March 27, 2020

Requests by Pemex and CFE to the Energy Regulatory Commission

By José María Lujambio and Antonio Riojas

Economic regulators exist to correct the failures of certain markets, and thus promote their efficient development. These regulatory agencies have multiplied in recent decades throughout the world in order to protect consumers and users of certain products and services against, for example, conditions involving natural or legal monopolies. The goal has been to create a level playing field for regulated companies to compete in a fair environment and to guarantee open access to network infrastructure.

In Mexico, the purpose of the Mexican Energy Regulatory Commission (“CRE” by its acronym in Spanish) is to promote the efficient development of midstream and downstream activities in the hydrocarbons and petroleum sector, as well as in the value chain of the electricity industry. Despite the fact that private investment was allowed as part of the energy reform of 2013-14, the Mexican government decided not to privatize the existing public entities operating in the sector, i.e., not to sell their assets. Instead, the purpose of said reform was to convert them into productive State-owned enterprises that would compete under equal circumstances against private companies.

In recent months, Mexico has seen a reaction against equal competitive conditions by its State-owned enterprises Mexican Petroleum (“Pemex”) and the Federal Electricity Commission (“CFE”). These companies have not promoted constitutional or legal reforms; rather, they have acted under the authority and tone set by the current administration and have submitted their own respective lists of requests to the CRE.

After Pemex Industrial Transformation (“Pemex TRI”) officially requested a package of strengthening measures, on December 16, 2019, the CRE issued Resolution A/043/2019, which overruled the methodology to determine prices for first-hand sales of refined products and sales made at storage terminals. With this Resolution, the CRE has eliminated a measure that mitigated the dominant power of Pemex TRI in those markets. This is true despite a transitory provision of the Hydrocarbons Law mandating that asymmetric regulation should continue until “a greater participation of economic agents is achieved”. It is surprising that the CRE considered that such goal had been achieved, when, for example, in November 2019 Pemex and its subsidiaries imported 82% of gasoline and 64% of diesel through points of entry to Mexican territory.

Further, at the end of December 2019, a document sent by the CFE to the CRE entitled “Petition Document” was made public. Based on the document’s contents, the Financial Times published an article with a striking headline predicting the dismantling of the Wholesale Electricity Market (“MEM” by its acronym in Spanish) in Mexico. In truth, while the Petition Document addresses certain aspects of the MEM, several of the listed actions would harm, above all, projects with contracts executed under the Electricity Public Service Law of 1992, particularly self-supply corporations.

One of the most sensitive issues addressed in the Petition Document is the request to update the fees charged for electricity transmission service (“post stamp wheeling”), which the CFE applies to self-supply corporations that use renewable energy sources. Such fees were established in 2010 by the CRE to comply with the law of 2008, whereby the Mexican government determined the public benefit of deploying renewable energy and clean technologies in order to promote energy sustainability and reduce dependence on hydrocarbons. This measure, among others that were strictly regulatory in nature, was a determinant factor for the investment decisions that led to the initial flourishing of wind energy generation in Mexico (approximately 2,000 MW in operation in 2014).

So far the political defense of the progress made in energy matters during the last three decades, by those who conceived them at the time, has been notably weak. In any case, if the CRE addresses certain requests from Pemex and the CFE, and thereby violates the rights of other companies, such companies would have valid legal arguments to promote or defend their interests before Mexican courts.