BACKGROUND On February 13, 2020, the CRE submitted to CONAMER the draft “Resolution of the Energy Regulatory Commission amending the General Administrative Provisions setting forth the terms to request authorization for the modification or transfer of permits for the generation of electric power or electricity supply, contained in Resolution Number RES/390/2017” (the “Amendments to the Provisions”), requesting an exemption from the regulatory impact analysis (“RIA”), which was rejected by CONAMER on February 17, 2020. Subsequently, on October 5, 2020, the CRE again submitted the Amendments to the Provisions to CONAMER, once more requesting an exemption from the RIA; however, the following day the Governing Body of the CRE approved the Regulation without CONAMER having ruled on the RIA exemption and without having received the corresponding final opinion. LEGAL FRAMEWORK APPLICABLE TO THE SELF-SUPPLY AND COGENERATION REGIME 1. Legal framework prior to the enactment of the Electric Industry Law Before the enactment of the Electric Industry Law (“LIE”), the law governing the sector was the Public Electric Power Service Law (“LSPEE”), which was amended on December 23, 1992 with the objective of broadening and defining the participation of private parties in the activities of generation, import and export of electric power. In particular, its Article 3 permitted the generation of electric power for self-supply, cogeneration or small-scale production, which gave rise to the regime of electric power generation permits under the self-supply and cogeneration modalities, among others, by private parties. Thus, with the objective of providing a regulatory framework for the granting and operation of these permits, on May 31, 1993 the Regulations to the Public Electric Power Service Law (the “Regulations”) were published in the Official Gazette of the Federation (“DOF”), which established that private parties holding self-supply permits could generate power to (i) be consumed by those same private parties (self-supply) or (ii) sell their surplus to the Federal Electricity Commission (“CFE”). Article 101 of the Regulations defined self-supply as “the use of electric power for self-consumption purposes, provided that such power comes from plants intended to satisfy the needs of the group of co-owners or partners as a whole.” Likewise, Article 36 of the LSPEE established the limitation preventing permit holders from delivering electric power to third parties who were not partners of the permit-holding company, unless they were included, subject to prior authorization, in the expansion plans associated with the permits or by means of an assignment of rights. In connection with the sale of surplus, the LSPEE established that self-supply permit holders must make their electric power generation surplus available to the CFE, for which purpose permit holders entered into agreements with the CFE for the acquisition of surplus power whose surplus was 20 megawatts (“MW”) or less, and power purchase agreements for those with surplus exceeding such amount. 2. Legal framework following the enactment of the LIE With the publication of the LIE in the DOF on August 11, 2014, the LSPEE was repealed. The second transitory article of the LIE established that the self-supply and cogeneration permits granted or processed pursuant to the LSPEE would be respected in their terms; however, the tenth transitory article states that such permits would retain their original term and could not be extended. Likewise, the possibility was established for self-supply and cogeneration permit holders to request migration to permits with a sole generation character so that they would be regulated in accordance with the LIE. Consistent with the foregoing, pursuant to the LIE and the Law of Coordinated Regulatory Bodies in Energy Matters (“LORCME”), it was established that the CRE would have the power to review and authorize modifications to the expansion plan and the addition and removal of partners. In connection with the sale of surplus to the CFE, with the issuance of the LIE the Legacy Interconnection Agreements were created, which are the agreements entered into on the basis of the LSPEE, and these may be modified with respect to the addition and removal of load centers, provided that this does not entail a modification of their term. 3. The General Administrative Provisions setting forth the terms to request authorization for the modification of electric power generation permits (RES/390/2017) Pursuant to the powers granted by the LIE, the CRE is empowered to authorize and resolve modifications to the permits granted under the LSPEE. Thus, in order to provide a regulatory framework applicable to such modifications, on April 17, 2017 the CRE published in the DOF Resolution RES/390/2017, by means of which the General Administrative Provisions setting forth the requirements to process before the CRE the modifications and transfers regarding self-supply permits (the “Provisions”) were issued. The Provisions established: (i) the cases in which the permits could not be modified, (ii) the requirements to be met to modify the persons authorized as beneficiaries of the electric power or establishments associated with cogeneration, and (iii) it was established that load centers are not required to be included in the Registry of Qualified Users (“RUC”) and may be included in the permits granted under the LSPEE. In this regard, on the basis of the LIE and the Provisions, only the following may be included as partners of self-supply and cogeneration permit holders: (i) load centers that already received the public electric power service upon the entry into force of the LIE, regardless of their demand; and (ii) load centers that did not receive the public service before the LIE, provided that, given their level of demand, they are not required to be included in the RUC, that is, Basic Users. It is necessary to emphasize that, in accordance with the Provisions, self-supply permits have a fixed generation capacity determined in the Legacy Interconnection Agreements, as well as a defined term, which implies that once the original term of the permits concludes, permit holders may migrate to the regime established in the LIE or exit the market. MODIFICATIONS CONTEMPLATED IN THE AMENDMENTS TO THE PROVISIONS As mentioned above, on February 5 the CRE requested from CONAMER the RIA exemption. Thus, the main objectives of the Amendments to the Provisions were focused on: (i) facilitating the transition from the price regime regulated by the LSPEE toward the regime established in the LIE, (ii) favoring the supply of electric power under the regulatory framework of the LIE, and (iii) allowing coexistence between the two legal frameworks without generating adverse conditions between the permit holders of the two schemes. With the foregoing objectives, the CRE included within the sixth provision a fourth section establishing that generation permits may not be modified when it involves the addition of new load centers that have entered into a basic supply contract under the LIE. Likewise, item “i” was eliminated, modifications were made to items “ii,” “iii” and “iv,” and item “v” was added, all in subsection “e)” of the ninth provision relating to the permits granted under the LSPEE. These changes related to the change of the persons authorized as beneficiaries of the electric power or establishments associated with cogeneration may be summarized in the following points: a) Item “i.” – The possibility of including new persons as partners, who had not been previously authorized in the permit, by means of a request for inclusion in the corresponding expansion plans, was eliminated. b) Item “ii.” – The documentation required in this item to carry out the modification of the permit was limited so that it applies only to the partners included in the expansion plans. c) Item “iii.” – The subsection was narrowed to refer to the need to provide the information relating to the maximum demands of the load centers. d) Item “iv.” – The following modifications were made: i. The need to submit the information requested by the CRE to prove that it is not a load center that has entered into supply contracts under the LIE was added. ii. For load centers that have a contract under the LIE and for those that are required to be registered in the RUC, once their term has concluded they may not be included in self-supply and cogeneration permits granted under the LSPEE, and must be subject to the regulations applicable to Basic or Qualified Supply. iii. It is established that load centers already in the RUC that have requested their removal therefrom may not be included in these permits and must be subject to the regulations applicable to Basic or Qualified Supply. e) Item “v.” – Item “v” was added, establishing that partners already approved or in expansion plans, who have merged or spun off, must prove their status as partner or beneficiary of the electric power, provided that no new load centers are included. Basic Users are those load centers with a demand of less than 1 MW, whereas Qualified Users are those load centers that report a demand equal to or greater than 1 MW. The foregoing modifications entail the elimination of the possibility of adding to the generation permits load centers that hold a Basic Supply contract under the LIE, favoring that they remain with the sole provider of this service, as well as users who, without being required by the LIE, had migrated to the qualified service and wished to exit this scheme, forcing them to remain in it or to contract the basic supply service with CFE, as it is the sole provider of this service. COMMENTS OF THE COMMISSION ON THE AMENDMENTS TO THE PROVISIONS On the basis of the foregoing, the Commission detected three issues arising from the possible effects on competition and free market access that the Amendments to the Provisions could generate, and issued recommendations in this regard. 1. Uncertainty generated by the reduction of incentives to invest and the limitation on the possibility of competing in the market In terms of what was pointed out by COFECE, the Amendments to the Provisions entail a substantive change to the operating rules of the permits granted under the LSPEE, which, pursuant to the second and tenth transitory articles of the LIE, were to be respected. The foregoing could affect the terms and conditions of the Legacy Interconnection Agreements, discouraging investment and participation in this market. Likewise, considering that these permits constituted a supply alternative for the industry in the context of an electric sector that operated under a vertically integrated monopoly, their design created an appropriate scenario for investors to recover their investments. By preventing permit holders from attracting new partners or replacing those who exit, the recovery of investment and costs will be hindered, discouraging investments in expansion, maintenance and technological replacement, which could have generated better conditions for their users, thereby undermining the operation of the National Electric System as a whole. 2. Limitation of the options of basic service users The Commission considered that the Amendments to the Provisions could limit the options of basic service users, since those who did not receive supply before the entry into force of the LIE could not be added to the self-supply contracts and would be required to contract the service with CFE Basic Supply, which is currently the sole provider of services in that market. In particular, the addition of item “iv” of the sixth provision and the modification to subsection “iv” of section I of the ninth provision contemplate the elimination of the possibility that load centers that have contracted CFE Basic Supply may obtain electricity from a self-supply or cogeneration permit holder, leaving them with a single option to cover their needs. The foregoing inhibits the need for CFE Basic Supply to compete to attract and retain these users through better supply conditions, which would imply granting an advantage to the CFE by artificially ensuring the permanence of users in basic supply. As a result, the possibility that users may opt for more convenient options to acquire electricity would be eliminated, increasing their costs and artificially diminishing competition in the markets in which CFE participates. 3. Granting of exclusive advantages to CFE Basic Supply Lastly, COFECE considered that the Amendments to the Provisions could confer upon CFE Basic Supply, as the sole provider of the service, exclusive advantages, since it could benefit by retaining as customers those new users with demands of less than 1 MW who would be prevented from associating with self-supply or cogeneration permit holders. Likewise, the electric power surplus of self-supply permit holders that is not allocated should be made available to CFE in accordance with the terms and conditions of the Legacy Interconnection Agreements, which allows one to infer that CFE could dispose of such surplus from permit holders at a price lower than the market price. 4. Granting of exclusive advantages to CFE Basic Supply Starting from the three issues described above and detected by the Commission, it considers that, given the regulatory framework of the permits granted under the LSPEE, they should be phased out gradually given the impossibility of extending them, but this does not mean that the rationality of these permits should not be recognized, and the conditions under which they operate must be respected. Therefore, the Commission considers that in the event that the CRE deems it necessary to modify the transition regime, it was recommended that the changes implemented must respect the provisions of the transitory articles of the LIE, so as to allow the recovery of investments made and planned, avoiding granting exclusive advantages to other participants in the industry. Along these lines, the Commission considered that the analysis established in the General Law on Regulatory Improvement is fundamental to identify and implement regulatory improvements, for which reason the Amendments to the Provisions must be submitted to CONAMER’s RIA procedure prior to their publication in the DOF. ALTERNATIVES IN THE FACE OF THE IMPLEMENTATION OF THE AMENDMENTS TO THE PROVISIONS In terms of the Federal Economic Competition Law (“LFCE”), there are two means – not mutually exclusive – that those affected by the Amendments to the Provisions could employ against the possible effects that could be generated by their implementation, as well as resorting to the Judicial Branch through an amparo lawsuit for the issuance of the Amendments to the Provisions and/or the fact that they do not have CONAMER’s RIA. We understand that as of today there is no current and direct harm as a result of the issuance of the Amendments to the Provisions; however, considering the possible implications, it is suggested to urge the Commission by any of the following avenues: (i) the filing of a complaint for the commission of relative monopolistic practices; and/or (ii) the informal submission of a report that could give rise to the initiation of an investigation for the existence of probable barriers to competition and free market access. These two procedures hold different conditions in terms of their nature, timelines and results, for which reason a brief explanation of each of these is offered below. 1. Complaint for the commission of relative monopolistic practices Under this avenue, a formal complaint would be filed against the CRE for the possible commission of relative monopolistic practices consisting of: (i) discriminatory treatment against permit holders subject to the LSPEE and (ii) the establishment of an action that has the object and effect of hindering the production process. The complaint may be filed before COFECE by any person, without it actually being the affected party. In the event that the complaint is admitted, an investigation procedure would be processed that may last up to thirty months, followed by an administrative procedure that regularly takes eight months and culminates with the issuance of a resolution in which the economic agent that engaged in the anticompetitive conduct may be sanctioned. The sanction that the Commission may impose for engaging in monopolistic practices may be the suppression of the conduct, as well as the imposition of a fine. In the event that a sanction is imposed and it can be proven that one of the permit holders was affected as a result of the reported actions, the restitution of damages could be sought. Now then, there are challenges associated with this avenue, since to successfully conclude this procedure it would have to be demonstrated that the CRE is an economic agent that is subject to economic competition matters, as well as to prove that the powers contemplated in the Amendments to the Provisions do not consist of strategic activities in terms of Article 28 of the Political Constitution of the United Mexican States (“CPEUM”), since otherwise such acts would not be subject to the LFCE. In summary, through this avenue permit holders have the possibility of formally urging COFECE to initiate a procedure against the CRE that may benefit them, currently or potentially, against the implementation of the Amendments to the Provisions; however, it is a procedure that may last approximately 30 months, in which various questions regarding the applicability of competition regulation would have to be resolved. 2. Informal report for the existence of barriers to the competition process Under a new procedure created under the latest constitutional reform on economic competition, there is the possibility that permit holders may informally submit a report by means of which they demonstrate that there are no conditions of effective competition in the market as a consequence of the Amendments to the Provisions, in order to determine the existence of barriers to competition and free market access as a result of the issuance of the Amendments to the Provisions. It is relevant to mention that this type of procedure cannot be formally requested by any private party, for which reason sufficient elements would have to be submitted to motivate the Commission to initiate such investigation on its own motion; without the foregoing guaranteeing that COFECE will have a formal obligation to initiate such procedure. This type of procedure is composed of an investigation procedure that may last up to eighteen months and an administrative procedure that lasts approximately six months. Unlike the previous procedure, under this one no sanction would be issued against the CRE, but rather a resolution would be issued by means of which recommendations may be presented to the public authorities, in this case the CRE and/or CONAMER (as the body in charge of regulatory improvement); or the elimination of the identified barrier to the competition process may be ordered, in the event that the CRE can be considered an economic agent in terms of the LFCE. Under this procedure, the challenge persists of demonstrating that the powers under which the CRE is acting are not identified as strategic activities in terms of the CPEUM. Nevertheless, it is likely that COFECE will not rule on such determination, leaving it to the Judicial Branch to rule on such situation. This procedure, briefer than the previous one, would appear to fit better with the particularities contained in the Amendments to the Provisions; however, sufficient elements must be gathered to allow the Commission to commence this investigation on its own motion. In this regard, it should be noted that our firm has succeeded in promoting the foregoing on more than one occasion. 3. Filing of an amparo against the issuance of the Amendment to the Provisions and/or CONAMER’s failure to rule As an additional alternative, permit holders who consider that they are affected in their legal interests as a result of the issuance of the Amendments to the Provisions may resort to the Judicial Branch by way of amparo to request the protection of their acquired rights in the permits granted on the basis of the LSPEE and the applicable transitory articles of the LIE. Likewise, the aggrieved permit holders could initiate an amparo lawsuit on the basis of the concept of violation consisting of the fact that the Amendments to the Provisions do not have CONAMER’s final opinion on the RIA exemption, which is a mandatory requirement in the drafting of laws, legislative decrees and acts of a general nature that generate compliance costs for private parties. On the basis of the foregoing, permit holders are fully empowered to file an amparo claim on the basis of the two aforementioned scenarios, which could confer upon them short-term precautionary measures (provisional stay of the challenged act) and a possible final resolution exempting them from compliance with the Amendments to the Provisions. For additional information, contact our experts: Fernando Carreño, Partner: +52 (55) 5258 1042 | fcarreno@vwys.com.mx Gerardo Rodríguez, Associate: +52 (55) 5258 1042 | grodriguez@vwys.com.mx Michel Llorens, Associate: +52 (55) 5258 1042 | mllorens@vwys.com.mx
