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Notes on the Energy Reform in Mexico

March 12, 2014
Notes on the Energy Reform in Mexico

Approximately three months ago, the most important constitutional reform on energy in Mexico up to now waspublished in the Official Journal of the Federation. This reform intends to implement radical changes bypromoting competition in a sector that has been historically characterized by the concentration of productiveactivities at the hand of the Mexican government since the 1930s, which began to open up to private investmentjust two decades ago.The same holds true for the hydrocarbon industry, given that oil production has always dominated public debatein Mexico. Nevertheless, it is also the case that the electricity sector is quietly undergoing its greatesttransformation since its nationalization in 1960. Since then, and until the 2013 reform, the generation,transformation, distribution (including transmission) and storage of electrical energy for public consumption,given the strategic importance of these activities, has been the exclusive province of the federal government. Bymeans of a creative constitutional interpretation, the reforms to the 1992 Public Utility Electrical Energy Lawbroadened the opportunities for self-storage and gave way to a vigorous independent framework for theproduction of energy, among other achievements. Nevertheless, such reforms did not allow the generation ofelectrical energy for sale between private parties.As a result of the alarming financial situation faced by the Federal Electricity Commission (Comisión Federal deElectricidad, CFE), the opacity, politicization and cross-subsidization in determining electricity fees, the lack ofinvestment in networks and the urgency to meet ambitious goals in the reduction of greenhouse gases, the needfor a far reaching reform became indispensable. In their respective initiatives, Mexico’s President and numeroussenators of the National Action Party (PAN) proposed the need to move toward an institutional framework thatwould allow for the creation of a true electricity market.The result is a model in which planning and control of the national electricity system will continue to rest in thehands of the federal government by means of an operator that is independent of other parties in the industry,specifically, the CFE; electricity transmission and distribution will be considered public utility services, whichwill also be entrusted to the State, and the remaining activities in the electricity industry will be opened toparticipation from private industry, in accordance with the terms established by the new laws. Nevertheless, all ofthe above activities will continue be subject to supervision by the Energy Regulation Commission (ComisiónReguladora de Energía, CRE) with renewed autonomy for such agency.Thus, although much work remains in order to bring about a duly integrated legal structure, we now have a solidconstitutional basis from which to work. To begin with, in accordance with the transitory articles of theconstitutional reform, important regulatory laws containing the detailed rules and norms must be issued no laterthan the end of April. To date, none of such specific regulations have been published. One would hope that theunacceptable delay affecting the telecommunications sector, where the absence of secondary laws is hamperingthe regulatory work of the new Federal Telecommunications Institute, an institution which is clearly ready tobegin its mandate, does not repeat itself in the energy sector. Subsequently, presidential regulations will beforthcoming, which will provide as to the administration of the due observance of the law. General administrativeprovisions entrusted to a regulatory body will be provided for at the next regulatory level. Lastly, we will see thespecific contracts.Meanwhile, those working on the energy reform’s regulations should consider the following:1. Tenth transitory article, paragraph c) of the decree of constitutional reforms grants the CRE the power toregulate the generation of electricity and transport fees for the transmission and distribution of electricity.There is no room for confusion: The Department of Finance and Public Credit will no longer determine thefees that the CFE charges for its network services or for electricity as a product. Finally, a technicalspecialized regulator will be in charge of such work based on a meticulous cost analysis. Nevertheless, theCFE will continue to be a dominant player in the generation, sale and distribution of electricity, and theregulations should treat such agency as such if it desires a strong market to flourish in the short term.Furthermore, consumer subsidies should be granted to those who truly need them in accordance with energyand social policy, and not as a result of regulatory considerations.2. Paragraph a) of the eleventh transitory article leaves the Department of Energy (Secretaría de Energía,SENER) as coordinator of the sector and grants it the power to establish the terms of the strict legalseparation that will be required to promote open access and efficient operation of the electricity sector and tooversee compliance. The intent was for SENER to construct the “Great Wall of China.” Nevertheless, suchmandate will be exhausted when the rules for the operation of at least two State-owned companies areestablished: The first one in charge of the generation and sale of electricity, and the second in charge oftransmission and distribution. As a result, responsibility for the true and effective regulation of open accessto the network should belong with CRE through the issuance of terms and conditions and economicregulation of electricity transmission and distribution services, including approval of the rules for dispatchand other instruments to be applied by the new system’s independent operator.3. The National Energy Control Center will play a key role in the new model. As an independent operator, itwill ensure that the CFE does not unduly discriminate in providing access to the electricity grid for its owngeneration purposes. The basis for this is found in transitory article sixteen, subsection b) of the reform decree. In any case, since the CENACE is being created as a decentralized organization, as part of theFederal Public Administration, it must be ensured that in its organization and operation the various interestedparties participating in the industry have a voice with respect to the international best practices.4. The law shall regulate the procedures for contracting so that individuals may participate in the financing,installation, maintenance, management, operation and expansion of transmission and distributioninfrastructure. Perhaps a permit system would have been more appropriate to encourage private participationin these activities, as had been proposed by the PAN. Given that there was not much success in the draftingof the eleventh transitory article of the decree for constitutional reform, the law must be very clear on thescope of the exclusivity of the State in transmission and distribution, and what activities will be done "onbehalf of the nation," in addition to what should be understood by operation and management for hiringpurposes. At issue is how to establish the appropriate incentives to grow the infrastructure of the nationalelectricity system, particularly to develop the enormous potential for renewable energy.5. A big question is what kind of obligations with respect to clean energy and reduction of contaminatingemissions will be established under the law for participants in the electricity industry, as ordered by theseventeenth transitory of the reform decree. Hopefully, the drafters are thinking of what has been called inthe United States “renewable portfolio standards,” by means of which various states force suppliers toprovide a certain percentage of their electricity from renewable sources. In a best case scenario, this could beaccompanied by strict federal controls on emissions of greenhouse gases and the corresponding emissionswhich help to optimize the energy mix as a whole. The mature technology of renewable energy, such as windand, more recently, solar photovoltaic energy, suggests that in Mexico subsidies may not be required.In its electricity sector restructuring, Mexico is at least twenty years behind most countries in the Organization forEconomic Cooperation and Development (OECD). Mexico should use this lag in implementation to its advantageand learn lessons from the international experience of other countries that have already reformed their electricitysectors.

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