held hostage by this company that is not competitive and which does not want to become competitive," said Alfredo Green, the head of the energy supply committee at Mexico's manufacturers association.

Power fluctuations can damage industrial plants and lead to lost production, forcing companies to invest in special equipment to protect factories from power surges and blackouts.

Even Mexico's military has been affected. The army plans to spend 7.7 million pesos ($575,000) to protect computers at one of its bases in the capital region from power failures, Reforma newspaper reported on Tuesday. ($1 = 13.38 pesos) (Editing by Lisa Shumaker)