Mexico: Analysis Of Mexico’s New Electric Industry Law

Keywords: Mexico, electricity, energy, Electricity Law,

A new law (the "Electricity Law") opening the electric industry to private sector participation in generation, transmission, distribution and power marketing activities became effective on August 12, 2014. The Electricity Law is part of a set of new laws to implement the constitutional energy reform that became effective on December 21, 2013.

This legal update addresses the main features of the new Electricity Law.

BACKGROUND

The Mexican electric industry was governed by a restrictive legal framework that limited private sector participation and reserved most of the market to the state-owned Federal Electricity Commission (Comisión Federal de Electricidad or the CFE). Since 1992, private sector investment has been restricted to certain electric generation projects. Private companies could not take part in the transmission and distribution sectors, and there was no power trading market.

The CFE was vertically integrated—combining the operation of the national grid, its control of the wholesale generation market, a monopoly over transmission and distribution, and the supply to almost all Mexican customers. This structure caused inherent difficulties in adequately and efficiently supplying the electric energy demand in Mexico due, in part, to (i) CFE budgetary constraints, (ii) opaque rules for interconnection to the national grid and (iii) severe congestion, limiting transmission services. Because CFE's budget was in effect controlled by the national treasury, the CFE long ago ceased to have the financial resources to properly maintain and expand the country's electric infrastructure.

Electric tariffs in Mexico were set by the Department of Finance (Secretaría de Hacienda) and not by the Energy Regulatory Commission (Comisión Reguladora de Energía or the CRE), the industry regulator, resulting in a tariff regime more responsive to political considerations than economic realities. While the industrial and commercial sectors generally do not receive government subsidies, agricultural and residential customers have received large subsidies. Despite these subsidies, residential consumers in Mexico pay, on average, higher tariffs than the same consumers in the United States.

THE NEW ELECTRICITY LAW

The Electricity Law provides separately for generation, transmission, distribution and power marketing activities.

From the regulatory side, three agencies will have primary responsibility for the sector. The Department of Energy (Secretaría de Energía or the SENER) will have the policy function; the CRE will have the regulatory function; and the CENACE, a new decentralized agency, will manage the power grid and the wholesale electric market.

The generation and wholesale of electricity will take place under a regime of free enterprise and open competition. The CFE will be just one competitor in the new generation market.

While transmission and distribution facilities will remain under state ownership, the private sector will be able to participate in the construction, operation and maintenance of such facilities.

The operation of the National Electricity System, including the new wholesale electric market, will be run by the CENACE. This agency will also regulate open and non-discriminatory access to the transmission and distribution infrastructure.

The participants in the new wholesale electric market shall be the generators, power marketing companies and large end users (or "qualified customers"). The power marketing companies may sell power to end users (which may be qualified customers or regulated customers).

Generation Sector

  • A permit from the CRE is required for the construction, ownerhip and operation by any qualified person of power plants with a generation capacity greater than or equal to 0.5 MW.
  • The permits shall also include the right to build, own and operate private interconnection lines to deliver power output to the grid.
  • Generation companies whose output cannot meet their contractual customers' energy demand will have to purchase energy in order to meet such demand (i) in the wholesale electric market or (ii) through power purchase and sale agreements (PPAs) with other generators or with power marketing companies.
  • Generation companies can, in turn, sell their electricity (i) in the wholesale electric market or (ii) by entering into PPAs with a power marketing company, with qualified customers or with other generators.
  • Participation by generation companies in power marketing activities through affiliates is not prohibited.
  • Generation companies that produce energy through renewable sources or clean technologies shall be eligible to receive tradable clean energy certificates.

Power Marketing (Suppliers)

  • To the extent a power marketing company sells power, it is called a supplier. Any qualified person may obtain a permit from the CRE to supply power to qualified or regulated customers.
  • There are three different types of suppliers: (i) basic service suppliers, (ii) qualified service suppliers and (iii) last resource suppliers.
  • The basic supply is the supply of electric power under a regulated tariff regime. Regulated customers are residential consumers and small businesses.
  • The qualified supply is provided pursuant to freely negotiated PPAs with large end users.
  • The last resource supply is provided to qualified customers in emergency cases under maximum rates.
  • Power marketing companies may purchase electric energy (i) in the wholesale electric market or (ii) through PPAs with generators or other power marketing companies. Purchase of power by power marketing companies for resale to regulated customers must be carried out through competitive bidding processes.
  • Suppliers (and qualified customers participating directly in the wholesale electric market) will be required to acquire clean energy certificates.

Qualified Customers

  • The designation as a qualified customer is attached by registration with the CRE. The applicant shall demonstrate that its existing demand exceeds certain thresholds (initially 3MW, with such threshold being reduced to 1MW by the third anniversary of the effective date of the Electricity Law).
  • A qualified customer may purchase energy (i) in the wholesale electric market or (ii) under a PPA with a generation company or a power marketing company.
  • There will be obligatory requirements for the acquisition of clean energy certificates by qualified customers that purchase energy directly in the wholesale electricity market.

Wholesale Electric Market

  • It is a spot market operated by the CENACE where generators, suppliers and qualified customers (acting directly and not through a power marketing company) are gathered for selling and buying electricity at real-time system marginal costs.
  • Generation companies must operate their units in accordance with the dispatch orders of the CENACE and coordinate their maintenance operations with the CENACE.
  • The CENACE will dispatch the system's power plants based on a merit order of ascending operating costs (regardless of their contracted capacity under PPAs), under which the lowest operating cost power plant satisfies system energy demand before the next lowest operating cost plant is dispatched.
  • The CENACE can form partnerships with private parties in order to provide auxiliary services for spot market operations.

Transmission And Distribution

  • The CFE through its affiliates (or other state-owned companies) will own the transmission and distribution lines and will provide the service of transmission and distribution of electricity. However, such entities will not directly buy or sell the electricity that flows through their lines.
  • Tariffs for transmission and distribution services will be regulated by the CRE.
  • The SENER or the CFE's affiliates may form partnerships or reach agreements (through public bidding processes) with private entities in order to carry out the financing, installation, maintenance, management, operation and expansion of transmission and distribution infrastructure.
  • Transmission and distribution grids will be under a "not unduly discriminatory open access" regime managed by the CENACE.

CFE

  • The new CFE will operate through separate affiliated companies to take part in every sector of the electricity industry.
  • The new CFE will have to compete on an equal footing with private parties in the generation and marketing of electricity, but will remain the exclusive provider of transmission and distribution services.

Clean Energy Certificates

  • The SENER will establish the criteria for issuing clean energy certificates to generators, which will relate to energy generated by clean technologies (as defined in the Electricity Law).
  • The SENER will also regulate the obligation of the suppliers and qualified consumers that participate in the spot market to acquire clean energy certificates, in proportion to energy purchased or consumed.
  • The clean energy certificates shall be negotiable.

Use Of Land

  • The transmission and distribution of electricity have a special priority over any other activities that involve the use of the surface and subsurface of lands lying within the limits of the respective projects, including hydrocabon-related activities. The affected lands are subject to legal easements for the installation of transmission and distribution networks.
  • The Electricity Law contemplates the right of occupation and use of land owned by third parties for the location, construction and operation of site-specific generation projects (ie., hydroelectric plants) and transmission and distribution facilities. The consideration for the purchase, use or occupation of land, goods or rights that are necessary for conducting these activities shall initially be negotiated directly between the interested parties. If they do not reach agreement, the industry participant may request that (i) a district judge grant a legal easement or (ii) the Ministry of Agricultural, Territorial and Urban Development conduct a mediation. Lack of agreement after the mediation may also result in the imposition of a legal easement.

National Content

The SENER will establish a minimum national content in the new projects related to the financing, construction, maintenance and operation of transmission and distribution facilities. This requirement will be subject to availability in terms of comparable quality, cost and time or performance.

CONCLUSION

The new Electricity Law establishes a legal framework for electricity-related activities in Mexico, and has structurally changed the national electric industry.

Its fundamental principles are:

  • The generation and wholesale of electricity will take place under a regime of free enterprise and open competition.
  • The CFE will no longer have a regulatory function and will not manage the electric power system.
  • Transmission and distribution networks will be managed by an independent agency under an open access regime and regulated transmission and distribution tariffs.
  • Large end users of power will be free to choose their suppliers and the terms and conditions of power supply.
  • The new law provides for mechanisms to encourage the use of clean energy sources.
  • The new law also provides for a mechanism to solve disputes concerning the required use of lands owned by third parties.

Much remains to be determined by regulations to be proposed and implemented in regard to this new law, but today there is a detailed picture of Mexico's future electric power sector.

Originally published Winter 2014

Learn more about our Energy practice.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2015. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions