Energy Regulatory Commission (Mexico)

Comisión Reguladora de Energía

Country

Location

Regulated area

Mexico

Mexico City

Energy & natural resources

Useful pages on the regulator website

Key individuals

  • Leopoldo Vicente Melchi García: President Commissioner
  • Miguel Ángel Rincón Velázquez: Executive Secretary of the Board

Regulatory oversight

Energy industry: background and current context
Pursuant to the constitutional Energy Reform, published on 20 December 2013, articles 25, 27 and 28 of the Mexican Constitution were amended to modernise Mexico’s energy industry, fully opening the whole value chain (in the hydrocarbon and power industries) to private investment, and ending the state’s monopoly. This Energy Reform modified the principles, key players, roles, scope and, in general terms, the understanding of the Mexican energy industry.

The main package of the Energy Reform’s implementing legislation, which contains several new laws (including the Power Industry Law (Ley de la Industria Eléctrica), the Energy Transition Law (Ley de Transición Energética) and the Hydrocarbons Law (Ley de Hidrocarburos), among others), and several amendments to existing legislation, was published on 11 August 2014. The Energy Reform energised the industry and attracted both investment and competition.

However, since the new president was elected in July 2018, the new administration has expressed a different vision of the energy industry based on a reinforcement of the government-owned entities, and has developed a new policy, contrary to the principles and the structure contemplated in the Constitution and the regulations. This change of philosophy has generated confusion and has taken the whole sector into a re-evaluation stage. Many investments are being questioned and government decisions are being challenged in courts. We expect this turmoil will soon transition into a more productive process, in which the government and the private sector can work together to develop an industry that is vital to the Mexican economy.

The 2013 Energy Reform also contains several transitory articles that describe in more detail the basis for the implementing legislation and regulation of the power and hydrocarbons sectors. Among these, transitory articles tenth and twelfth of the Energy Reform describe the legal power and authority of the Energy Regulatory Commission (Comisión Reguladora de Energía (CRE)).

Power sector
Prior to the Energy Reform, the generation, conduction, transformation, distribution and supply of electric power were considered a public service and, as such, were overseen by the state. The Federal Electricity Commission (Comisión Federal de Electricidad (CFE)) had exclusive control over the generation, transmission, distribution and commercialisation and supply of power. As an exception to the public service, private entities could generate power under schemes of independent production (sale of power to CFE), self-supply, cogeneration, small production and for import and export.

Following the opening of the sector to private participation pursuant to the Energy Reform, the state retains exclusivity over the transmission and distribution of power (considered strategic areas). Otherwise, the law allows the participation of private investment in all other activities in the power sector, including the generation, supply and trade of power, as well as the creation of a nationwide wholesale electricity market.

Oil and gas sector
Prior to the Energy Reform, private investment was not allowed in the Mexican hydrocarbons sector (except for the transportation by pipeline, storage and distribution of natural gas, which has been allowed since 1995). Mexican Petroleum (Petróleos Mexicanos (PEMEX)) had exclusive control over exploration, production, processing, refining, transportation, storage, distribution and first-hand sales of oil, natural gas, refined products and basic petrochemicals. From 1995, private entities have only participated in transportation by pipeline, storage and distribution of natural gas.

Pursuant to the Energy Reform, private investment is now allowed in all activities within the hydrocarbons sector. The exploration and production of hydrocarbons (upstream activities) are considered as strategic activities and the nation carries them out exclusively through either entitlements awarded directly to state productive enterprises (government-owned entities with a commercial purpose) or exploration and production contracts awarded to both state productive enterprises and private parties. All other activities within the hydrocarbon sector (midstream and downstream) may be carried out by state productive enterprises or private parties (commercial entities incorporated according to Mexican law, which may have up to 100% foreign investment).

The CRE as power regulator
The CRE is in charge of the regulation and supervision of Mexico’s power sector, including, but not limited to:

  • granting and revoking permits for the generation, supply and trading of power;
  • issuing import and export authorisations;
  • regulating the vertical integration of power industry participants;
  • establishing and supervising the methodologies for prices and tariffs;
  • supervising the wholesale electricity market;
  • issuing clean energy certificates;
  • establishing or authorising the interconnection agreements and the form of agreements between CENACE and power industry participants; and
  • monitoring and inspecting power industry participants and their compliance with applicable laws and regulations.

 

The CRE as oil and gas regulator

  1. CRE (oil and gas midstream ‒ storage, transportation and distribution)
    The CRE is in charge of Mexico’s oil and gas midstream sector, including, but not limited to:
    • granting and revoking permits for transportation, storage and distribution;
    • approving and regulating integrated systems;
    • regulating the vertical integration and cross-participation of permit holders; and
    • approving and supervising the terms and conditions pursuant to which permit holders shall provide their services, including prices, tariffs (if applicable) and other conditions applicable to the rendering of services.
  2. CRE (oil and gas downstream: commercialisation and retail sales)
    The CRE is also in charge of the regulation and supervision of certain O&G downstream activities, including, but not limited to:
    • the granting and revoking permits for the commercialisation and retail sales of hydrocarbons, refined products and petrochemicals;
    • regulating the vertical integration and cross-participation of permit holders; and
    • approving and supervising the terms and conditions pursuant to which permit holders shall provide their services.

Other participants
The Constitution also defines the roles of other participants in the energy industry that carry out certain activities considered strategic for the adequate development of the power and hydrocarbons sectors. These include:

  • Ministry of Energy (Secretaría de Energía (SENER)) as the policy maker of the Mexican energy industry (both power and oil and gas sectors) and regulator of certain oil and gas downstream activities (refining, processing and foreign trading of hydrocarbons and refined products);
  • National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos (CNH)) as the regulator of Mexico’s oil and gas upstream sector;
  • Energy and Environment Security Agency (Agencia de Seguridad Energía y Ambiente (ASEA)) as regulator of industrial safety and environmental protection in the oil and gas industry;
  • National Centre of Energy Control (Centro Nacional de Control de la Energía (CENACE)) as the electric system operator;
  • National Centre of Natural Gas Control (Centro Nacional de Control de Gas Natural (CENAGAS)) as the national pipeline system operator and capacity manager; and
  • Federal Electricity Commission (Comisión Federal de Electricidad (CFE)) as the owner and operator of the power transmission and distribution system.

The Energy Reform also re-creates PEMEX and the CFE as state productive companies, to be engaged in oil and gas and power activities, respectively, having a more commercial role and nature than under the state monopoly regime, and which still have a significant stake in the relevant markets.

Reporting and disclosure obligations

In general, permit holders and other industry participants (eg, power generators, suppliers and contractors) must provide and respond to requests for information from the CRE, within its respective jurisdiction and authority.

Permit holders must report to the CRE for statistical, regulatory and supervision purposes, information relating to economic, technical and safety matters, such as prices and tariffs and other service conditions, discounts offered, costs and revenues, volume and quality of products or transactions, inventory reports, complaints from off-takers or users, accidents, available capacity (if applicable), requests for service not met, the facility’s maintenance programme and evidence of compliance thereto, among other information. The specific content and frequency of reports and disclosures varies for each activity; for instance, power generation requires monthly reports while fuel pipeline transportation requires quarterly reports.

Additionally, permit holders and other industry participants must comply with any request for information from other competent authorities, within their respective subject-matter jurisdictions, such as SENER, CNH, ASEA, CENACE, CENAGAS, the Ministry of Finance, the Ministry of Economy, or the federal tax bureau (Servicio de Administración Tributaria), among others.

Monetary sanctions and recent behaviour.

Failure to comply with the relevant laws and regulations may result in investigations by CRE (and other government agencies and regulators) and lead to the imposition of different sanctions, which may include fines, permit revocations and payment of damages.

Certain monetary sanctions with regard to the power sector and all monetary sanctions with regard to the oil and gas sector are indexed to the daily measuring and update unit (unidad de medida y actualización (UMA)). In 2020, the daily UMA value is 86.68 Mexican pesos.

With regard to the power sector, most fines range from (i) 2% to 10% of the gross income of the offender in the immediately preceding year or (ii) 10,000 to 200,000 daily UMAs.

With regard to the oil and gas midstream and downstream sectors, CRE’s fines range from 7,500 to 450,000 daily UMAs.

The corresponding sanction will be applied after the following have been taken into consideration: (i) the damage caused or that may be caused; (ii) the intent of the infraction or lack thereof; (iii) the severity of the infraction; (iv) the economic capability of the offender; and (v) any repeat offences by the offender. In the event of recidivism, the fines imposed may be up to double the authorised threshold.

Non-monetary sanctioning powers and behaviour

Failure to comply with the relevant laws and regulations may result in investigations by the CRE (or other government agencies and regulators) and lead to the imposition of different sanctions, which may include (i) warnings, (ii) temporary or permanent suspension of operations, (iii)  removal or disqualification of personnel, and (iv) reversal of permits, among other sanctions.

Both the Mexican power and hydrocarbons sectors are considered of public interest and public policy (orden público), meaning they are essential activities for the people and take preference over any other commercial activities.

With regard to power and oil and gas midstream and downstream regulated activities, if a permit holder defaults in its obligations under a permit, the CRE may (i) revoke the permit; (ii) temporarily take over the relevant assets, rights and facilities, or (iii) intervene in the permitted activity. In such cases, the CRE may contract a third party to guarantee the continuity of the services or supply covered by the permit.

A temporary takeover of the assets, rights and facilities necessary for the provision of the corresponding service will proceed in the following cases:

  • for public utility causes established in the Expropriation Law;
  • failure by the permit holder to comply with its obligations for causes not attributable to the permit holder (eg, a natural disaster or the disruption of public order); or
  • when an imminent danger is foreseen that may affect national security, energy security or the national economy.

The CRE may intervene in the provision of the respective service when the permit holder fails to comply with its obligations and (i) endangers the quality, reliability, continuity and safety of the power supply (with regard to the power sector) or (ii) endangers the supply of hydrocarbons (with regard to the oil and sector). In the oil and gas midstream and downstream sector, prior to intervention in the provision of the service, the permit holder must be allowed a set amount of time to remedy the underlying cause for the intervention.

The corresponding sanction must be applied considering (i) the damage caused or that may be caused, (ii) the intent of the infraction or lack thereof, (iii) the severity of the infraction and (iv) repeat offences by the offender.

Recent and upcoming developments

Mexican power sector
The government has shown a clear disagreement with the current industry structure and functions and has contemplated repositioning the CFE as the state monopoly. This position has resulted in several actions against the establishment, development of the Mexican wholesale market and the participation of private entities in power activities. The following are some of the most relevant actions taken by the Mexican authorities.

  1. CFE Wish List
    Early in 2020, a document containing a list of requests to be made to different energy regulators, thought to be drafted by the CFE and known as the CFE Wish List (Pliego Petitorio de CFE), was leaked by the media. By means of this Wish List, the CFE is requesting a series of actions and modifications by the power sector authorities aimed at strengthening the position of the CFE in the power industry. If implemented, these actions and modifications could have a significant effect on the sector’s permit holders and the projects they have developed, as well as on the banks or markets that have financed them. Some of these actions or modifications would have no legal or contractual basis or would contravene certain provisions of the Constitution and the legal and regulatory framework applicable to the sector.
    The actions and modifications requested in the CFE Wish List, as implemented by or relating to CRE, include the following:
    • SENER Reliability Policy: On 15 May 2020, SENER issued a policy on the reliability, safety, continuity and quality of the SEN (the Reliability Policy). The Reliability Policy mainly sets forth general guidelines on the planning, functioning and operation of the SEN and the Wholesale Electricity Market (MEM) to guarantee power supply in the SEN under the principle of reliability. The Reliability Policy places particular emphasis on the alleged link between the intermittence (variability) of the generation of renewable power plants (specifically, wind and solar photovoltaic facilities) and the reliability (or lack thereof) in the SEN. In general, the Reliability Policy gives SENER regulatory powers over the CRE and CENACE, contravening the industry structure created in the Constitution. Under the Policy, SENER imposes on CRE and CENACE additional procedures, analysis requirements, rules and costs, aimed at intermittent renewable power plants for the purposes of their interconnection to the grid, dispatch in the MEM and operation in the SEN. The changes set forth by SENER affect all activities within the power industry, particularly on power generation, the size of which is yet to be determined. As of June 2020, the Reliability Policy may affect 260 generation projects already in operation (representing 32.6GW), 56 generation projects in the construction or testing stage (representing 8.4GW), 130,000 projects of distributed generation, 82,500 jobs and US$44 billion in investments.
      The Reliability Policy has also been challenged in courts through amparo recourses and is currently suspended.
    • Increases in wheeling tariffs by the CRE and the CFE: In May 2020, the CRE approved a resolution with new wheeling tariffs for grandfathered projects, and on 10 June 2020, the CFE published new tariffs for renewable and efficient cogeneration. The new wheeling charges implied an increase of between 400% and 800% on the respective tariffs, with the low voltage tariff suffering the biggest price increase. As with the other measures, the new tariffs have been challenged in courts through amparo proceedings as they are deemed to contravene Mexican law.
  2. CRE silence
    With the power industry currently in turmoil, the CRE has not been responding to permit applications, amendments and other requests, adding uncertainty to the market. This ‘silence’ by the CRE has also been challenged in the Mexican courts.

Mexican oil and gas sector
As of June 2020, there are no equivalent measures on the CFE Wish List for the oil and gas sector.

Challenges

As in other parts of the world, the energy industry is subject to extensive regulation and supervision by the government and regulatory agencies or entities, such as the CRE.

With the new administration, the Mexican energy industry has seen a shift with regard to the Energy Reform of 2013, with the current government seeking to strengthen both the CFE and PEMEX. Fear of a 180-degree shift has lessened since the Energy Reform required a constitutional amendment, which needs a supermajority quorum, an extraordinary amount of political negotiation and building a consensus between Mexico’s major political parties ‒ circumstances that are unlikely to occur. A legal reform only requires a lower majority to be passed in Congress, but it must respect the constitutional principles that govern the industry.

Some of the challenges the participants in the Mexican industry have faced include the following:

  • changes in public policies resulting in new regulation (such as the Reliability Policy and the increases in wheeling tariffs);
  • changes in key personnel at the competent authorities, resulting in new interpretations of existing laws and regulations;
  • lack of response by regulators about certain matters (eg, the amendment of self-supply power generation permits to add new off-takers);
  • budgetary cuts and austerity measures imposed on the regulators, which has hampered their operational capabilities, delaying their response time; and
  • political pressure from the government to renegotiate contracts with the CFE and PEMEX.

The current regulatory crisis will end at some point and take the different actors to a negotiation table where they can create a more constructive dialogue and develop efficient solutions in a sector that is vital to the Mexican economy.

Notes for foreign investors

The Foreign Investment Act (Ley de Inversión Extranjera) has been amended to eliminate restrictions on foreign investment in Mexico’s energy industry (both the power and oil and gas sectors). The only relevant consideration is that the holder of the power-related permits or oil and gas-related permits must be, in all cases, a Mexican commercial entity, which nevertheless can be wholly owned by foreign investors.

Pursuant to the Federal Labour Law (Ley Federal del Trabajo), at least 90% of the employees of any employer must be Mexican. For technical and professional positions, employers should use Mexican workers unless no suitable candidates are available, in which case they may temporarily hire foreign workers (up to 10% in the relevant specialised area). This rule is not applicable to directors and managers.

Oil and gas permit holders must give preference (in terms of price, quality and timely delivery) to Mexican goods and domestic services, including the training and hiring, at technical and directive level, of Mexican nationals.

As a general rule, foreign investment in Mexico’s energy industry is protected by general bilateral investment treaties and free trade agreements. However, considering the state monopoly prior to the Energy Reform, an analysis of the specific treaty in each case is needed, as certain Mexican treaties provide for reserves (exclusions) regarding the Mexican energy industry. If an investment treaty does not have the respective reserves, it would suffice to qualify as an investor under the relevant treaty to be subject to the available protection.

Other regulators it works closely with

Secretaría de Energía
SENER
Ministry of Energy (Mexico)

Comisión Nacional de Hidrocarburos
CNH
National Hydrocarbons Commission (Mexico)

Agencia de Seguridad Energía y Ambiente
ASEA
Energy and Environment Security Agency (Mexico)

Secretaría de Hacienda y Crédito Público
SHCP
Ministry of Finance (Mexico)

Secretaría de Economía
SE
Ministry of Economy (Mexico)

Secretaría de Medio Ambiente y Recursos Naturales
SEMARNAT
Ministry of Environment and Natural Resources (Mexico)

Secretaría de Comunicaciones y Transportes
SCT
Ministry of Transportation and Communications (Mexico)

Comisión Federal de Competencia Económica
COFECE
Federal Antitrust Commission (Mexico)

Centro Nacional de Control de Energía
CENACE
National Centre of Energy Control (Mexico)

Centro Nacional de Control de Gas Natural
CENAGAS
National Centre of Natural Gas Control (Mexico)

Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo
FMP
Mexican Petroleum Fund for Stabilisation and Development

Get unlimited access to all Latin Lawyer content