Pedro Reséndez
Counsel Greenberg Traurig

Regulatory Integration For Cross-Border Energy Trade

Wed, 02/22/2017 - 09:55

The Energy Reform can be considered the constitutional development with the most impact on Mexico in recent years, creating a new economic paradigm by opening the sector to private participation. Contracts are being drawn up to allow new players to enter the industry. CFE has sparked more speculation with the announcement of the first open transmission project, the Oaxaca line. This also will be the first CFE and private investor joint venture to develop grid projects, so many are eagerly awaiting the reaction of the industry and investors.

Pedro Reséndez, Counsel  of Greenberg Traurig, one of “America’s Best Corporate Law Firms” according to Annual Law and the Boardroom Study, has overseen several companies’ moves during the Reform and the transition period. From the point of view of a company that has seen this process from both sides of the border, he says “the US saw this transition through over several years, while in Mexico it was a swift process.” Reséndez sees some potential stumbling blocks along the road because the way energy supply is managed has changed drastically. “Previously, energy commercialization was permitted under very specific circumstances. Today companies can import energy and resell it,” he says. Now that most regulations are in place, with tender conditions and rates being internationally competitive, Reséndez says the company has “a short list of retailers, qualified users and new companies wanting to supply electricity, so the change has been positive.”

The firm advises companies in energy generation, retail and off-takers by explaining the new regulations, preparing new contracts and creating subsidiaries and cross-border transactions for businesses that import electricity and gas. Reséndez lists securing financing for private companies and the state’s challenge to achieve integration between US and Mexican regulations, as well as integration and interconnectivity, as some of the potential challenges in the market. “We are no longer in a transition year and we are starting to see some results, maybe not in the tariffs but definitely in the projects and tender participation,” he says. While positive results have eased Mexico out of the transition period, Reséndez believes another hurdle ahead will involve cross-border communications. “One of the Mexico’s objectives is to communicate effectively with receiving countries for energy to be transferred effectively. Interstate markets in the US work under the Federal Energy Regulatory Commission  (FERC), which is similar to CRE but it also divides regulation of energy by state, as large economies have complicated regulations,” he says.

The motivation to encourage Mexico’s energy buyers to cooperate is price. While cost is the main reason why companies would import electricity instead of buying it locally, according to Reséndez, cost is also what would encourage Mexico-based companies to source locally. “Electricity is being treated as a commodity following the Reform,” says Reséndez. It is subject to fluctuations in price, influenced by external forces and while privatization of an industry is generally met with wariness it lets economic factors rule the market, which could result in perfect competition.

Now that companies can sell to CFE as traders, without even owning a plant as in the past, companies can also import energy and are no longer required to offer energy contracts to public bidding. This facilitates fair competition and new entrants to the market. “Companies are freer to negotiate the terms of the contract,” says Reséndez. If private companies enter the industry, with government support and expertise, energy subsidies that totalled up to US$5 billion in 2013, according to a Senate report, would no longer be needed going forward. Financing structures have remained largely unchanged but adjustments to land availability and permit requirements have been made, which Reséndez says makes securing project financing easier. CFE was required to have the gas, permits and real estate ready when negotiating but now that this is not the case, another obstacle could block the industry from advancing, as not all awarded projects are being developed. Doubts surrounding the completion of certain projects hang on whether project developers can secure private financing or PPAs. Lenders may finance projects that do not meet the old stipulations but they may charge more or only offer a portion of the funds requested.