THE POWER SECTOR IN: MEXICO 1

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1 THE POWER SECTOR IN: 1 Issue Area I. Current Status of Sector Reform: Key Points Power System Overview Structure Competition Role of the State Electricity generation in Mexico was 181,691GWh in 1998 with an installed capacity of 34,977.9 MW (28.2% of which were hydro, 58.5% thermal, 7.4% carbon fired plants, 3.7% nuclear, and 2.2% geothermal and wind). Electricity demand is expected to grow at 5.5% per year. The expected requirements of installed capacity for year 2005 are of around 13 GW according to government figures. Due to the lack of government funds to invest in this expansion, the government expects that the private sector will perform it. Electricity coverage in Mexico is around 95% of the total population. The Mexican electricity system is completely interconnected and behaves as a sole market, with the exception of the Baja California peninsula, which remains isolated due to technical and economic reasons. The electricity service in Mexico is currently dominated by two state owned enterprises: the Comisión Federal de Electricidad (CFE), which is in charge of power generation, transmission and distribution nationwide, and Luz y Fuerza del Centro (LFC), which is responsible for the distribution service in Mexico City and surrounding areas. Since 1992, IPPs, self-generators, cogenerators, and power importers are allowed to participate in the sector, by selling the power they generate to CFE. Power may also be generated or imported by large users or groups of users and wheeled through the public transmission grid to meet their own requirements. The reform process proposed by the government to congress contemplates the unbundling of both CFE and LFC and the subsequent privatization of the generation and distribution companies resulting from the restructuring. The separation of the different activities will occur in the initial stages of the reform process, while the privatization process is expected to occur at the later stages. There is no competitive activity in the sector at this time, except for competitive solicitations for BOO/BLT projects. The proposed industry structure will improve competition, especially in the wholesale market. The unbundling of CFE and LFC will result in the creation of various companies in charge of generation and distribution. The new wholesale market will be administered by an independent entity, and the transmission lines will be separate from the generation and distribution activities. Both transmission and distribution will be considered natural monopolies and regulated by CRE. Apart from the generators and distributors, the wholesale market will also have the participation of large consumers and marketers (who would sell electricity to large customers and distribution companies). Both CFE and LFC are directly involved in most of the activities in the electricity sector, they are in charge of organizing, administering, operating and planning the generation, transmission and distribution systems. They are even involved in regulation activities for the sector. The Energy Secretariat oversees and regulates both CFE and LFC and participates in planning. The Energy Regulatory Commission (CRE) has regulatory functions, mainly regarding private sector participation in the electricity sector. The Finance Secretariat approves tariffs and regulates the financial operations of the CRE. The government proposal contemplates major institutional change in the electricity sector. The Energy Secretariat (SE) will be in charge of formulating energy policy and the changes of the industry. It will also be in charge of indicative planning. The CRE will increase its participation in the electricity sector, as it will assume the regulatory aspects of CFE and LFC. There would also be a system administrator, COSEN, which will be a public entity independent from the commercial actors in the system. It will also operate the wholesale market. The government also expects to keep the nuclear plant and some of the hydroelectric plants, and the 1 This profile incorporates the government s proposal for a new industry structure in Mexico. It was reviewed by JM 7/24/99 1

2 Regulatory Institution Private Sector Participation Major Outstanding Issues transmission system. The remaining assets divested from CFE and LFC will most probably be privatized. The Energy Secretariat formulates regulations for the Comisión Federal de Electricidad and Luz y Fuerza del Centro. CRE (Energy Regulatory Commission) is the technical agency of the Mexican federal government responsible for regulation of the electric power and natural gas industries, regarding private sector participation. Both CFE and LFC are auto-regulated natural monopolies; CRE only regulates the interaction between CFE and private generators. The proposed institutional structure puts CRE as the major entity in charge of regulation. It will acquire all the regulation attributes coming from the Energy Secretariat and from CFE and LFC. CRE will be in charge of the technical and economic regulation of the new electricity industry. It will remain as the overseeing agency of the industry. CRE is completely independent from the SE, and is autonomous in both technical and operative terms. It has been mostly concentrated in the natural gas industry, which means that it still needs some consolidation in order to regulate the new electricity industry properly. Since the reforms to the Federal Law in 1992, most of the power expansion has been performed by the private sector. Between 1994 and 1997 the government approved 60 generation permits with a total capacity of 2,670 MW. Most of the permits (57.2%) were awarded to self-production projects, followed by cogeneration projects (21.9%) and IPPs (19.9%). The remaining permits were awarded to small production (0.7%) and imports (0.2%). Private participation accounts currently for 3.3% of the total generation market. CFE tendered 10 new IPPs in 1998, and awarded two of them (with an installed capacity of 675 MW) to private investors. It has already received bids for other two (675 MW) and the remaining 6 are expected to be awarded in Due to the government s lack of funds to undertake the needed expansion, the CFE has awarded contracts to private investors to undertake most of the needed expansion. Private participation was initiated through BLT (Build Lease Transfer) projects, but most of the latest tenders have been done using the BOO (Build Own Operate) structure. The Samalayuca II project (700 MW partially financed by IDB), which was the first large privately funded plant in the country, initiated its operations in October As the proposal for change of the electricity industry has already been sent to congress, most of the expected IPP tenders have been delayed. One of the major objectives of the electricity reform is to incentive private investment through a competitive market. Electricity reform also contemplates the privatization of the government held assets. The privatization process will require additional work, as it needs constitutional change. The change will move the generation, transmission, distribution and marketing activities from exclusive control of the government to priority areas, which the government will control by giving permits and concessions. The articles that should be changed are articles 27 and 28 of the constitution and require congressional approval. 1. Sending the proposal to congress represents a major step in the restructuring process of the industry. The government should continue to be committed the to reform in order to see some results. The major concern arises due to the closeness of presidential elections. Having an important reform proposal, which is highly controversial in major groups of he country, could go against the government. The proposal needs changes to the constitution, which requires approval by two thirds of the congress. 2. Having such a detailed constitution in Mexico diminishes flexibility in the needed changing processes of the country. 3. The privatization of CFE and LFC is seen as a natural consequence of the restructuring process. It finds major opposition among Mexicans, who consider that their public services should remain in government hands. It is also the only portion of the reform that needs constitutional change. For that reason, the government should explain clearly the benefits of privatization within the context of the new liberalized market. 4. The transition situation should be managed carefully, as the new investors should be attracted into the market under competitive conditions that do not affect the future operation of the market. In that 2

3 II. Legal & Regulatory Framework Legal Basis same track, the current contracts with IPPs could be revisited, to understand their new position under a competitive market Constitution. Article 27 states that it is exclusively a function of the Nation to generate, transform, distribute, and supply electric power that is to be used for public service. No concessions for this purpose will be granted to private persons and the Nation will make use of the property and natural resources that are required for these ends. Amendment to the Federal Law on the Public Service of Electric Power (December 1992). Pursuant to Article 73 of the Mexican Constitution, under which all aspects of the electric power industry were reserved to the Comisión Federal de Electricidad (CFE), the federal law was amended by Congress to allow private, including (in some cases) foreign, investment in the electric power industry. According to this amendment, the following categories are not considered public service and, therefore may be undertaken by private firms: Generation for self-supply, cogeneration, or small production; Generation by IPPs for sale to CFE; Generation (through cogeneration, small production, or IPPs) for export; Imports for self-use only; and Generation for use in emergencies during interruptions of electric power that is being supplied for public service. Thus this amendment changed, without altering the Constitution, the definition of the term public service. Rules of Procedure for the Federal Law on the Public Service of Electric Power (May 1993). Established the mechanisms for new power generation by the private sector. Law of the Energy Regulatory Commission (October 1995) The Energy Regulatory Commission is defined as a decentralized administrative organization of the Ministry of Energy. The CRE is responsible for solving questions on the application of the regulatory provisions of Article 27 of the Mexican Constitution in the area of electric power and natural gas. The CRE awards and rejects permits for those activities that are not considered public service. It is also in charge of supervising the performance of the contracts between permit grantees and CFE, issuing arbitration resolutions in accordance with the terms of applicable legislation, and participating in studies relative to the establishment of prices and rates of the products and services related to electric power. Resolution approving the model for the Contrato de Adhesión para Interconexión (October 1996), establishing the contracting relationship between CFE and the private generators (more than 10 MW), that will use the transmission and distribution infrastructure of the Commission. Agreement Authorizing the Restructuring, Adjustment and Modifications to the Supply and Electricity Sale Tariffs (November 1996) Decree Reforming the Rules of Procedure for the Federal Law on the Public Service of Electric Power (July 1997). Specifies more precisely the Cogeneration and self-producers concepts. It also increases the flexibility for the requirements in CFE s competitive solicitations by the private participants, defines the alternative sources for power purchases by CFE in emergency cases, and establishes the possibility for the private sector to build and maintain their own transmission lines. The new legislative measures to be taken within the process of reform will include: 1. Constitutional reform, changing articles 27 and 28, so the government changes its obligation in the electricity industry from operator to regulator, which approves permits and concession for the operation of new companies. 2. Creation of a new law that will formulate the new industry structure, the functioning of the market and the participation of the different sectors in that industry. 3

4 Role of the State Institutional and Regulatory Entities and Jurisdiction Sector Planning 3. Resolutions that will regulate the previous law. CFE and LFC, the state-owned electricity companies, perform most of the activities related to the performance and regulation of the electricity sector. The government, through the energy secretariat is in charge of some regulatory and policy functions in the sector. The secretariat of finance is in charge of setting tariffs. CRE is only in charge of the regulatory functions regarding private sector privatization in the sector. The unbundling-privatization of the national utilities as well as the creation of a new wholesale market will imply a completely new role for the state. It will move out of many commercial activities, such as most of the generation and distribution companies and will concentrate more in policy, planning, system operation and regulation. In the generation industry, the government will mostly move away, keeping the operation of the nuclear plant and of some hydroelectric plants, which reservoirs have multiple uses. Most of the distribution companies will be privatized and the transmission assets will be aggregated in a single company (REN), which will be initially in government hands. COSEN will also be a public entity in charge of the system and market operation. All the regulatory responsibilities of both the SE and the CFE and LFC will be transferred to CRE, which will also be in charge of regulating the new industry structure. CRE is already a public company, independent from the government. The government will be in charge of setting sector policies through the Energy Secretariat (SE). The Secretaría de Energía (SE) formulates policy and regulations for the electricity sector. The Energy Regulatory Commission (CRE) was created in 1995 and was granted the technical and operative autonomy to promote the efficient development of the electricity industry. Among its areas of concern are the supply and sale of electricity to consumers; the generation, export and import of electricity undertaken by the private sector; and the acquisition of electricity destined to the public service. The CRE will participate in the establishment of electricity tariff and methods for the calculation and determination of prices, concede permits and authorizations required to undertake the regulated activities. The Investments Promotion Unit (UPI) was created by the Energy Secretariat with the objective of promoting and coordinating the participation and investment of the national and foreign private sector in the energy sector. The Secretaría de Hacienda y Crédito Público (SHCP) is in charge of setting the electricity tariffs and the policies regarding subsidies. It has the faculty to participate in the decision-making process for implementing energy policy. Comisión Federal de Electricidad (CFE) is the Vertically Integrated federal electricity company. It is in charge of the generation, transmission and distribution activities in all the country, with the exception of the distribution in Mexico City. CFE is also in charge of electricity planning and dispatch of the system. Its is an auto-regulated enterprise within the system. Luz y Fuerza del Centro (LFC) is the distribution company for the central part of the country (Mexico City and its surrounding areas) and represents one fourth of the total generation in the country. It is also an auto-regulated company within the system. Sector reform will transform completely the structure of the system, as CFE and LFC will be completely separated, new companies will be created and sold to the private sector. The regulatory and tariff setting attributions of SHCP and SE will be transferred to CRE and a new company, COSEN will be created to operate the system and the market. The SE and the Ministry of Finance oversee CFE s and LFC s expansion plans. CRE provides guidelines for solicitations for power projects issued by CFE and LFC, and oversees market issues regarding IPPs 4

5 and non-utility generation projects. The government proposal is based on market forces, which means that the market will provide enough incentives for system expansion. The SE will be in charge of indicative planning, showing the current investment opportunities. III. Sector Structure and Participants Structure Participants and Degree of Private Sector Participation The operating assets of the sector are concentrated under the vertically integrated Comisión Federal de Electricidad (CFE), responsible for generation, transmission and distribution activities in almost all the national territory; and the Luz y Fuerza del Centro enterprise that provides distribution services for Mexico City and its surrounding areas. After the reform of the electricity law in 1992, various private investors have entered the market. Many of those private investors are building plants for selfconsumption and cogeneration or are independent producers selling its energy to CFE. The first step of the restructuring process proposed by the government will be the transformation and unbundling of the national utilities. This means that both CFE and LFC will be unbundled both horizontally and vertically into different business units. A second step will be the creation of a wholesale market and the entrance of new private investment in the industry. The last step will be the privatization of the government owned companies. This privatization will not include the nuclear plant and some hydroelectric plants. Generation: The Mexican Constitution mandates that only the Government can provide power generation, transmission and distribution services. Due to that constitutional reason, the government has monopoly power, providing those services through CFE and LFC. However, the 1992 Electric Public Service Law allowed private investors to own/operate generation or cogeneration plants used for their own supply, and sell the excess power to the CFE. It also allowed the entrance of Independent Power Producers, which can only sell their energy to CRE or to export it. Since that time, most of the expansion has been performed using private participation. Most of the private projects between the years 1994 to 1997 were promoted by the industry mostly for self-consumption but also for cogeneration. The first project that involved private investment was the 700 MW Samalayuca II project, which was awarded in 1996 and is already in operation. Among other BLT projects that are currently under construction are the 450 MW Rosarito II project, the 100 MW geothermal station and the thermal plants in Chihuahua and Monterrey. IPP projects started with Merida III, which was awarded in January In 1998, CFE announced the tendering of 10 new IPP projects. From those projects, only two (the 225 MW Hermosillo and the 450 MW Rio Bravo thermal plants) were awarded. CFE has already received tenders for the Saltillo (225 MW) and El Sauz-Bajio (450 MW) projects, and expects to tender the remaining six projects in the first half of Most of the expansion will be mostly built with natural gas fired plants. The increasing percentage of plants built for self-consumption is a clear sign of the high prices and the inefficient service that CFE is currently providing. The procedure of tendering projects to private investors to attend future demand requirements is currently the dominant process used by CFE. IPP tendering is expected to slow down while the reform process moves through congress. The main reason for this is that the new industry structure will be mostly based on merchant plants operating under a competitive market. On the other hand, many legal issues will be raised, as CFE will no longer exist, and the long-term contracts with CFE will have to be transferred to any of the new companies. Transmission: CFE, as a government enterprise, has a legal monopoly for all transmission functions. The 1997 Decree that modifies the Rules of Procedure of the Federal Law on the Public Service of Electric Power establishes the possibility for the private sector participants to build and operate their own transmission lines. Under the proposed structure, all of CFE s transmission assets will be transferred to a new transmission company (REN). This company will be in charge of the maintenance, conservation and expansion of the system. Other companies will also be allowed to build new transmission lines through a concession with the government. Distribution: By constitutional law, only the Government via CFE or LFC can provide 5

6 Targets for Privatization distribution/commercialization services. LFC is the only distribution company that is independent from CFE; it serves Mexico City and its surrounding areas. LFC s demand corresponds to almost 25% of the total demand in the country. Under the proposed structure, the country will be subdivided in different distribution zones, and the distribution networks that are currently operated by CFE and LFC will be assigned to those zones. The distribution companies will be sold through concession processes to different companies. Both Constitutional mandate and its corresponding regulatory framework do not allow the privatization of Mexico s electricity companies. One of the major results of the restructuring process will be the privatization of the companies coming from CFE and LFC. Generation plants will be completely privatized and distribution and transmission assets will be sold through concessions to the new private investors. The only commercial assets that are expected to remain in government hands will be the Laguna Verde nuclear plant and multi-purpose hydroelectric projects. New Investments Taking into account Mexico s growth rate, the government has estimated that in the period between 1999 and 2005, the system will need 13,000 additional megawatts of installed capacity. The transmission and distribution systems also require strong investments in order to guarantee the service to final consumers. The government has calculated that this investments will require around 250,000 million pesos (around 26,000 million dollars). The major incentive for the restructuring process is that the government does not have enough funds to perform these investments and needs a more competitive environment to attract private investment into the sector. The opening of the market to private investors is the second step of the government s strategic plan, following the restructuring of the national utilities and is expected to occur before the end of this presidential period. Even though the IPP tendering process is expected to slowdown, some projects will be awarded using this structure in the transition process. IV. Electricity Markets: Areas of Competition and Monopoly Bulk Power Transmission and Distribution (Networks) CFE currently supplies power on an exclusive basis to all public enterprises in the country, and is the sole market for the self-generators, IPPs, and cogenerators selling power to the public system. Up to 1992, only self-generators were allowed to generate power in addition to CFE. With the amendments of the Electric Public Service Law, the Secretaría de Energía and the CRE may grant permits for the self-supply, cogeneration, small production, independent production, exportation, or importation for self-use only. Small production projects may not exceed 30 MW of capacity, and only Mexican citizens or corporations organized under Mexican law and domiciled in Mexico may be granted a permit. The electricity generated should be destined for sale to CFE or for export. In addition, a small production facility may supply all of the electric power that it generates to small rural communities or isolated areas lacking electric power, and the total capacity of the project must not exceed 1 MW. The generation of power by a plant with a capacity in excess of 30 MW and for the exclusive sale to CFE or for export is considered independent production. The same rules of origin for the small producers apply to IPPs. An independent production project must have been previously included in the respective planning and program of CFE or must be the equivalent of such a project (except in the case when the power generated is destined to exportation). CFE s market power will be significantly reduced through the restructuring process. It will be unbundled, and each one of the newly created companies will be independent. These companies and new investors will compete against each other in the wholesale market (MEM) to supply the demand. The administration of the MEM by an independent agency (COSEN) will guarantee the competition in the market. Privatization of the government held assets would finalize cross-ownership concerns. CRE will be in charge of overseeing market power and some restrictions will be put for vertical and horizontal ownership of the system. CFE has the legal monopoly for all transmission functions. The National Interconnected System (SIN) covers 7 of the 9 areas of the National Electric System. Two independent systems operate in Baja California and Baja California Sur. The independent system of Baja California has interconnections with the western grid of the United States, through 2 transmission lines of 230 kv. 6

7 Retail Distribution CFE s restructuring will result in the creation of a new transmission company, REN. This company will be considered a natural monopoly and will be regulated by CRE. REN will be privatized through a concession process, in which the buyer will acquire a 30-year concession of the transmission network. The contract can be renewed after that period and will confer exclusivity to that company. Concessionaires of the transmission and distribution networks are obliged to provide open access to their networks, through their regulated tariffs. By constitutional law, only the government via CFE and LFC can provide distribution/commercialization services. CFE s restructuring will also result in the creation of various distribution companies in the different regions of the country. These distribution companies will also be in charge of retail sales to regulated consumers. This means that distribution companies will be regulated in both their distribution and retail services. At the same time large qualified consumers will be allowed to buy electricity directly from the market, having the choice to buy their electricity from the distribution company, the marketers or directly from the wholesale market, and pay only the distribution portion to the distribution company. III. Load Dispatch and Pool Operation Dispatch Entity and Basis Pool Operation VI. Pricing Bulk Power Transmission/ CFE undertakes central load dispatch functions as part of its legal transmission monopoly. CFE has historically set the operating criteria for dispatch and has been virtually independent of oversight in this area. The CRE is in charge of reviewing and, if necessary, regulating this area in order to implement the 1992 reforms, which allow third party wheeling. The new dispatch entity will be COSEN, in charge of both system and market operation. COSEN will be a government-owned entity with independent management. There is no power pool in Mexico at this moment, CFE is in charge of dispatching the units, transporting the electricity and selling it to final users. The new wholesale market (MEM) will consist of a centralized power pool operated by COSEN. The generators, the distribution companies, the marketers and the large consumers will form this power pool. Generation companies will bid into the pool the prices at which they are willing to be dispatched and the quantities that they are willing to offer. Parallel to this market there will be a financial market, in which generators and consumers (distribution companies, large consumers and marketers) will sign bilateral contracts. These contracts will exist in order to hedge the price volatility that could occur in the power pool. The real dispatch on the power pool will not be based on the bilateral contracts, but on the offers made by generators to the power pool. The prices for CFE s generated power sold to its distribution subsidiaries or to LFC are based on economic costs and investment expansion costs (i.e. LRMC). PPAs between CFE and IPPs, cogenerators and self-generators are based on negotiated prices and include capacity and energy components. The price structure of the new wholesale market will be based on the pool operation. Generators will send their offers for electricity sales the day before, indicating the quantity and minimum price that they are willing to receive. COSEN will aggregate the offers and will choose the ones that offer the lowest prices until they meet the totality of the demand. The last unit to be dispatched will be the marginal unit, and its price bid will be the short run marginal cost (SRMC) of the system. All dispatched generators will be remunerated at this price and all buyers will also pay this price. This dispatch process will occur for hourly intervals. In cases of congestion of the transmission lines, prices will be set in regional terms, and regulation should provide the incentives for construction of transmission lines in those cases were large regional differentials in price exist. The new structure will also include bilateral contracts, which are basically financial contracts to hedge against price risk in the MEM. These contracts will have the contracts for differences structure. Transmission service provided by CFE is based on cost-of-service, but the transmission capacity is 7

8 Distribution (Networks) Retail Tariffs Subsidies VII. Sector Problems and Priorities Framework and Other Issues currently constrained and requires additional funding for expansion of the grid to be able to support new generated power increments. New price incentives could result in the construction of the needed expansion for the country. Transmission and distribution prices will be regulated using a price cap regime. Tariffs will be revised every five years and will be calculated for each one of the companies separately. The tariff will include investment costs, maintenance and a reasonable return on their investment. Tariffs can be adjusted during the five-year period through a mechanism of incentives. Among the adjustments that could be included will be: inflation and devaluation of the currency; productivity gains, which should be transferred to final consumers through lower tariffs; and additional and non-expected costs, such as changes in the tax structure. Companies have the incentive to increase their efficiency, as they will retain the gains from their cost reduction during the periods at which tariffs have not been revised. In 1995 the Government approved a 20% nominal increase in tariffs (except for industrial consumers), and a fuel adjustment was applied to all consumers. For 1996, an average nominal adjustment of 30% for all consumers was adopted. In November 1996 and April 1997 new adjustments to the tariff structure were adopted for the large consumers and an automatic adjustment regime is operating to maintain in real terms the general tariff level for low, medium and high tensions, representing around 55% of the electricity sales. Nonetheless, additional actions are required to set tariffs equivalent to the Long Run Marginal Cost, and therefore reducing the cross-subsidies that are currently in place. The prices for final users will be a compound of the different commercial activities. The prices will be the sum of the generation cost, and the regulated transmission and distribution costs. For regulated customers, the generation cost will consist of an average of the costs to the distribution companies to acquire the electricity directly from the pool and from the agreed prices in the bilateral contracts. The generation portion for qualified users will depend on their decision to buy from the MEM, to use bilateral contracts, or to buy from marketers or from the distribution company. The price structure is generally characterized by cross-subsidies between consumer classes and rate distortions. High consumption users generally subsidize low-consumption users; agricultural consumers are considerably subsidized by other rate categories. The government expects to dismantle the current subsidy structure and create a more transparent one and directed to the groups that need it. This means that the subsidy structure will be clearly defined in quantity, group of recipients and will be temporal. 1. The government needs to participate actively in the restructuring process in order to obtain satisfactory results from the reform. The reform has already found major opposition from various Mexican groups who oppose the privatization of the national resources. The reform should be approved by congress before the end of the current presidential period, and the different government entities should be continuously committed to the process. Both president Zedillo and the secretary of energy have shown the schedule of reform and expect to have the first two steps ready before the end of the presidential period. This means that by the end of year 2000 both CFE and LFC would be restructured, the different business units will be operating, COSEN will be created and the new wholesale market will be operating, with open entry to new investors. 2. One of the major concerns among Mexicans is that restructuring means privatization, in the case of Mexico, that could be the most feasible consequence. CFE s condition as a vertically integrated monopoly, which owns or contracts all the generation, owns all the transmission and distributes in all the country, does not allow competition. CFE is already moving to a more competitive organizational structure, separating its activities into different operational units, the next steps should be horizontal separation and a possible privatization. For that reason, the opposition among the unions is so brave, as they relate privatization with reduction in personal. CFE s union is supporting the reform, but LFC s union has shown strong opposition to the process. Even the government s political party (PRI) has been opposed to the privatization, as their statutes include the retention in state hands of the energy resources and the president did not discuss with its party the reform before 8

9 sending it to congress. The privatization will be the last step of the reform process, as this is the only part that requires a constitutional change. The initial part of the process of reform will be the unbundling of CFE and LFC and the creation of the wholesale market with the participation of private investors. This gives the government time to convince the different groups about the benefits of privatization within the new market structure. 3. Both CFE and LFC have deteriorated their quality of service to consumers and the generation plants are in need of maintenance or replacement. The investments in those companies should come from the private sector within the new industry structure. 4. The structure of tendering IPP projects could represent losses to CFE, as it will be holding a large amount of long-term contracts that could not represent international price standards in the long term. As the industry moves to a more liberalized structure, CFE s contracts will have to be redefined, determining which of the newly created companies will keep them and maybe renegotiate them. Operating Needs 1. Current demand growth will require the construction of 13,000 MW of new capacity in the system before year Strong investments will also be needed in the transmission and distribution systems. The government pretends to move out of the commercial activities in the system by creating the new industry structure, in which new investors will come and build the required infrastructure. The current IPP structure is not as flexible as desired, and major efficiency gains could result from the opening of the industry. 2. High losses and low productivity are characteristics of the national utilities. Restructuring will clearly result in productivity gains for the system and the companies will be given the incentives to become more efficient. Electrification and Energy Efficiency CFE, through its 13 distribution utilities has been responsible for rural electrification. CFE funds the electrification programs. The overall coverage is 95%, with rural coverage somewhat lower than this level. In the new industry structure, each regional distribution company will be obliged to provide the required expansion in its area, as long as the investment can be recovered through the current price structure. The government will establish subsidies to promote electrification programs for rural and lower income groups. VIII. Sources and Relevant Web Pages Sources Secretaría de Energía, Mexico, Propuesta de Cambio Estructural de la Industria Eléctrica en México CRE, Mexico, InfoCRE. Special Edition, February Latin American Power Watch. Monthly Newsletter. Washington DC. Relevant web Pages: Comisión Reguladora de Energía (CRE): Secretaría de Energía (SE): Comisión Federal de Electricidad (CFE): Luz y Fuerza del Centro (LFC): Catholic University of Chile: 9

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