National Centre of Energy Control (Mexico)

Centro Nacional de Control de la Energía

Country

Location

Regulated area

Mexico

Mexico City

Energy & natural resources

Useful pages on the regulator website

Key individuals

  • Alfonso Morcos Flores: Chief Executive Director
  • Carlos Ramírez Elizondo: General Counsel
  • Norma Rocio Nahle García: President Commissioner (as Minister of Energy)
  • Leslie Mónica Garibo Puga: 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 article sixteenth of the Energy Reform describes the legal power and authority of the National Centre of Energy Control (Centro Nacional de Control de la Energía (CENACE)).

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/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 reserves 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. The Energy Reform ‘extracted’ CENACE from being a subdivision of CFE to become an independent entity, with a strategic function that required it to have an impartial position. The new regulations granted CENACE, as a new government agency, the authority and responsibilities relating to the planning and operational control of the National Electric System (Sistema Eléctrico Nacional (SEN)), with the main obligation to allow open and non-discriminatory access to the system by the different market participants.

CENACE
CENACE is not a regulator per se. It is responsible for (i) the operational control of the SEN, (ii) the operation of the Mexican Wholesale Electricity Market (MEM), and (iii) open and non-discriminatory access to the National Transmission Grid (Red Nacional de Transmisión) and the General Distribution Grids (Redes Generales de Distribución). As such, CENACE’s main functions relate to the balancing of the SEN, both from a physical and financial standpoint, by means of dispatching power plants and demand response assets and operating the transmission and distribution grids in the context of the MEM.

As the operator of the SEN, CENACE is the government agency responsible for interconnection-related studies, and for instructing the performance of interconnections-related work. Its other responsibilities and functions include:

  • instructing the transmission and distribution service providers (ie, CFE Transmisión and CFE Distribución) on the execution of interconnection and connection agreements;
  • issuing market operation provisions (disposiciones operativas del mercado);
  • entering into market participant agreements (contrato de participante del mercado) that set forth the rights and obligations between market participants (ie, a power generator) and CENACE;
  • determining MEM-related prices (ie, reference prices and local marginal prices); and
  • carrying out short, mid and long-term power auctions.

Other participants
The Constitution also defines the roles of other participants in the energy industry that will 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);
  • Energy Regulatory Commission (Comisión Reguladora de Energía (CRE)) as the regulator of Mexico’s power and oil and gas midstream and downstream sectors, 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 Petróleos Mexicanos (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, market participants (ie, power generators, suppliers and energy traders), as well as other power industry participants (ie, transmission and distribution service providers), must provide and respond to requests for information from CENACE, within its respective jurisdiction and authority.

Market participants and other industry participants must report to CENACE for statistical, regulatory and supervision purposes, information relating to economic, technical and safety matters such as sale offers corresponding to the total available capacity of the power plants (including volume and products offered, offered price, etc.); metering information for the initial settlement process (liquidación original); proposed scheduled outages, among other information. The specific content and frequency of these reports and disclosures varies for each activity (ie, nominations from power generators must be submitted daily and hourly, while confirmation of or changes to scheduled outages must be submitted quarterly).

Additionally, market participants and other industry participants must comply with any request for information from other competent authorities, within their respective subject-matter jurisdictions, such as SENER, CRE, National Centre of Natural Gas Control (Centro Nacional de Control del Gas Natural (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, or with CENACE’s instructions, may result in the imposition of different sanctions, which may include penalties and payment of damages. Note that CRE, as the regulator responsible for the oversight of the MEM operated by CENACE, has the power to impose sanctions on any market participant in breach of its obligations.

Certain monetary sanctions with regard to the SEN and the MEM, and CENACE’s instruction, are indexed to the daily measuring and update unit (unidad de medida y actualización (UMA) in replacement of daily minimum wages). In 2020, the daily UMA value is 86.68 Mexican pesos.

Failure to comply with regulations relating to the SEN and the MEM, including CENACE’s instructions and authorisations, shall result in fines that range from (i) 2% to 10% of the gross income of the offender in the immediately preceding year or (ii) 50,000 to 200,000 daily UMAs. Non-compliance with CENACE’s dispatch instructions may be interpreted as a gross default of the quality, reliability, continuity and safety rules of the SEN.

Failure of power plants to offer the available capacity in the MEM or of users to reduce consumption as controllable demand, in both cases pursuant to article 104 of the Power Industry Law, shall result in an additional fine of up to twice the amount invoiced by CENACE.

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 twice the authorised threshold.

Non-monetary sanctioning powers and behaviour

Failure to comply with the relevant laws and regulations, or with CENACE’s instructions, may lead to the imposition of different sanctions, which may include the termination of the relevant interconnection agreement or market participant agreement, and the reversal of the corresponding permit.

CENACE has the authority to (i) limit or suspend the engagement of market participants in the MEM following serious breaches pursuant to the market rules (reglas de mercado) and (ii) suspend the service of qualified users participating in the market (usuarios calificados participantes del mercado) that breach their payment or guarantee obligations.

Recent and upcoming developments

The government has shown a clear disagreement with the current industry structure and functions and has contemplated repositioning 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.

Cancellation of power auctions
Early in 2019, CENACE cancelled, at SENER’s request, the fourth long term power auction to award contracts for the purchase of power and clean energy certificates. The auction was due to take place in November 2018 but was first postponed and later suspended by the new administration. Earlier long-term power auctions achieved wind and solar prices that were among the lowest in the world. To date, it is not clear if, or when, long-term power auctions will be resumed.

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 CENACE, include the following:

  • CENACE Decree: On 29 April 2020, CENACE issued a resolution whereby, based on the contingency resulting from the preventive actions to mitigate and control the health risks associated with the covid-19 pandemic, as well as an alleged general reduction in energy consumption in Mexico, CENACE ordered the suspension of pre-operational tests for solar and wind projects, arguing that the intermittent nature of those facilities could damage the system. Several generators, in defence of their interests, have filed amparo proceedings against this resolution. The courts have issued injunctions suspending the effects of the CENACE decree until final resolution of the amparo proceedings.
  • 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 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.

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 CENACE.

With the new administration, the Mexican energy industry has seen a shift regarding 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 CENACE Decree of 29 April 2020);
  • 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;
  • 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

Not applicable.

Other regulators it works closely with

Secretaría de Energía
SENER
Ministry of Energy (Mexico)

Comisión Reguladora de Energía
CRE
Energy Regulatory Commission (Mexico)

Comisión Federal de Electricidad
CFE
Federal Electricity Commission (Mexico)

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

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

Get unlimited access to all Latin Lawyer content