Mexico is moving to create a competitive power market open to private investment in almost all areas. The Mexican president, Enrique Peña Nieto, sent a draft package of nine new laws and proposed amendments to several existing laws to Congress in late April. The legislative package has been scheduled for debate and votes in Congress beginning in mid-June. Amendments to the package are already being discussed among the political parties. The new laws implement changes to the Mexican constitution that were made in December 2013 to open the power and oil and gas sectors in Mexico to private participation. (For earlier coverage of the constitutional reforms, see “Mexico Opens its Energy Markets” in the February 2014 NewsWire starting at page 57.) A Competitive Power Market The package of nine new laws includes a draft new electric industry law (Ley de la Industria Eléctrica) that would allow the private sector to participate freely in the generation and sale of electricity, while leaving the electricity grid under the operational control of a state-owned agency. The new electric industry law will create a new wholesale electricity market (Mercado Eléctrico Mayorista) to be operated by the Centro Nacional de Control de Energía (CENACE), currently a unit within the Comisión Federal de Electricidad (CFE). CENACE will also become the independent system operator for the entire grid. The Ministry of Energy and the Comisión Reguladora de Energía (CRE) will have regulatory and supervisory authority over the wholesale power market. The Ministry of Energy will be responsible for issuing the market rules, and the CRE will be responsible for issuing permits to participate in the wholesale market as a buyer or seller of electricity. The CRE will also be responsible for setting tariffs for transmission, distribution and basic retail services, setting general conditions for market participants, issuing forms of interconnection contracts, and managing clean energy certificates and emissions certificates. It will also issue a form of contract that CENACE, the independent grid operator, will enter into with wholesale market participants. Operational control over the national grid (Sistema Eléctrico Nacional) and the transmission and distribution of electricity are considered strategic areas that will remain in the hands of the Mexican government through a state entity. However, the private sector will be able to participate in transmission and distribution of electricity through agreements and joint ventures with state-owned agencies. CFE will become a fully competitive entity as a “productive state enterprise” under the new law and will be permitted to participate, through separate subsidiaries, in the different market activities, but it will no longer be responsible for the control and operation of the national grid. CFE will continue to be the provider of basic retail services to residential users and small and medium-sized commercial users under regulated tariffs. None of CFE’s assets will be privatized. Wholesale Market Participants The electric industry law would prohibit a single company from participating in more than one of the following activities: generation, transmission, distribution, commercialization and supply of electricity or basic resources for the electric industry. However, a common parent can participate in all the activities as long as it does each through a separate subsidiary. “Commercialization” of electricity refers to buying and selling electricity and clean energy and emissions certificates. The law divides wholesale market participants into a number of categories: generators (Generadores), retail service providers (Suministradores), traders (Comercializadores), smaller customers under five megawatts called “basic service users” (Usuarios Básicos), larger customers over five megawatts called “qualified users” (Usuarios Calificados), transmission providers (Transportistas) and distributors (Distribuidores). Generators, retail service providers and qualified users may become direct participants in the wholesale market by entering into the relevant agreement with CENACE and then providing a performance bond to CENACE. Each such party will have to inform CENACE of each power plant or load point it intends to represent or use to tap into the grid.The CRE will establish rules for retail service providers and qualified users. The CFE will remain the principal electric utility in Mexico and will continue to be the exclusive service provider to basic service users. Generators The electric industry law puts generators into one of two categories: those authorized to generate electricity from power plants and agents for or resellers of electricity from such power plants. With the exception of exempt generators, all power plants will require permits from the CRE to be able to generate and sell power into the market. Exempt generators own power plants that are used exclusively for private use during emergencies or service interruptions and are only allowed to sell energy through retail service providers. Generators are not permitted to provide retail, transmission or distribution services directly. Generators will be permitted to sell power directly into the wholesale market through CENACE, to a qualified user or both. They will also be allowed to sell power for self-consumption, meaning from an inside-the-fence project, or for export, in each case without interconnecting to the national grid or the general distribution networks. Each generator participating in the wholesale electricity market will be able to set its price for electricity, but will have to report its cost of operations to CENACE on a daily basis. CENACE will maintain a data base of the costs of operations for all generators and will be able to determine whether prices are being offered competitively. End Users End users with an aggregate consumption above five megawatts, as well as those who prior to the enactment of the electric industry law operated under the self-supply (autoabastecimiento), cogeneration and energy import schemes, are classified as “qualified users” and are permitted to purchase energy directly from CENACE or from a generator. The five-megawatt threshold is not a set threshold, but rather it is one that the Ministry of Energy will be able to modify from Mexico continued from page 33 Mexican Wholesale Electricity Market Transmission Distribution Operational Control Transmission Rights Energy; Capacity; Related Services CFE-Transmission CFE-Distribution CENACE CENACE Generator Exempt Generator Power Hedge Agreements Trader Regulated Tarif fs Wholesale Electricity Markets CENACE Basic Service Retail Service Provider Qualified Retail Service Provider Basic Service User Non-Registered Qualified User Registered Qualified Use time to time. It is expected that this threshold will be reduced over time. End users with an aggregate consumption below five megawatts may only buy electricity from retail service providers. End users may register with CENACE as qualified users for certain load points, while remaining basic service users for other load points. Commercialization The electric industry law uses the term comercialización to refer to a wide range of things. They include selling electricity, clean energy certificates and emission reduction certificates, entering into power hedge agreements and buying transmission and distribution services. Retail service providers will sign contracts to buy electricity from generators or from the grid and resell it to customers in the regions where the retailers operate. The law provides for three types of retail service providers. All retail service providers will require a permit from the CRE and must be registered market participants. Basic service providers will only be permitted to sell power to basic service users and will be required to enter into power hedge agreements. For the time being, it is expected that only CFE, through a retail subsidiary, will provide these services. Qualified service providers will be able to sell electricity to larger customers called qualified users and act for exempt generators in placing their electricity in the wholesale market. Emergency retail service providers may only provide emergency power services to qualified users, at the maximum regulated price and for a limited time period, to maintain continuity in the supply of electricity. They also may represent exempt generators in the wholesale market. Qualified users that are registered market participants will be permitted to do any commercialization activity other than sell electricity to third parties. Power traders will be able to operate in the market. Transmission and Distribution Although the distribution and transmission of electricity will remain under the control of the state, the government will be authorized, through productive state enterprises (mainly, CFE subsidiaries), to enter into agreements or joint ventures with private parties to finance, install, maintain, manage, operate and expand the transmission and distribution network. The CFE is expected to launch public nternational tenders for the construction and operation of transmission lines, with CFE acting as supervisor and remaining the middleman for dealing with CENACE, registered market participants and end users. The electric industry law imposes on private companies participating in these services joint liability as service providers. If not clarified or modified, this could become a major impediment to private sector participation. The tariffs for these services, as well as the terms of service, will be regulated by the CRE. The law establishes a local content component for contracts and joint ventures to provide transmission and distribution services, except where an international treaty or commercial agreements provide otherwise. The local content requirement will be set by the Ministry of Energy, but it is not intended to be a barrier to private investment. The law also bars any transmission and distribution infrastructure from being granted as collateral security. The interconnection of power plants and load points with the grid will be regulated by CENACE. CENACE may direct transmission providers and distributors to interconnect to power plants requesting interconnection under terms that are not unduly discriminatory. The law provides for an open access obligation, subject to technical and security requirements. Transmission providers and distributors will be obligated to enter into interconnection agreements using forms issued by the CRE within 10 days after issuance of an order by CENACE. Generators and end users can install interties, at their own expense, or may request CENACE or the transmission providers and distributors to build such facilities as part of their network expansion and modernization plans or may contract with them for the construction services, at the generators’ and end users’ own expense. Other Information Generators and qualified users will be permitted to enter into private power purchase agreements. CENACE will act as the gobetween. It will ensure delivery of the electricity required by a qualified user, even if the electricity needed exceeds what the generator produces. CENACE will bill for any excess electricity at spot market prices. Unfortunately, the electric industry law is mostly silent about renewables as it does not differentiate among technologies. However, it allows accelerated depreciation of renewable energy projects similar to what the existing legislation provides, and the Ministry of Energy will implement a mechanism for trading clean energy certificates and emission reduction certificates to promote clean energy and diversify energy sources. Electricity customers will be able to engage in net metering with their retail suppliers. The CRE will issue a form of contract to be used and decide on the payment methodology. Implementation of the Reforms Debate over the new legislative package in the Mexican Congress is expected to be heated, notwithstanding that the President’s party, the PRI, controls the most seats in both houses of Congress. It is possible that modifications to the current drafts will be made. However, the laws are expected to pass. Once approved, the reforms are expected to be implemented in stages. The first stage will require the creation of CENACE as an independent state agency and independent system operator, the establishment of the wholesale electricity market, the issuance of market rules by the Ministry of Energy and the issuance by the Ministry of Energy and the CRE of implementing regulations. This process is expected take approximately 12 months to complete.