By: José María Lujambio
Cacheaux Cavazos & Newton
Mexico City, Mexico
Perhaps one of the most noteworthy developments to come from the Mexican energy reform on electricity is that it allows private parties to freely generate and sell the electricity they produce to suppliers or, in certain cases, directly to qualified users, thus creating a truly competitive power market.
The new structure not only allows for the sale of electricity, but also that of associated products such as capacity, ancillary services, clean energy certificates and transmission financial rights. In order to participate in the market, generators, marketers (including suppliers), and qualified users must enter into an agreement with the new system and market independent operator, the National Energy Control Center (Centro Nacional de Control de Energía or CENACE).
In accordance with the Electricity Industry Law (Ley de la Industria Eléctrica or LIE) in effect as of August 12, 2014, the rules for the wholesale electricity market are comprised of the following: a) market framework, such being general administrative provisions that will contain the principles of its design and operation; and b) operating provisions, such being the criteria, guidelines, manuals and technical proceedings issued in accordance with the market framework.
As a principle, the regulation of services rendered by the transmission and distribution networks, the operation of the electricity system, and the power market and its related products, should be the responsibility of an autonomous regulatory agency whose decisions are not subject to political influence, in a broad sense, or by public policy concerns. The draft bill of the LIE presented by Mexico’s President to Congress last April did not address such principle given that it intended to grant the Department of Energy (Secretaría de Energía or SENER), in an unclear manner, certain authorities of a regulatory nature, to the detriment of the autonomy of the Energy Regulatory Commission (Comisión Reguladora de Energía or CRE). Legislators corrected several of the problems regarding this issue. Nevertheless, the political negotiation did not result in an optimal outcome, given that the agency in charge of energy policy will continue to interfere in the regulatory body’s work.
For example, the SENER will issue a non-binding opinion as to the market framework issued by the CRE and the operating provisions issued by the CENACE. The SENER, in coordination with the CRE, will form a committee that will review the work of the CENACE and the wholesale electricity market in order to deliver an opinion on its operation. Interestingly enough, the SENER will issue the first market rules (the framework and the operating provisions) and will be responsible for oversight during the first year of operation, with mere technical support coming from the CRE (see Articles 11, Sections VI, XIV and XV, 112, and Transitory Third Article of the LIE). By illustration, one can imagine a scenario in which the Department of Communications and Transportation gives an opinion on the main regulatory instruments of the Federal Telecommunications Institute or openly replaces such agency. This would be unacceptable at this point in the regulatory development of Mexico. Nevertheless, something very similar has occurred in the energy sector.
On the other hand, there is no justification for the exclusion of market rules from the regulatory improvement and public consultation mechanisms, as ordered by the Federal Administrative Procedure Law, per Article 95 of the LIE. While it may be inconvenient for some authorities to go through the Federal Commission for Regulatory Improvement (Comisión Federal de Mejora Regulatoria or COFEMER), it is clear that the market framework and its operating provisions are administrative norms that should not pass without a cost - benefit analysis and the democratic legitimacy required by law as a general rule. Furthermore, market rules should be published in the Official Journal of the Federation and not simply notified to market participants, as if they were an exclusive group outside the purview of federal law.
On September 19, the draft of the presidential regulations to the LIE was made available on the COFEMER website. This document will provide the exact enforcement procedures of such law in the administrative sphere. Besides various problematic aspects that exceed the scope of this article, the confusion generated by the draft regulations concerns the nature and purpose of the rules of the wholesale electricity market:
- In accordance with article 3, the authorities will indicate, from among the acts or resolutions they may issue, those provisions that will form part of the market rules. In reality, the rules should be integrated into one legal instrument, not several, given that this will result in a lack of legal certainty and clarity for the industry.
- Article 4 provides that the market rules shall include provisions regarding the planning of the national electricity system and the methodology for cost allocation related to the expansion and modernization of its networks. However, neither the infrastructure planning entrusted to the SENER nor the infrastructure fee regulation entrusted to the CRE need to be considered part of the wholesale electricity market regulation, which should be limited to the transactions as to electricity and its related products.
- In the same sense, Article 53 provides that proceedings for the interconnection of power plants to the national electricity system should be established in the market rules. Once again, market rules should govern market transactions and not the access of generation to public utility networks.
Electricity sector restructuring has occurred in many countries over the past two decades, and such restructurings have always been complicated procedures from which Mexico can learn numerous lessons. The hope is that the technical expertise of Mexico’s authorities in the energy sector will somehow make up for the structural deficiencies of the regulatory model in the wholesale electricity market so that the implementation of the electricity reform itself will be successful.
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November 2014
Sources of information and disclaimer: The following sources of information, among others, have been used in preparing this document: Official Journal of the Federation, presentations by the Department of Energy, and the website of the Federal Commission for Regulatory Improvement. Mexican Energy Law does not constitute legal or tax advice and should not be used for purposes other than as purely informative for the general public. For more information on Mexican Energy Law, any of the issues mentioned therein or to inquire about legal services, please contact CCN energy practice attorneys, whose data can be found at http://ccn-law.com/en/practice-areas/energy.
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