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October 2014

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The Proposed Energy Presidential Rulings

October 18, 2014

Article 89, section I of the Mexican Constitution confers upon the President of the Republic of Mexico the powerto provide, in the administrative area, for the compliance with laws. Such relates to the regulatory authority of theFederal Executive, which encompasses not only the issuance of rulings (reglamentos) but also of decrees,resolutions, orders and other regulatory instruments, which should be countersigned by the heads of thedepartments responsible for their implementation.Since the beginning of the last decade, the proposed presidential rulings, and actually all of the generalregulations issued by the federal public administration, must go through a prior process of public consultation,which seeks to provide a greater democratic legitimacy to governmental regulation. Additionally, the proposalsmust undergo a cost-benefit analysis by means of the necessary regulatory impact assessment. All of this is to bedone through the Federal Commission for Regulatory Improvement (Comisión Federal de Mejora Regulatoria, COFEMER), an agency within the Department of Economy, which in the last few years has been baptized as “theregulator of the regulators.”In the ceremony where the energy laws were signed, President Peña Nieto instructed that their implementationprocess be fully accelerated. Among the ten points announced for such purpose, he ordered that, at the latest, inOctober 2014, all of the respective presidential rulings would be published. All of this despite the fact that theFederal Congress gave the Federal Executive a term of 180 calendar days for the issuance of the HydrocarbonsLaw rulings, in accordance with transitory Article Four of that statute, and in the case of the Electric IndustryLaw, a term was not even established for issuing its rulings.During the third week of September, various proposed drafts of rulings were published on the COFEMERwebsite in order to kickoff the approval process. It should be noted that the Hydrocarbons Law, as well as theElectric Industry Law, are so detailed that they do not leave much room for rulings, in addition to the fact thatboth highlight the manner in which Congress delegated many of the regulatory functions directly to theregulatory agencies, which will be exercised by means of general administrative provisions. In any case, theHydrocarbons Law will initially be implemented through an instrument that is fundamentally dedicated toupstream activities and general matters and another that will cover midstream and downstream activities in thehydrocarbons’ value chain. The Electric Industry Law, with its 169 substantive articles and 24 transitory articles,would be developed by rulings consisting of 110 substantive articles and 9 transitory articles. Likewise, theamendment of various current environmental rulings was proposed in order to accommodate the new authority ofthe National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector.It is very positive news as to how soon the Federal Executive intends to finalize the energy reform by means ofthe various levels of regulation in order to accomplish, as soon as possible, the issuance of permits and thesubscription of specific contracts. The objective is commendable: provide full and timely legal certainty for newinvestment in the sector. Such is due to the fact that in the recent past there have been unfortunate delays in theissuance of regulatory provisions. An extreme case was the draft of the Natural Gas Rulings, which wassubmitted to never-ending negotiations during periods of varying intensity between 2010 and 2012 among theDepartment of Energy, the Energy Regulatory Commission, Petróleos Mexicanos, the Federal ElectricityCommission, private permit-holders and large industrial users, and, in the end, the instrument did not see the lightof day.The exercise of the presidential regulatory power is extremely delicate. The rulings should strictly abide by theletter of the law and adhere to the development of its content without establishing additional obligations forindividuals. The stakes involved are huge. The governmental haste has created a certain amount of concernamong the stakeholders, as several organizations have immediately requested to extend the time period to makecomments and opine regarding the proposed draft rulings.We must trust that the professionalism of the technical areas within the Department of Energy, the regulatoryagencies of the sector, and above all, the Legal Counsel of the Federal Executive, will give rise to solid rulings,complete in the details required by the industry, and which will stand up to constitutional challenges.