Mexico utility to get more flexibility with oil-to-gas conversion program

Mexican utility Comisión Federal de Electricidad (CFE) is getting ready for major changes in the country’s laws that would potentially separate its functions, like generation, from other functions, and allow it to do more joint ventures with other parties in areas like power generation.

CFE on June 23 went out for approvals from its securities holders of an amendment of the definition of an “Optional Purchase Event” in its securities documents. The changes would modify the provisions relating to its characterization as a legal entity under Mexican law and to its participation in the electric industry in Mexico.

“The Proposed Amendment is intended to align the Indenture with proposed changes in Mexican law resulting from reforms to the Mexican energy sector that are expected to be considered by the full Mexican Congress and implemented in the near future,” the company noted.

CFE is the national electricity company of Mexico and is 100% owned by the Mexican Government. As of April 30, it provided electricity to 37.8 million customer accounts, which is about 98.1% of the Mexican population. It generates over 91% of the electricity consumed in Mexico, including electricity generated by independent power producers. The remaining electricity generation in Mexico is currently attributable to Petróleos Mexicanos and certain private-sector participants.

Following the approval of amendments to the Mexican Constitution by the Mexican Congress in December 2013 and by a majority of Mexico’s state legislatures, the Permanent Commission of the Mexican Congress formally declared such amendments approved and the President of Mexico, Enrique Peña Nieto, signed them into law.

This Energy Reform Decree includes transitional articles that set forth the general framework for the secondary legislation or implementing laws that are required to give effect to the Energy Reform Decree. On April 30, President Enrique Peña Nieto submitted to the Mexican Congress draft bills proposing such Secondary Legislation.

Key features of the Energy Reform Decree that relate to CFE’s operations include:

  • Continued government participation: The Mexican Government will remain exclusively responsible for the planning and administration of Mexico’s national power system and the transmission and distribution of electric energy, which will remain a public service.
  • Private-sector participation: The Mexican Government will permit private-sector companies to enter into contracts with CFE related to electricity transmission and distribution, although concessions will continue to be prohibited with these activities. In addition, although private-sector companies could only participate in limited electricity generation activities before the Energy Reform Decree was enacted, those private-sector companies will now be able to invest and participate in all aspects of electricity generation and commercialization.
  • Conversion to a productive state enterprise: The Energy Reform Decree provides that CFE is to be converted from a decentralized public entity to a productive state enterprise no later than Dec. 21, 2015.
  • Regulatory oversight and authority: The Ministry of Energy and the Energy Regulatory Commission will be granted additional technical and administrative authority over certain CFE operations and the electric energy sector generally. The Ministry of Energy will establish a legal framework to encourage the openness and efficiency of the electric energy sector and will monitor compliance under this framework. The Energy Regulatory Commission will be entrusted with regulating and issuing permits to private-sector companies for power generation.

“We believe that the Energy Reform Decree and the Secondary Legislation will strengthen us by shifting our focus towards value creation, increasing our autonomy and flexibility and enabling us to evolve from being an electric company to being an energy company involved in additional aspects of the energy value chain in Mexico,” CFE said.

The utility expects that the full implementation of the Energy Reform Decree will benefit it in the following key respects:

Legal Form: As a productive state enterprise CFE will generally retain the same rights, powers and privileges it had as a decentralized public entity, but under a new legal framework that will provide CFE with increased managerial and budgetary autonomy to generate economic value.

Scope of Mandate: CFE will remain responsible for the transmission and distribution of electricity for public service purposes. The scope of its mandate will be enlarged, which will enable it to transform from being solely an electric company to being an energy company involved in additional aspects of the energy value chain in Mexico, including natural gas commercialization to industrial customers.

Operational Focus: In addition to current activities, CFE will be able to sell natural gas to industrial customers for power generation and other purposes. CFE expects to play a key role in the development of Mexico’s natural gas pipeline network, as highlighted by its recently announced initiative to construct five new pipelines, which will be built by private participants under long-term contracts with CFE.

Strategic Importance: CFE will continue to operate Mexico’s electricity transmission and distribution networks and sell electricity to residential consumers and small and medium industrial and commercial consumers. It expects to continue to be the sole entity of the Mexican Government engaged in the generation of electricity for sale to third parties.

Organizational Structure: The CFE Law Bill proposes that the utility create subsidiary productive state enterprises that will each undertake one of its key electric sector activities—generation, transmission, distribution and commercialization. In addition, CFE’s Board of Directors will be empowered to create additional subsidiaries to engage in any new lines of business that it wants to pursue without the need to obtain approval from the Mexican Congress.

Energy Procurement: Frequent shortages of natural gas due to low domestic production and the lack of transportation infrastructure have restricted CFE’s transition to using lower-cost natural gas to generate electricity, which is three to four times less expensive than fuel oil. “We believe that the full implementation of the Energy Reform Decree will result in an increase in the supply of natural gas as private-sector participants are able to explore, extract and produce natural gas in Mexico and the natural gas pipeline network continues to expand,” CFE noted. “We currently purchase substantially all of our natural gas from Petróleos Mexicanos, which has at times since 2006 limited the amount of natural gas it makes available to us. Following the full implementation of the Energy Reform Decree, we believe that we will have a greater number of suppliers from which to purchase natural gas.”

Partnership Flexibility: Following the enactment and implementation of the Secondary Legislation, CFE expects to be permitted to enter into joint ventures with private-sector companies for electricity generation, transmission and distribution, as well as for the distribution and commercialization of natural gas to industrial customers. “We believe that our knowledge of Mexico’s hydrologic conditions and our ability to be a supplier of natural gas will make us a desirable partner,” the utility said. “We expect that these collaborations will, in turn, help us gain access to new technologies that will allow us to modernize our transmission and distribution networks and thereby reduce the quantity of electricity that is used in Mexico but not paid for. Moreover, by participating in joint ventures, we believe we will also be able to optimize our use of capital, potentially reduce our costs and share in any returns generated by these joint ventures.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.