Policy and law
What is the government policy and legislative framework for the electricity sector?
Until 2013, the generation, transmission, distribution and marketing of electric power for public utility service purposes in Mexico was exclusively reserved to the federal government, through the Federal Electricity Commission (CFE), a public body of the federal government operating as a vertically integrated monopoly. Private participation was allowed only in the generation and transmission of power not intended to provide public utility services, under six types of permit. However, as a result of the lack of sufficient government funds to meet the significant increase in energy demand during the past decade and as part of the package of structural reforms that Mexico has enacted during the administration of President Enrique Peña Nieto, the Mexican energy sector is now subject to a completely new legal framework, enacted on 11 August 2014, following a historic Constitutional reform passed and enacted in December 2013, that opened almost all areas of the oil, gas and power industries to private participation and competition, with no foreign investment restrictions.
Over the past 20 years, the federal government fostered the participation of private companies in the electricity sector, particularly in power generation. Though its independent power production programme proved successful (private independent power producers have a generation capacity of more than 12,000MW, which currently represents 17.5 per cent of the current installed capacity, a considerable portion of the growing demand) and self-use power generation projects also gained a presence, the rapid growth in energy demand - between 2018 and 2032, the increase in electricity demand is expected to entail an additional 66,912MW of generation capacity (requiring investments of approximately US$90 billion), 50 transmission projects representing 1,196km-c, 18 transformation projects representing 3, 716.4MVA, and 39 compensation projects representing 923.2MVAr (requiring investments of approximately US$772 million)) - the limited governmental resources and high debt levels that were being reached, the need to provide clearer rules and opportunities to continue receiving private investment and increase competition in the electricity industry, the lack of scrutiny and transparency of the CFE rates and service conditions, and the lack of reliability and excessive costs of power for industrial processes (which affects the competitiveness of Mexican industries in a global economy), led the Mexican government to include the regulation of the electricity industry in a major package of legal reforms comprised of a Constitutional reform, amendments to 12 existing laws and the promulgation of nine new laws (known as the ‘Energy Reform’).
The first important change resulting from the Energy Reform is that the oil and gas industry and the electric power industry (previously vertically integrated and exclusively reserved to Pemex and the CFE under the Constitution) are no longer considered strategic activities, and accordingly, all parties are free to participate except in those activities that have been expressly reserved to the state under the new article 27 of the Constitution (namely, nuclear power, power transmission and distribution as a utility service, and the dispatch and operation of Mexico’s National Electric System to be controlled by an independent system operator). Pemex and the CFE are no longer considered public instrumentalities of the federal government and were transformed into ‘state productive enterprises’, a new form of state-owned commercially oriented companies, each managed by a board of directors and subject to corporate governance principles.
Moreover, for the electric power sector, the Energy Reform contemplated the creation of a completely new industry model based on a competitive wholesale electricity market operated by the new independent system operator (ISO), while keeping the state’s control and ownership of the National Grid and its exclusivity with respect to power transmission and distribution activities, but with the express possibility of entering into contracts with private parties assisting the Mexican state in the development of such activities (including public-private partnership (PPP) arrangements). The Energy Reform opened the market to merchant power plants that sell their power in bulk, where the ISO dispatches the system on the basis of cost efficiencies, providing market participants with non-discriminatory access to the grid, which is expected to affect the cost of power to the end user, thereby reducing the price differentials that the industrial and residential sectors currently have with respect to other economies. The wholesale electricity market commenced operations back in January 2016, with a short term market, which includes a day ahead market, and a real time market.
The Energy Regulatory Commission (CRE) became the regulator of the midstream and downstream oil and gas industry, and all areas of the electricity industry, which turned the CRE into a powerful and critical part of the Mexican government.
The main legal framework for the electric power industry resulting from the Energy Reform included the following four federal statutes:
- the Law of Coordinated Regulatory Agencies, governing the organisation and authority of both the National Hydrocarbons Commission as upstream regulator, and the CRE for midstream and downstream activities, including Mexico’s electricity industry;
- the Electricity Industry Law, which liberalises and provides the new organisation of the electricity industry, from generation to distribution and marketing, including the creation of a wholesale electricity market;
- the Law of the Federal Electricity Commission, which reorganises the existing power utility, the CFE, and defines its new role in the market, as well as its contracting methods; and
- the Geothermal Energy Law providing for the terms of exploitation of geothermal resources.
In parallel, various federal statutes were amended, including the Foreign Investment Law, the PPP Law and government procurement laws, among others.
Initially, no new statutes were enacted to regulate specifically renewable energy sources; however, in December 2015, the Energy Transition Law was enacted (and the previous Law for the Use of Renewable Energies and the Financing of the Energy Transition was repealed). This statute is aimed at promoting the diversification of the energy sources used to generate electricity through the use of renewable energies, and promoting the sustainable utilisation of energy and the reduction of polluting emissions from Mexico’s electric power industry.
2Organisation of the market
What is the organisational structure for the generation, transmission, distribution and sale of power?
Commercially speaking, the Mexican electricity sector is still divided into two main areas: the electric power public utility service and the activities in which private participation is allowed. The generation, transmission, distribution and sale of power for public utility service purposes, previously reserved to the federal government through the CFE, is yet controlled by the CFE. However, as one of the most important and first changes resulting from the Energy Reform, the operational control of the National Electric System (SEN, which encompasses the generation, transmission and distribution facilities used in the provision of electric power public utility services) has already been assumed by the National Centre for Energy Control (CENACE), a governmental instrumentality created as a spin-off of the CFE, in charge of operating the SEN and dispatching all of the power output generated by the CFE and private generators interconnected with this system, and provide open access to all market participants.
Private participation, on the other hand, is still concentrated in those activities where private participation was already allowed prior to the Energy Reform, particularly independent power production (IPP) (private generation facilities aimed at supplying all of their capacity and power output to the CFE) and self-supply generation (private generation facilities aimed at supplying power for self-supply purposes to the holder of the relevant self-supply power generation permit and its shareholders).
The total installed capacity in the country in 2017 was over 75,685MW, of which 70.5 per cent corresponds to conventional power plants and 29.5 per cent to clean energy plants. Since 1997, most of the CFE’s capacity additions have been successfully installed through IPPs (with an installed generation capacity of more than 13,247MW in 21 years). As a result of the Energy Reform, no additional IPP projects have been launched by the Mexican government, but similar schemes could be implemented in the future.
Nevertheless, private participation has grown consistently in all areas of the electricity industry, now that the wholesale electricity market has initiated operations, allowing private companies to participate in new areas such as power marketing and even public utility services. The new design of the sector, as contemplated in the Electricity Industry Law, includes:
- private and government-owned generators;
- CENACE, as the independent operator of the SEN and the wholesale electricity market;
- government-owned transporters and distributors, in charge of providing public utility transmission and distribution services through the national transmission grid and the general distribution grids, all to be spun off from the CFE;
- private entities participating in transmission and distribution activities as contractors to the government-owned transporters and distributors, under PPP schemes;
- private and government-owned marketers, who may participate in the wholesale market and represent generators and qualified offtakers;
- private and government-owned suppliers, which are load serving entities who hold a permit authorising them to provide power supply services (classified as basic supply service, qualified supply service or last resource supply services);
- qualified offtakers, which are large offtakers entitled to acquire energy directly from the wholesale market, or from a marketer or a supplier; and
- non-qualified offtakers receiving basic supply services from an authorised supplier.
Regulation of electricity utilities – power generation
Authorisation to construct and operate generation facilities
What authorisations are required to construct and operate generation facilities?
The main permit required to construct and operate generation facilities is the power generation permit granted by the CRE.
In addition, power generation facilities require a federal environmental, safety and health impact authorisation granted by the Ministry of the Environment and Natural Resources (SEMARNAT) and if the use of national waters is involved, a concession or a permit granted by the National Waters Commission (hydroelectric projects with a generation capacity of 30MW or less that do not affect the flow or quality of water do not require a water concession). A critical authorisation in terms of costs and timing, when applicable, is the change of forest land use authorisation, which is granted by SEMARNAT and may be subject to the payment of governmental fees if relevant flora reallocation works are required. Land use and local environmental permits must also be obtained from the state and municipal authorities where the project is located. Likewise, in certain areas of the country, the archaeological clearance should be obtained in a timely manner in order to verify the project’s feasibility.
Moreover, the new Electricity Industry Law requires those intending to obtain a generation permit to file with the Ministry of Energy (Sener) a social impact assessment; Sener shall then evaluate such assessment and issue the corresponding resolution and recommendations. The regulations establishing details about the scope and effects of this new requirement were issued on 1 June 2018.
Grid connection policies
What are the policies with respect to connection of generation to the transmission grid?
Although power transmission and distribution services are reserved to the state, CENACE, as independent operator of the SEN, is the entity in charge of guarantying open access to the SEN. The general technical requirements to permit the interconnection of generation facilities to the SEN are issued by CENACE and approved by the CRE, who is also the authority in charge of approving the model Interconnection Agreements, approving the charges payable for the studies required to determine the specific infrastructure required to permit each interconnection and other aspects of the interconnection process, and resolving disputes concerning access to the SEN.
In turn, transporters and distributors are obligated to permit, on a non-discriminatory basis, the interconnection of all generation facilities that request such interconnection, whenever the interconnection is technically feasible. For that purpose, CENACE shall instruct the relevant transporter or distributor to enter into the required interconnection agreement, once the characteristics of the specific infrastructure have been determined. The transporter or distributor and the relevant generator shall then enter into the corresponding interconnection agreement within 10 business days following the notification of CENACE’s instructions. Upon conclusion of the required infrastructure, a verification unit authorised by the CRE shall certify that the interconnection facilities comply with the characteristics established by CENACE and all applicable standards; in that case, CENACE shall instruct the transporter or distributor to carry out the physical interconnection within the 72 hours following such instruction.
The Market Rules (which are the rules and procedures regulating the operation of the wholesale electricity market) regulate the criteria that CENACE shall use to determine the specific infrastructure requirements, the priority granted to each interconnection request and the procedures to jointly evaluate requests affecting a single region.
Instead of installing the required infrastructure at their cost (either through the execution of the relevant works or the contribution of the required funds), generators may choose to request CENACE or the distributor to include it in the expansion and modernisation programmes of the National Transmission Grid and the General Distribution Grids, as applicable, provided such infrastructure brings specific benefits to the SEN (such benefits being evaluated pursuant to the general criteria issued by the CRE). In that case, the generator may be required to guarantee the development of the proposed generation facility.
If the generator chooses to execute the necessary works or contribute the necessary funds, the generator has the option to acquire the corresponding financial transmission rights, or otherwise receive the proceeds of their sale, pursuant to the Market Rules.
Alternative energy sources
Does government policy or legislation encourage power generation based on alternative energy sources such as renewable energies or combined heat and power?
During 2017 , power in Mexico was produced from these sources in the following proportions:
- 13 per cent conventional thermoelectric;
- 10 per cent hydro;
- 50.21 per cent combined cycle;
- 7 per cent steam, turbogas and internal combustion;
- 9 per cent coal;
- 3 per cent nuclear;
- 3 per cent wind;
- 2 per cent geothermal, solar, distributed generation and others; and
- 3 per cent bioenergy and efficient cogeneration.
For over a decade, the government encouraged combined-cycle gas-fired power plants, making this type of technology a requirement in most of the IPP projects called by the CFE, but in 2010 the CFE began undertaking international public tenders for the award of long-term contracts for renewable energy projects (particularly, wind farm projects), owing to Mexico’s climate change laws and policies. These power plants and renewable energy facilities were developed by private companies under the IPP scheme contemplated in the previous legal framework.
The IPP bids were very successful, not only because of the number and diversity of reputable power companies participating in such international tenders, but also because of the rates and competitiveness of the offers. All of the payments under the contracts awarded were financed by resources of the federal government. Key issues affecting IPPs for combined cycle power plants, however, included the lack of infrastructure to supply natural gas to the power plants under development; the increasing scarcity of natural gas in Mexico and the inconsistency between the terms of the natural gas supply services offered by Pemex and the fuel supply terms required to make these projects suitable for project finance purposes. As a result, liquefied natural gas (LNG) supply became an important part of the supply of natural gas in Mexico and the CFE included long-term supply arrangements with LNG suppliers as part of its fuel supply strategy. Likewise, the CFE anchored a large number of natural gas pipeline projects that allow the CFE to have access to several supply sources of gas imported from the United States. As a result of the energy reform, however, the IPP programme has been superseded by the power and energy auctions that CENACE has been organising periodically. Nonetheless, there are no legal restrictions impeding CFE’s marketing and supply divisions from entering into long-term contracts with generators in order to anchor large-scale generation projects under schemes that could resemble IPPs.
In 2008, the Law for the Use of Renewable Energies and the Financing of the Energy Transition (the Renewable Energies Law) was enacted, precisely to regulate and promote power generation based on renewable energy sources, and in September 2009 the implementing regulations of the Renewable Energies Law were published. Following the global need to reduce the emission of greenhouse gases and global warming, the Renewable Energies Law was aimed at strengthening the competitiveness of the Mexican energy sector, reducing the use of fossil fuels and promoting the use of renewable energy. Moreover, as part of the CFE’s programme to encourage the development of renewable energy projects in Mexico, in 2009 and 2010 it awarded four long-term power purchase agreements to private independent power producers developing wind power projects in Oaxaca, each with a generation capacity of 100MW.
The Mexican authorities developed and implemented the mechanisms necessary to allow renewable energy projects in Mexico to qualify for obtaining of certified emission reductions under the Kyoto-Bonn-Marrakesh Protocol and other similar programmes. Moreover, in June 2012, the General Climate Change Law was enacted, setting forth the basic framework to permit the creation of a domestic market for certified emissions reductions intended to survive the Kyoto Protocol or other mechanisms that may supersede such international instrument. The General Climate Change Law contemplates:
- the creation of the National Environmental and Climate Change Institute, intended to generate and consolidate all technical information for monitoring greenhouse gas emissions and the effects of climate change;
- a Green Fund, administered by the federal government to support and encourage initiatives towards emissions reduction;
- the requirement of implementing economic incentives to foster the development of clean energy sourced facilities, efficient cogeneration and renewable energies;
- the gradual development of a subsidies programme to promote the use of non-fossil fuels, energy efficiency and sustainable public transport; and
- the promotion of electricity generation from clean energy sources, with the expectation of reaching 35 per cent by 2024.
Some of the incentives for renewables that the Mexican government had already implemented under the previous legal framework (including accelerated tax depreciation rates and financing programmes) are still in play, but not all of them have been retained in the new regime.
Instead, the new statutes provide for different incentives, mostly intended to:
- promote open access to transmission and distribution infrastructure, and allow an adequate interaction of firm and intermittent power resources in the grid;
- support the development of new generation capacity through clean energy auctions resulting in long-term and medium-term agreements (‘clean energy’ includes renewable energy, nuclear and efficient cogeneration); and
- increase the involvement of offtakers in supporting clean energy projects, through the imposition of clean energy requirements reflected in a number of clean energy certificates (CELs) that load-serving entities will be required to obtain on an annual basis.
Pursuant to the Electricity Industry Law and subsequent resolutions by the Ministry of Energy, qualified offtakers and power suppliers are required to acquire CELs for at least 5 per cent of their total energy consumption during 2018, 5.8 per cent for 2019, 7.4 per cent for 2020, 10.9 per cent for 2021 and 13.9 per cent for 2022. CELs are granted to clean energy generators based on their power output, and are part of the products that may be traded in the wholesale electricity market. Moreover, the Energy Reform included a new Geothermal Energy Law, aimed at creating a new framework to develop Mexico’s vast geothermal resources, which have been underused for decades, mainly owing to the absence of adequate regulations.
What impact will government policy on climate change have on the types of resources that are used to meet electricity demand and on the cost and amount of power that is consumed?
Government policy with respect to climate change is mainly focused on, and related to, the incorporation of renewable energy sources on a larger scale. As a result, the federal government has so far promoted the development of renewable energy projects anchored by long-term power purchase agreements awarded through public bidding processes to sell power to the CFE, which in turn is used to provide electric power utility services. The effects of the new mechanisms that are contemplated in the Electricity Industry Law (which consist mainly of requiring qualified offtakers and power suppliers to acquire a certain number of clean energy certificates) are yet to be seen. In line with the promotion activities being developed by the federal government, a number of instruments have been issued to provide developers with details and information to generally assess the availability of renewable resources in Mexico, as well as to identify potential challenges and barriers for each type of technology. Moreover, CENACE is expected to continue launching long-term auctions for the purchase of energy and CELs from renewable energy generators, as a way to further promote renewable energy sources.
Does the regulatory framework support electricity storage including research and development of storage solutions?
Although the Market Rules contain references to electricity storage, the laws and regulation do not provide yet an adequate regulatory framework to promote or support the development of storage solutions. The Ministry of Energy and the CRE are working on developing that legal framework. Specifically, the Energy Transition Strategy to Promote the Use of Clean Technologies and Fuels provides, as part of the government’s strategies, the creation of a group of entities supporting the development of new storage technologies.
Does government policy encourage or discourage development of new nuclear power plants? How?
The generation of nuclear power is exclusively reserved to the Mexican state, through the CFE and therefore no private nuclear power plants are allowed in Mexico. Mexico has only one nuclear power plant, with an installed capacity of 1,610MW, representing 3 per cent of the aggregate installed capacity in Mexico.
While no commitments or formal announcements have been made, the Mexican government has indicated in a number of official documents that it is, at present, evaluating the possibility of increasing the generation of nuclear power as one of the strategies to reduce greenhouse gas emissions.
Regulation of electricity utilities – transmission
Authorisations to construct and operate transmission networks
What authorisations are required to construct and operate transmission networks?
Public utility transmission services are exclusively reserved to the state; however, the participation of private entities through different types of contracts is allowed in order to finance, install, maintain, administer, operate or expand the infrastructure necessary to provide transmission and distribution of public utility services. The associations and contracts entered into between the Mexican state and private parties for these purposes shall be awarded through competitive processes where any interested party is entitled to participate. The aforementioned processes may be launched either by CFE as the existing transmission entity, or directly by the federal government through SENER. Although the Electricity Industry Law is generally flexible with the type of mechanism that may be implemented to contract the construction and operation of transmission networks from third parties, there are certain minimum standards and requirements to be considered to proceed with the award and execution of the relevant contract. In addition, if the competitive process is launched by CFE, the process shall abide by the general contracting provisions for acquisitions, leases, services and works of CFE and its subsidiaries. The private entity awarded with the contract to develop, construct, maintain and operate transmission infrastructure shall, in addition, enter into an agreement with CENACE, as the entity operating the wholesale electricity market and dispatching the SEN.
The state productive enterprises providing transmission and distribution services will not require any specific permit for that purpose; however, the terms and conditions for the provision of such services are subject to CRE approval. In any case, the construction of transmission lines requires environmental and municipal authorisations, as well as authorisations to cross lands, lakes, rivers or other infrastructure facilities under the jurisdiction of governmental agencies or bodies, in which case rights of way and crossing permits must be obtained. In addition, in the case of transmission or distribution lines for public utility services, a social impact assessment shall be filed with Sener, for approval of the proposed impact mitigation and management measures.
Transmission lines constructed and owned by private power generation, export or import permit-holders may be used to transmit the power generated, exported or imported only by such permit-holders, who are not allowed to provide transmission services to third parties.
Eligibility to obtain transmission services
Who is eligible to obtain transmission services and what requirements must be met to obtain access?
At present, the only common carrier allowed to provide public utility transmission services in Mexico is the CFE (through its separate subsidiary enterprise in charge of transmission services), under terms, conditions and rates approved by the CRE; however, the participation of private entities is expected once certain ongoing projects are awarded, developed, constructed and in operation. Although specific regulations have not yet been issued, it is understood that only those eligible to participate in the wholesale market are eligible to receive power transmission or distribution services, and those power projects that were grandfathered under the Electricity Industry Law.
Government transmission policy
Are there any government measures to encourage or otherwise require the expansion of the transmission grid?
In the past, there were no government incentives specifically intended to encourage the expansion of the transmission grid. The CRE made important efforts to anchor grid expansion through open-season procedures for the reservation of transmission capacity, where participants wishing to reserve capacity were required to financially guarantee their commitments with respect to the reserved capacity they requested. These efforts resulted in some successful expansions of the grid; however, in light of the new alternatives and incentives that are now available under the current legal regime, it is unlikely that similar schemes will continue being used to promote further expansion. As mentioned above, the Electricity Industry Law provides new opportunities to allow private parties to assist the CFE in the financing, installation, maintenance, management, operation and expansion of the national transmission grid and the general distribution grids, through contracts entered with transporters and distributors (the PPP scheme may be used for these type of projects). Moreover, pursuant to the recently issued Market Guidelines (which regulate the wholesale electricity market) and related Manuals, financial transmission rights (FTRs) are granted to market participants who pay for the expansion of the transmission and distribution grids. These FTRs, which may also be traded in the wholesale electricity market, have a term of 30 years and are determined based on a calculation of the improvements that the relevant expansion grants to the SEN. The Development Programme of the national Electric System (PRODESEN), includes the planning strategy of the federal government for a period of 14 years. As part of such programme, SENER includes the Expansion and Modernisation Programme of the National Transmission Grid and the General Distribution Grids, which identifies those expansion projects that shall be developed and promoted by the transporters, distributors or by the federal government, as well as the general guidelines and specifications that such projects shall consider.
Rates and terms for transmission services
Who determines the rates and terms for the provision of transmission services and what legal standard does that entity apply?
The rates payable for power transmission services through the national electric grid and the general distribution grids are approved and supervised by the CRE, under methodologies intended to promote an efficient use of the grids, while allowing the carrier to recover adequate costs incurred in the provision of the services.
As one of the mechanisms to promote renewable energy projects, in April 2010, the CRE issued a methodology specifically applicable to determine transmission rates for projects based on renewable energy sources and efficient cogeneration projects. That methodology was aimed at promoting the use of clean technologies in the generation of power and was based on a post stamp scheme, where a fixed charge (denominated in pesos per kWh) was applicable to each level of transmission services (depending on the applicable voltage) subject to monthly inflation adjustments. However, those preferential rates will remain applicable only to those power projects that were grandfathered under the Electricity Industry Law. All other generators, importers, exporters, suppliers and offtakers contracting transmission and distribution services shall pay for those services at rates determined pursuant to the new methodology that the CRE approved on 7 September 2015. The new methodology became effective on January 2016 and is expected to remain in effect until December 2018. It is based on a post-stamp concept, with rates subject to adjustment based on inflation, exchange rate variations and the implementation of new transmission infrastructure. On 22 January 2018, CFE’s transmission subsidiary published in the Federal Register the latest update on the rates to be applied for the provision of the transmission services from 1 January 2018 to 31 December 2018. These rates are charged by CENACE as part of the settlements performed within the wholesale electricity market and paid by CENACE to CFE.
Entities responsible for grid reliability
Which entities are responsible for the reliability of the transmission grid and what are their powers and responsibilities?
The CRE is responsible for the development and surveillance of the legal framework regarding reliability matters. As part of these activities, the CRE issues on an annual basis a Reliability Report that informs the SEN’s development and level of compliance. CENACE is entrusted by law with the dispatch and control of the SEN pursuant to the dispatch regulations and market rules, but transporters and distributors (which are separate state-owned enterprises) are the entities actually in charge of providing transmission and distribution services. CENACE is now independent from the CFE and other market participants, and is required to comply with the Net Code, which was issued by the CRE to determine the efficiency, quality, reliability, continuity safety and sustainability criteria applicable to the SEN’s operation.
Regulation of electricity utilities – distribution
Authorisation to construct and operate distribution networks
What authorisations are required to construct and operate distribution networks?
Under Mexican law, no private power distribution networks are allowed, except in the case of small electric systems (which are systems that are not interconnected to the national electric grid but provide power utility services). Distribution grids held by state-owned enterprises (mainly CFE subsidiary enterprises) do not require a permit from the CRE), but the terms and conditions of their services are subject to CRE approval; on the other hand, the construction of power distribution grids is subject to the obtainment of environmental permits and local construction permits.
Access to the distribution grid
Who is eligible to obtain access to the distribution network and what requirements must be met to obtain access?
In essence, access to the general distribution grids is regulated the same way as access to the national transmission grid. See question 10.
Government distribution network policy
Are there any governmental measures to encourage or otherwise require the expansion of the distribution network?
Not yet. Until now, only a few private entities have obtained power distribution permits, mainly for small delimitated areas, and CFE continues to be the largest, and almost only, distributor. However, distribution services are subject to the principles of open access and universal coverage, which would require expansions, if they are economically feasible. The PRODESEN also includes as part of the expansion projects, some projects related to distribution networks.
Rates and terms for distribution services
Who determines the rates or terms for the provision of distribution services and what legal standard does that entity apply?
The applicable rates are approved by the CRE, under methodologies intended to promote an efficient use of the grids, while allowing the distributor to recover adequate costs incurred in the provision of the services. The CRE issued on 31 January 2015 the rates that CFE’s distribution entity should apply during the period running from January 2016 to December 2018. Recently, on 18 January 2018, CFE Distribución published in the Federal Register the latest update on the rates to be applied for the provision of the distribution services from 1 January 2018 to 31 December 2018. These rates are charged by CENACE as part of the settlements performed within the wholesale electricity market and paid by CENACE to CFE in consistency with certain agreements executed between such entities.
Regulation of electricity utilities – sales of power
Approval to sell power
What authorisations are required for the sale of power to customers and which authorities grant such approvals?
The provision of power supply services to end users requires a permit from the CRE. Power supply services are classified as either: basic supply services (supply of power to small consumers), qualified supply services (supply of power to qualified (large) offtakers) and last resource supply services (back-up supply services).
Power sales tariffs
Is there any tariff or other regulation regarding power sales?
As a result of the Energy Reform, the CRE is now the agency in charge of issuing and applying the regulation of the rates for basic supply services, and approving the applicable service terms and conditions. The rates published by the CRE considered certain methodology based on the costs of each segment of the electricity industry value chain, as well as a transition process to allow end users to understand the new applicable rates. The Ministry of Finance and Public Credit, Sener and the CFE participated in the creation of the aforementioned methodology. Last resource supply services, on the other hand, are subject to maximum rates, also determined pursuant to the methodologies approved by the CRE.
Qualified supply services are subject to free competition, and are not subject to regulated rates.
Rates for wholesale of power
Who determines the rates for sales of wholesale power and what standard does that entity apply?
Pursuant to the Electricity Industry Law, the prices for all transactions undertaken through the wholesale electricity market shall be determined by CENACE, based on the Market Rules and the offers received from the market participants. Moreover, local marginal prices (LMPs) shall be determined for each node and period, in accordance with the Market Rules, and those prices shall be applicable to the energy transactions on the wholesale electricity market.
Since the wholesale electricity market commenced its operations, CENACE has been reporting hourly LMPs for more than 2,400 nodes, identifying those in each of the three existing systems.
Public service obligations
To what extent are electricity utilities that sell power subject to public service obligations?
Yes. Suppliers are subject to public and universal service obligations that require them to: offer their services to anyone that requests them, to the extent it is technically feasible, under efficiency, quality, reliability, continuity, safety and sustainability conditions; comply with the provisions of the Electricity Industry Law concerning social impact and sustainable development; contribute to the Electricity Universal Service Fund; and comply with the applicable clean energy and polluting emissions reduction obligations, among others.
Which authorities determine regulatory policy with respect to the electricity sector?
The CRE, Sener and Hacienda determine the regulatory policy with respect to the electricity sector. However, there are also a number of consultation councils that have been created, with the participation of representatives of industry stakeholders, to opine on and participate in the determination of regulatory policies affecting the electricity sector.
Scope of authority
What is the scope of each regulator’s authority?
The main powers given to the CRE are:
- the granting and enforcement of permits for the generation and supply of power;
- the approval of the terms and conditions for the provision of transmission and distribution services;
- the issuance of the methodology for the calculation of the rates payable for transmission and distribution services, as well as basic supply and last resource supply services; and
- approval of the Market Rules for the operation of wholesale market (except for the initial set of Market Rules, which was issued by Sener).
Sener is in charge of national energy policy and the overall planning for the SEN. Likewise, Sener is in charge of establishing the requirements and procedures related to clean energy certificates, authorising the expansion and modernisation programmes for the national electric grid and the general distribution grids and instruct transporters and distributors to execute the projects contemplated in such programmes, as well as establishing coverage obligations for the supply of power to rural communities and underdeveloped urban areas, and implement the mechanisms to direct funds to those purposes.
Establishment of regulators
How is each regulator established and to what extent is it considered to be independent of the regulated business and of governmental officials?
The CRE was created by administrative action, but was later strengthened by the promulgation of the Law of the Energy Regulatory Commission, enacted by Congress in 1995. Thereafter, as part of the Energy Reform, the scope of authority and independence of the CRE was enhanced under the Law of Coordinated Regulatory Agencies for the Energy Sector, which now governs the organisation and authority of both the National Hydrocarbons Commission, as upstream regulator, and the CRE for midstream and downstream activities, including Mexico’s electric power industry.
The CRE is considered to be a quasi-independent agency of Sener. It is a federal commission with revolving membership of seven commissioners appointed by the President and ratified by the Senate, subject to transparency laws.
In general terms, the CRE’s resolutions, directives, norms and permits are independent and do not require the supervision or approval of a third-party.
Challenge and appeal of decisions
To what extent can decisions of the regulator be challenged or appealed, and to whom? What are the grounds and procedures for appeal?
CRE decisions are subject to judicial review only through an amparo proceeding. This is a special type of court proceeding wherein any person or entity in Mexico (national or foreign) may ask for judicial review in respect of acts or omissions of the government in violation of the petitioner’s ‘bill of rights’. An amparo proceeding is a combination of the common law injunction and writs of certiorari, mandamus and habeas corpus. In this type of amparo proceeding, the petitioner typically requests an injunction against certain governmental acts, or a mandamus (a request to the court to command the defendants, namely, the government agencies involved in the challenged act) to redress the government acts in question, because such acts were performed in violation of the petitioner’s bill of rights (normally, due process of law violations). Normally, the injunction granted may be either provisional (during the amparo proceeding) or definitive (if the final determination of the court is that the relevant act or omission was unconstitutional). However, the CRE’s resolutions are not subject to provisional injunctive relief, except in the case of resolutions whereby fines are being imposed.
Acquisition and merger control – competition
Which bodies have the authority to approve or block mergers or other changes in control over businesses in the sector or acquisition of utility assets?
An acquisition of private generation or transmission facilities that entails the direct transfer of the assets and the relevant power generation or import permit requires the approval of the CRE and, if the transaction surpasses the monetary thresholds established under the Federal Law of Economic Competition to qualify as a reportable transaction, the approval of the Federal Economic Competition Commission (CoFeCe).
If there is no direct transfer of assets or permits, normally there are no changes to the control rules specifically applicable to businesses in the electricity sector in Mexico; thus, the main authorisation required for a change in control performed at a mezzanine level (ie, a change in control implemented through the acquisition of a participation in the company holding the relevant permit and owning the assets) would be CoFeCe’s approval, which is applicable to all economic activities in general. Nevertheless, the CRE may include in its permits and authorisations provisions requiring its approval for any change in control of the permit holder. Owing to its market presence, the CFE’s transfers are generally subject to CoFeCe approval.
Review of transfers of control
What criteria and procedures apply with respect to the review of mergers, acquisitions and other transfers of control? How long does it typically take to obtain a decision approving or blocking the transaction?
The current legal framework does not specifically require the authority to approve a transaction that involves a change in control over businesses in the sector. However, as a result of the change in the vehicle’s upstream corporate structure some critical permits may need to be amended, which then may be considered as an indirect request for approval of the transaction. The permits that may be subject to amendments are those obtained from the CRE to perform the power or supply activities. For purposes of such amendment, the new owner needs to prove that it satisfies all legal, financial and technical capabilities required to own a project. On the other hand, the approval by the CRE to transfer power generation or transmission assets and the related power generation, supply or import permit is aimed at ensuring that the new permit-holder meets all the requirements established under the applicable laws, from a legal and technical perspective, rather than an analysis of the antitrust or competitive aspects of the transaction. Accordingly, the procedure is similar in essence to that undertaken to grant a power generation, supply or import permit in which the CRE evaluates compliance with the applicable legal requirements to hold the requested permit, the technical qualifications of the facilities’ operator in order to assure safety and conformity with the power generation or supply schemes in which private participation is permitted. The Market Manuals include a number of informing and reporting obligations to CENACE that, although not directly related to the change of corporate structure, may be required to be made (eg, changes in the organisational structure notified to CENACE).
The CoFeCe’s review of a reportable transaction is, on the other hand, aimed at analysing the possible anticompetitive effects that the transaction may have in the relevant market. Obtaining CoFeCe approval entails the filing of a data-intensive pre-merger notification report to be analysed by the CoFeCe, which normally requests the production and filing of additional information and documentation. Based on its analysis of the transaction, the CoFeCe may approve the transaction as described in the pre-merger notification report, approve the transaction subject to compliance with certain conditions, or prohibit the transaction. Based on the applicable waiting periods, the process may take up to nine months in complex cases; however, these types of authorisations are normally obtained in approximately two to four months.
Prevention and prosecution of anti-competitive practices
Which authorities have the power to prevent or prosecute anti-competitive or manipulative practices in the electricity sector?
The CoFeCe is the Mexican federal agency empowered to prevent and prosecute anticompetitive practices in all economic sectors, including the electricity sector. The CoFeCe may impose sanctions on the economic agents involved upon determining the existence of a punishable conduct (such as tie-in sales, bid rigging or other sorts of monopolistic practices) that causes harm to other economic agents vertically or horizontally located.
Since its creation in 1993, the CoFeCe has been gradually developing an understanding of the energy sector and the important role this federal agency has to play in enforcing antitrust laws and regulations in a market that is, by its very nature, monopolistic, particularly with regard to the unparalleled situation of the Mexican energy industry, which involved for decades two vertically integrated monopolies controlled by the government: Pemex, in the oil, gas and basic petrochemicals sectors; and the CFE, in the electricity sector. The restructure of the energy sector calls for a more active role for the CoFeCe, assisting the regulators in the development of new competitive markets. As a result of another constitutional reform in 2013, CoFeCe has become fully independent and has a very broad authority. Moreover, as a result of the Energy Reform, Sener has been vested with very broad powers in order to ensure the separation of activities, with the authority to order the divestiture of assets and companies.
The Electricity Industry Law further provides for CoFeCe with broad authority to sanction price fixing and market manipulation, including the authority to restrict the participation of government entities (eg, CFE entities) acting against competition.
Determination of anti-competitive conduct
What substantive standards are applied to determine whether conduct is anti-competitive or manipulative?
As in other jurisdictions, Mexican law establishes a list of conducts considered to be anticompetitive per se. Under a ‘rule of reason’ analysis, however, the CoFeCe is empowered to prosecute and punish any anticompetitive or manipulative conduct aimed at or having the effect of damaging or impeding the competition process or free concurrence in the production, processing, distribution and marketing of products or services in the relevant market, provided the party undertaking such conduct is proven to have substantial power over the relevant market.
Sener and CRE, on the other hand, have been vested with broad powers aimed at assuring competition in the industry.
Preclusion and remedy of anti-competitive practices
What authority does the regulator (or regulators) have to preclude or remedy anti-competitive or manipulative practices?
The main tool is the imposition of substantial fines by the CoFeCe. Also, the CoFeCe may require the relevant economic agent to cease any anticompetitive practice and even order the divestment of assets. Sener has also the same power (except for ordering divestments), and once such penalties have been conclusively established by the CoFeCe or Sener, the relevant injured party may use such resolution for a prima facie case for the payment of actual damages and lost profits before a Mexican court.
End users, on the other hand, are entitled to cumulatively pursue a claim before the Federal Consumer Protection Agency if power suppliers violate the Federal Law of Consumer Protection.
Acquisitions by foreign companies
Are there any special requirements or limitations on acquisitions of interests in the electricity sector by foreign companies?
As a general rule, there are no special requirements or limitations on acquisitions of interests in the electricity sector by foreign companies except for the CFE, in which direct private participation (national or foreign) is legally barred, since this entity is exclusively controlled by the federal government; However, if the foreign investor intends to acquire more than 49 per cent of the capital of a Mexican company and such company has more than 3.6 billion pesos in assets, the prior approval of the National Commission on Foreign Investments may be required.
Authorisation to construct and operate interconnectors
What authorisations are required to construct and operate interconnectors?
There are no specific authorisations for the construction and operation of international interconnections or ties, and therefore, the authorisations are the same as the ones required to develop any transmission line; however, the Grid Code issued by the CRE provides that CENACE shall be the one determining the need to develop or reinforce international asynchronous ties between the SEN and other systems. Moreover, if they facilities cross the US-Mexico border, their construction shall be authorised by the Mexico-US International Boundaries and Waters Commission. Likewise, an authorisation by the Ministry of Finance is required in connection with the metering devices that will be used to determine the amounts of electricity being imported or exported.
Interconnector access and cross-border electricity supply
What rules apply to access to interconnectors and to cross-border electricity supply, especially interconnection issues?
There are no cross-border fees applicable to cross-border electricity supply. The export and import of power by private parties requires either a permit or an authorisation by the CRE. The Imports and Exports Manual establishes the rules applicable to Market Participants interested in performing import or export activities in the wholesale electricity market using the existing cross-border ties and the SEN’s infrastructure. In terms of the aforementioned Manual, there are two main types of import and export activities, those performed for commercial issues and those required for emergency or reliability issues. Even though, as a general rule, the first-come-first-served principle applies to access to the existing ties, the import and export activities required for emergency or reliability purposes (those activities have been entrusted to CENACE), have certain preference. In addition, the import or export of power requires a special permit granted by the customs authorities in connection with the metering facilities used to measure the imported or exported power. Foreign power plants exclusively connected to the SEN may interconnect and inject power to the SEN under specific interconnection and dispatch rules that are different from those applicable to other foreign power plants.
Transactions between affiliates
What restrictions exist on transactions between electricity utilities and their affiliates?
As a result of the Energy Reform, the clear separation of activities has become a predominant principle in the laws regulating the electricity industry (and the energy sector in general). The CRE and CoFeCe are required to oversee the adequate development of the market, and are granted with the authority to approve the participation of affiliates in related business activities. Moreover, the CRE has been vested with the authority to issue rules and limitations for transactions among affiliates (particularly transactions between generators and affiliate power marketing companies), and rules regulating the participation of power generators (or their shareholders) in natural gas transportation or storage companies (in the understanding that such participation shall be approved by the CRE and CoFeCe). Those functional separation rules have not yet been issued, but the CRE and CoFeCe are currently working on them, along with the separation rules that will be applicable to the oil and gas midstream sector.
In addition to the foregoing, certain terms for CFE’s legal separation were issued by SENER on 11 January 2016. Such separation rules seek to further regulate CFE’s participation in the market, as well as to set the guidelines that will apply for all transactions between CFE’s subsidiaries and affiliates. A breach of any of the separation rules by CFE’s holding entity, a subsidiary or an affiliate, grants SENER the right to impose certain penalties, that will apply in addition to other procedures or sanctions imposed by CoFeCe, if applicable.
Enforcement and sanctions
Who enforces the restrictions on utilities dealing with affiliates and what are the sanctions for non-compliance?
Sener, the CRE and CoFeCe have concurrent jurisdiction to enforce and penalise non-compliance on vertical integration rules and other types of affiliated-marketing transactions.
Update and trends
Update and trends
Are there any emerging trends or hot topics in electricity regulation in your jurisdiction?
In July 2018, Andres Manuel Lopez Obrador, a left-wing politician and former major of Mexico City, was elected as new President in Mexico. In connection with the electricity sector, Mr Lopez Obrador has anticipated that his administration will endeavour to strengthen and modernise CFE, increasing its generation capacity with particular emphasis pn the modernisation of its hydroelectric generation facilities. Moreover, Mr Lopez Obrador has reiterated the need to increase the development and operation of renewable projects in order to mitigate climate change and comply with Mexico’s obligations under the Paris Agreement. For instance, he has proposed the creation of a National Programme for Climate Change Adjustment and has mentioned his support to the transition to a renewable market. No clear guidelines or parameters have been released on how the aforementioned goals will be implemented by Mr Lopez Obrador’s government, but no significant changes in the electricity sector are expected within the short term.
For the rest of the energy sector, Mr. Lopez Obrador has anticipated important policy changes for the oil and gas industry, intended to increase the production and refining capabilities of Pemex, and make the country less dependent on imports.