Although much of the buzz around Mexico's energy reform focused on the oil & gas sector, the Mexican power sector also underwent a fundamental change. Together with eight new and twelve amended federal laws, Mexico's President, Enrique Peña Nieto enacted the Ley de la Industria Eléctrica (the "Act") on August 11, 2014.
The Act allows private entities to participate in the generation and marketing of electricity for the first time via a wholesale electricity market (the "Wholesale Market"), a spot market in which certain generators and suppliers (essentially authorized marketers) together with qualified users, (the "Wholesale Market Participants") can sell, and qualified users can purchase, electricity and related services at prices based on the cost of production. It also prevents a single entity from carrying out more than one of the following activities: generation, transmission, distribution, marketing or supply of electricity. Different subsidiaries of the same parent, however, count separately.
Most importantly, electricity reform in Mexico has created new opportunities for private investors, given new roles to state-owned companies under conditions that promise to limit their ability to dominate markets and created new governmental authorities (and enhanced the powers of existing ones) to regulate the electricity sector.
Wholesale Market Participants
To generate electricity, a power plant owner (a "Generator") must obtain a permit from the regulator or be exempt from such a permit. To be exempt, the Generator must have a capacity of less than 0.5 MW and no participation in the Wholesale Market. Further, exempt Generators may only sell electricity through Suppliers (as defined below), or use the electricity for self-consumption, i.e., without connection to the national grid. Thus an exempt Generator is not a Wholesale Market Participant.
In contrast, permitted Generators have the right to sell electricity directly in the Wholesale Market or alternatively via power purchase and sale agreements with Suppliers or other permitted Generators. These Generators may not participate in the Wholesale Market on behalf of exempt Generators, nor provide electrical services directly to final users.
Under the Act, a power marketing company which sells power is a "Supplier" and is required to obtain a specific permit from the regulator. Suppliers purchase electricity from permitted Generators, exempt Generators or the national grid, and resell the energy to end users operating within the area allocated to them in their permit. Suppliers must submit their demands for electricity to CENACE (described below).
The supply agreements between Suppliers and final users will take the form approved by the regulator.
Qualified Users are entitled to purchase electricity directly from the Wholesale Market if they either consume over 5 MW or already supply their own electricity. Qualified Users also must submit their demands for electricity to CENACE.
Consumers that do not consume over 5 MW or supply their own electricity are deemed "Basic Supply Users." These users are largely residential or small commercial users, the supply to whom is a high-priority to, and thus remains the responsibility of, the Comisión federal de Electricidad (CFE).
Before the Act, CFE had been vertically integrated and operated the national grid and the transmission, distribution and supply of electricity within Mexico. Now, CFE is a "state productive entity", a for-profit company which, together with its subsidiaries, will compete with both domestic and international power companies at all levels of electricity production. None of CFE's assets were privatized under the Act.
CFE (through its affiliates and subsidiaries) remains the entity responsible for power transmission and distribution, although private investment may participate in such segments through the financing or construction of related infrastructure. Under the rules providing for the separation of activities, CFE's transmission and distribution subsidiaries may not purchase or sell the electricity flowing through their own lines. Such transactions will instead be available to Wholesale Market Participants.
The CFE newly spun-off dispatch division now named Centro Nacional de Control de Energía ("CENACE"), monitors the Wholesale Market to ensure fair competition and efficiency and prevent discrimination in the provision of access to the transmission infrastructure. Another fundamental goal of CENACE is to increase the transparency of CFE's operations.
Wholesale Market Participants are required to enter into an agreement with CENACE (the form of which is to be standardised by the regulator) before they are able to participate in the Wholesale Market. They must also submit their operating costs and prices to CENACE, which will set the spot price for electricity. With this information, CENACE will be able to assess whether electricity is being priced competitively in accordance with the rules governing the Wholesale Market.
The Comisión Reguladora de Energia ("CRE") is the regulator of the Wholesale Market under the Act. It issues Generator and Supplier permits, sets the tariffs for energy services and issues standard form contracts for agreements between CENACE and Wholesale Market Participants.
CRE will also issue rules governing transactions between affiliated companies to ensure that there is separation between entities participating in the relevant activities of the electricity industry.
The introduction of greater private investment, combined with the approach of greater transparency in the sector will provide for greater competition in the electricity industry. The private entities entering the sector will bring with them experience and new technology. The Act encourages CFE entities and subsidiaries to enter into agreements and joint ventures with these private entities in the hope that CFE will acquire the latest technological knowhow.
Although distribution and transmission remain state-run activities, the new potential for private entities to finance, construct and operate necessary distribution and transmission infrastructure could bring much-needed investment and upgrading to the transmission networks in Mexico.
Although the decrees to enact the Act have been signed, it may take some time for them to be fully implemented. The Act is being implemented in stages, with the first steps being the decentralization of CENACE, the separation of CFE's powers via subsidiaries and affiliates and CRE's issuance of standard form contracts. A nine month deadline for CRE's standard form contracts began on the Act's enactment date. Therefore it may some months before private companies are able to enter into the relevant agreements with CENACE.