The Mexican government over the weekend disbanded Luz y Fuerza del Centro, a state-owned power utility that distributes 30% the country’s power supply, and ordered the federal electricity commission to seize the utility’s operations because it was hemorrhaging money and the ensuing budget gap could threaten service to some 25 million customers.

The closure of Luz y Fuerza del Centro was “a strictly legal measure” that complied with the federal law on parastatal organizations, Mexico’s Interior Secretary Fernando Gómez Mont told reporters at a press conference on Tuesday, “Article 16 of the Federal Law on Parastate Organizations permits the closure of decentralized firms and organisms when their operation is no longer required for the national economy or public interest,” he said.

The minister said that the government would have to transfer 300 billion pesos (US$22.5 billion) to keep the utility afloat through 2012. According to Bloomberg, losses from inefficiencies—Luz y Fuerza del Centro had reported a power loss of 30.6% in June 2009—had cost the company billions between 2003 and 2008.

Gomez Mont said that Comision Federal de Electricidad (CFE), Mexico’s largest state-owned power company, will now provide service to Mexico City and parts of four central states. CFE has a generation capacity of around 50,000 MW and a network comprising 49,000 kilometers of transmission and distribution lines. It supplies electricity to more than 80 million people.

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.

The minister called the press conference after the Mexican Electricians Union, one of the most powerful in the country, had “declared war” in response to the government’s announced closure of the utility, which employs 44,504 people.

Media outlets reported that the utility’s closure is part of the Mexican government’s efforts to improve the nation’s debt ratings. It has so far increased taxes, cut spending, and closed three ministries, Bloomberg reported.

Sources: Isria.com, Bloomberg, The Los Angeles Times