The Mexican Electricity Sector: Regulatory Update and Challenges

The Mexican Electricity Sector:

Regulatory Update and Challenges

Carlota CagigasEnergy Regulatory Commission

Association of Power Exchanges APEx 2007Paris, October 14-16

2

Index

I. Current Situation

II. Electricity Infrastructure and Trade

III. Energy Regulatory Challenges

IV. Final Remarks

3

I. Current Infrastructure Situation

4

Index 2006

Population 104.9 million /1

GDP usd 791 billion /2

GDP per capita based on PPP usd 8,530/2

Federal Budget USD 144,400 million /5

Total exports 123 billion USD /4

Total imports 124 billion USD /4

Foreign investment (sep 06-07) USD 32.5 billion /year /

Inflation 3.79% /4

Foreign debt / GDP 13.9% /5

Country risk 167 pts /6

Mexico has a strong and stable economy

Mexican Economy

Source:/1, CONAPO, (2007 estimated); /2, FMI, 2nd Quarter (2007); /3 Banxico, Inegi, Secretariat of Economy, Dic. 2007; /4 Banco de México, Sep 2007 ; /5 Secretariat of Finance and Public Credit; /6 JPMorgan, Dic. 2006

5

Mexican Energy Sector

Mexico is a rich energy country. The energy sector contributes with 5% of GDP

Proven reserves(2006)

North America %

Production (jun 2007)

North America %

Natural gas 14.54 bcf 5.27% 6.19 bcfd 4.8%

Oil 12.35 mmb 20.55%(5.6%*)

3.2 mbd 31.75%

Source: Secretariat of Energy, Pemex and BP.

Mexico has de-petrolized its exports, but not its economy

Oil exports represent around 14.9% of total exports7

Oil revenues contributes with one third of the Federal Budget

Source:/7 INEGI, Dic, 2006

6

2. 2007 power generation 220 TWh

3. National Transmission Grid 759,552 km(>115kV)

4. Strong presence of state-owned vertically integrated

monopolies

2007 Highlights of the Mexican Electricity Industry

Thermal IPP Otros

68%22%46%

Nuclear 3%

Hydro 22% Geothermal 2%

Coal 5%

1. Installed capacity 51,033 MW

CFE LFC Other*

Generation 69.3% 1.7% 28.0%

Transmission 98% 2% 0%

Distribution 79% 21% 0%

System operator is part of CFE

* IPP, self-supply, Cogen

Source: Electricity Prospective, Secretariat of Energy, 2006-2015

7


Source: www.cfe.gob.mx

57,600 miles

Distribution

CFE

84.7%

Own Capital: 69.3%

IPP: 15.4%

1.7%

LFC

3.7%PEMEX

9.9%

Self-supply & Cogen

98%

2%

79%

21%

Service provided through CFE and LFC transmission lines

Generation Transmission Final users

-

98%

29 million373,600 miles

The system operator CENACE (National Energy Control Center) is part of CFE

8

2007 National Installed Capacity

Source: Secretariat of Energy; 20071/ Includes all IPP capacity

By the end of July 2007, Mexico had an installed generation capacity of 51,033 MW.

11,333 11,457

1,365 960 85

11,457

23,233

51,033

0

10,000

20,000

30,000

40,000

50,000

60,000

MW

Hydro Thermal Coal Nuclear Geothermal Wind T o t a l IPPs 1_/

9

Electricty Generation by Source

Source: CFE, september 2007

año móvil Hidroeléctrica % Nuclear % Geotérmica % Eólica % Fósil % Total

Nov 00 - Oct 01 27,276 14.58% 9,292 4.97% 5,467 2.92% 6 0.00% 145,013 77.52% 187,054

Ene 01 - Dic 01 28,022 14.94% 8,360 4.46% 5,313 2.83% 6 0.00% 145,817 77.76% 187,518Ene 02 - Dic 02 24,502 12.72% 9,353 4.86% 5,201 2.70% 6 0.00% 153,492 79.71% 192,554Ene 03 - Dic 03 19,469 10.06% 10,016 5.17% 5,670 2.93% 5 0.00% 158,403 81.84% 193,563Ene 04 - Dic 04 24,766 12.46% 8,732 4.39% 6,269 3.15% 6 0.00% 159,004 79.99% 198,777Ene 05 - Dic 05 27,284 13.07% 10,318 4.94% 6,956 3.33% 5 0.00% 164,132 78.65% 208,695Ene 06 - Dic 06 29,970 13.90% 10,400 4.83% 6,371 2.96% 5 0.00% 168,796 78.31% 215,542

Feb 06 - Ene 07 29,916 13.83% 10,350 4.78% 6,379 2.95% 19 0.01% 169,719 78.43% 216,383Mar 06 - Feb 07 30,032 13.86% 10,363 4.78% 6,358 2.93% 38 0.02% 169,847 78.40% 216,638Abr 06 - Mar 07 29,824 13.72% 9,986 4.59% 6,349 2.92% 64 0.03% 171,102 78.73% 217,325May 06 - Abr 07 29,563 13.63% 10,102 4.66% 6,378 2.94% 85 0.04% 170,729 78.73% 216,857Jun 06 - May 07 28,621 13.16% 10,394 4.78% 6,466 2.97% 105 0.05% 171,887 79.04% 217,473Jul 06 - Jun 07 27,891 12.80% 10,367 4.76% 6,681 3.07% 117 0.05% 172,871 79.33% 217,927Ago 06 - Jul 07 27,596 12.63% 10,392 4.76% 6,911 3.16% 126 0.06% 173,433 79.39% 218,458Sep 06 - Ago 07 27,300 12.41% 10,380 4.72% 7,006 3.19% 142 0.06% 175,108 79.62% 219,936

2%

4%

6%

8%

10%

12%

14%

16%

Nov

00

- Oct

01

Ene

01 -

Dic

01

Mar

01

- Feb

02

May

01

- Abr

02

Jul 0

1 - J

un 0

2

Sep

01 -

Ago

02

Nov

01

- Oct

02

Ene

02 -

Dic

02

Mar

02

- Feb

03

May

02

- Abr

03

Jul 0

2 - J

un 0

3

Sep

02 -

Ago

03

Nov

02

- Oct

03

Ene

03 -

Dic

03

Mar

03

- Feb

04

May

03

- Abr

04

Jul 0

3 - J

un 0

4

Sep

03 -

Ago

04

Nov

03

- Oct

04

Ene

04 -

Dic

04

Mar

04

- Feb

05

May

04

- Abr

05

Jul 0

4 - J

un 0

5

Sep

04 -

Ago

05

Nov

04

- Oct

06

Ene

05 -

Dic

05

Mar

05

- Feb

06

May

05

- Abr

06

Jul 0

5 - J

un 0

6

Sep

05 -

Ago

06

Nov

05

- Oct

06

Ene

06 -

Dic

06

Mar

06

- Feb

07

May

06

- Abr

07

Jul 0

6 - J

un 0

7

Sep

06 -

Ago

07

72%

74%

76%

78%

80%

82%

84%

86%

Fósil

Hidroeléctrica

Nuclear

Geotérmica

10

The Mexican Electricity Sector

Combined cycle

Thermal (fuel oil )

Thermal (fuel oil – nat. gas)

Therma l (natural gas)

Thermal (coal )

Thermal (dual coal-fuel oil)

Internal combustion

Nuclear

Hydraoelectric

Geothermal

Wind

By August of 2007 CFE and LFC had a total combined capacity of 51,033 MW

11


Hermes

Electricité de France

There are 22 permits for natural gas fired combined cycle plants under the IPP scheme.

Of these, 21 permits, with 11,457 MW capacity, are in operation

12


400 kV

230 kV

115 kV

161 kV, 138 kV, 69 kV, 34.5 kV y 13.8 kV

400 kV

230 kV

115 kV

161 kV, 138 kV, 69 kV, 34.5 kV y 13.8 kV

There are and 431,205 miles of transmission & distribution infrastructure, ( 57,600 miles of transmision lines > 115 kV )

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Scheme No. of PermitsAuthorized

Capacity (GW)

IPP 22 12.6

Self-supply & Cogeneration

5408.23

+0.6*

Export 6 2.2

Import 32 0.243

Total 600 23.5

* Old PermitsSource: Energy Regulatory Commission; Aug.2007

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II. Electricity Infrastructure and Trade

20

Commercial Cross-border coordination issues

National and

International Markets

(Nodal prices, FTR’s)

UA

EL

Guatemala

Costa Rica

El Salvador

Honduras

Panama

Nicaragua

Strong Integration

National and

International Markets

(Nodal prices, FTR’s)

Regional Energy Markets

SMD -Initiative

Regional Energy Markets

FEA -

Strong Integration

WSCCWECC

WSCCERCOT

Vertical Integration or Moderated

Openness

Reform Process

Vertical Integration or Moderated

Openness

Reform ProcessWSCCCENACE

Regulatory

Differences

CFE exports and imports electricity for public service

Private generators are allowed to export and consumers are allowed to import electricity for self consumption. Both activities require a permit issued by the CRE

Future interconnections between Mexico and the United States (WECC and ERCOT) and between Mexico and Central America (SIEPAC), will allow greater interchanges

However, the development of a Regional Market may be an important challenge due to regulatory differences

CFE can not sign long term contracts except for IPP

Electricity Trade in North America

North America Energy Trade(GWh, 2000)

87

1,037

37,940

14,637

Net Importer

Net Exporter

Net Exporter

Source: EIA, Annual Energy Outlook 2006, DOE/EIA-0383 (2006) (Washington, DC, December 2001). Secretariat of Energy of Mexico; Electricity Prospective 2007-2015

Belice253

Guatemala1.0

Net ImporterSelf Sufficient

21

Total Exports 1,291 GWh

Total imports:

87 GWh

22


Generation, transmission, distribution and supply for public service is reserved to the State. Private generation is allowed under the following categories: cogeneration, self-supply, IPP, small scale production, and generation for export. Imports are also allowed.

US and Canada

Mexico

The demands on the grid have grown significantly by the increased electricity trade that followed the restructuring

of the industry in recent years

The electricity sector in US and Canada is in the process of evolving from a heavily regulated industry, dominated by vertically integrated and locally (or regionally) based utilities, into one with many more companies that produce and market electricity at both the wholesale and retail level

Electricity markets in many parts of North America are evolving from geographically limited markets to broader regional markets through an increasingly interconnected system

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North America Electricity Interconnection Infrastructure

Electric systems in US and Canada are highly interconnected

Close to 100 interconnections points

On the US-Mexico border, interconnections are weak (they were intended to satisfy stand-alone customers, and not regional electric demand)

There are only 19 high voltage interconnections (> 115kV)

Source: Secretariat of Energy; Electricity Prospective 2005-2014

Interconexiones eléctricas Canadá - Estados Unidos

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North America Electricity Interconnection Infrastructure

Source: Secretariat of Energy; Electricity Prospective 2006-2015

Interconnections 5 Permanent interconnections in

Baja California WECC 4 x230kV, 1 x115 kV

5 Non-Permant lines connected with WECC 4 x 230kV, 1 x115 kV

5 Permanent back to back interconnections with ERCOT (138 kV)

2 Non-permanent lines connected to ERCOT (138 kV)

1 Permanent line to Belize (115 kV)

1 Permanent back to back interconnection to SIEPAC by Guatemala (in construction) (400 kV)

Total Interconnection capacity: 1,336 MW

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SIEPAC Market Guatemala

Capacidad (23%)2,015.7MWHidro = 34%Geo = 1%Term= 65%

Generación (21%)7,009.3 GWhHidro= 36%Geo= 3%Term= 61%

El Salvador

Capacidad (13%)1,197.90 MWHidro = 37%Geo = 13%Term= 50%


Honduras

Capacidad (16%) 1,386.9 MWHidro = 34%Term= 66%

Generación (15%)4,907.9 GWhHidro= 29%Term= 71%

Nicaragua

Capacidad (8%)742.2 MWHidro =14 %Geo= 10%Term=75%


Costa Rica

Capacidad (22%) 1,961.2 MWHidro =67%Geo = 8%Term= 21%Eol= 3%

Generación (24%)8,061.8 GWhHidro= 81%Geo= 15%Term= 1%Eol= 3%

Panamá

Capacidad (18%)1,634.7 MWHidro= 53%Term= 47%

Generación (18%)5,912 GWhHidro= 65%Term= 35%

EP= 31%, Pri= 69%

EP= 36%, Pri= 64%

EP= 31%, Pri= 69%

EP= 88%, Pri= 12%EP= 11%, Pri= 89%

EP= 36%, Pri= 64%

EP=Public Utilities Installed CapacityPri= Private Utilites installed Capacity

Total Istmo

Capacidad 8,938.6 MWHidro =43 %Geo= 5%Term=51%Eol= 1%

Generación33,076.4 GWhHidro= 48%Geo= 8%Term= 43%Eol= 1%

26

SIEPAC vs CFE

Index SIEPAC

Installed Capacity (MW) 8,939 46,552

-Pulblic 3,680 39,287

-Private 5,206 7,265 2/

Max Demand (MW) 5,688 29,301 3/

Total Generation (GWh) 33,076 208,634 4/

Sales (GWh) 27,286 163,509 5/

-Regulated 24,962 NA

-Not regulated 2,306 NA

Users (thousand) Including LFC 6,592 28,003

Losses (TyD) % 17.1 16.8

Load Factor % 66 72

Fuente: CEPAL 2004 – Istmo Centroamericano: Estadísticas del sub-sector eléctrico. 2004

1 Public Service does not include self-supply generators2 IPP projects3 National Interconnection Grid4 Gross Generation5 Not considering exports

CFE1/

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CFE and SIEPAC Interconnection

TAPACHULA POTENCIA - LOS BRILLANTES.

( ACSR ) ( ACSR )

CHICOASEN

ANGOSTURA

TAPACHULA POTENCIA

ZONA TAPACHULA GUATEMALA

LOS BRILLANTES

NIVELES DE TENSION

400 KV

230 KV115 KV

30 KM 70 KM 193 K

M

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Central America Interconnection

Panamá

Managua

San José

Cd. Guatemala

Tegucigalpa

San Salvador

Los Brillantes

Chixoy

San Pedro Sula

El Cajón

15 de Sep.

Pavana

León

Pta. Nicaragua

Arenal-Carobicí

Fortuna

Bayano

Solo 115 kV.Red. Nal.

Under Construction

Interconexión México – Belice

(115 KV)

Belmopan

Mollejón Planta Hidro

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SIEPAC Interconnection

REFERENCIA

Central Hidroeléctrica

Central Térmica

Subestaciones

Línea Doble

Capitales

Panamá

Managua

San José

Cd. Guatemala Tegucigalpa

San Salvador

Los Brillantes

San Pedro Sula

El Cajón

León

Arenal-Carobicí

Fortuna Bayano

Belmopan

Mollejón Planta Hidro

Tapachula

Interconexión GU-MX

AngosturaChicoasenMalpaso

Nuclear Laguna Verde

A Ciudad de México

Cancún

Mérida

Línea SIEPAC

Línea de Interconexión

Interconexión GU-BL

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III. Energy Regulatory Challenges

Source: Natural Gas Prospective, Secretariat of Energy, 2006-2015 15

In 1995, Congress enacted the CRE Act, to:

Establish CRE as an independent authority responsible for natural gas and electricity regulation

Provide technical and operational autonomy to render the regulatory framework operative

Enhance its jurisdiction and legal standing

Concentrate regulatory instruments previously scattered among several agencies

EnergyPolicy andOperationFunctions

CRE

RegulatoryFunctions

Pemex,CFE

and LFC

StateOperators

Government

Ministryof

Energy

PrivateOperators

Domesticand ForeignInvestors

EnergyPolicy andOperationFunctions

CRE

RegulatoryFunctions

Pemex,CFE

and LFC

StateOperators

Government

Ministryof

Energy

PrivateOperators

Domesticand ForeignInvestors

CRE regulates state entities and private

participants

CRE Act

16Competencia CRE

Regulatory Framework

Reserved activities

Open to private participation CRE’s

mandate

Generation Transmission Distribution

CFE & LFCNational

Transmission Grid

Third Parties Others

Imports

Private Parties Others

Imp / Exp

ElectricityNational

Transmission Grid

Natural Gas Explora-tion

Trading

Produc-

tion

Process-ing

First Hand Sales

Trans-missio

n

Storage

Distri-bution

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Regulated Activity Authority

Generation

Transmission

Distribution

Private Generation Requires a CRE permit

LFC & CFE Public Service generation

Expansions require approval from SENER, SHCP, SEMARNAT,and CNA

Public Service Grid (National Transmission System)

Expansions require approval from SENER, SHCP, SEMARNAT and CNA

CRE regulates the interconnection contract between generator and CFE (backup, wheeling & surplus energy sale)

Public Service Distribution network

Expansions require approval from SENER, SHCP, SEMARNAT and CNA

State reserved activity

Regulated activities require authorization from different Government Agencies:


18

Regulated activities require authorization from different Government Agencies:

Private entities Requires a CRE permit

LFC & CFE: for Public Service use

Requires authorization by CRE

Includes private interties (Connected or not to the National Transmission Grid)

Regulated Activity Authority

Imports

Exports

Tariffs Final user tariffs are set by the Ministry of Finance (SHCP)

Tariffs are bundled and include generation, transmission, distribution and supply costs

Private Generation Requires a CRE permitIncludes private interties (Connected or not to the National Transmission Grid)


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IV. Final remarks

31

Despite being an energy rich country, Mexico imports large amounts of natural gas on which 42% of the electricity generation is based

After several years it has become necessary to improve:

Quality: Provide energy supply services with competitive cost indicators, power quality and service continuity standards

Transparency: provide the public electricity sector information such as plant costs, dispatch costs and plants, etc

Equity: Review present rules for electricity dispatch

Competitivity: Establish Regulatory Accounts in electricity tariffs

Final Remarks

CRE will play an important role in the definition and supervision of these competitive actions

32

Several bills aimed at strengthening CRE have been submitted to Congress and last November of 2006. Although they vary in scope and depth, most of them concur in granting CRE the following additional mandates:

• Electricity Tariff Determination

• Aprove Terms & Conditions for electricity transmission, distribution and supply services

• Publish rules for the system operation and dispatch

• Surveillance of the System Operation

Final Remarks

www.cre.gob.mxwww.cre.gob.mx

The Mexican Electricity Sector: Regulatory Update and Challenges

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