LatinFinance - September/October 2015 - 90

MEXICO
INFRASTRUCTURE

Historic energy reforms are shaking up how the national electricity
company does business - and a swath of projects are up for tender as a
result. By Patrick Ferguson and Sara Rosner

Charting the course

Pipeline projections
The projects up for tender, numbering more than two dozen, include several jumbo pipelines

90 L ATINFINA NCE.COM - September/October 2015

Credit: Steve Wilson

I

n June, Mexico's state-owned Federal Electricity Commission (CFE) attracted global
attention when it announced plans to tender almost $10 billion of projects this year. The massive buildout comes amidst a wave of industrial and commercial growth and less than a year
after the passage of landmark energy reforms that are expected to transform Mexico's energy
and power industries, as well as the state-backed utility.
The reforms, passed in August 2014, aim to open the country's power sector to private and
international investment and make it more competitive and efficient to support industrial
and commercial development by decreasing electricity prices. It made sense for CFE to issue
the tenders after the reform, as the government was likely making a holistic examination of its
energy and power needs in tandem with devising the legislation, says a project finance attorney focused on Mexico.
Like Pemex, CFE is undergoing fundamental changes as a result of the reforms. The company has enjoyed for decades a complete vertical integration of the power industry, controlling generation, transmission and distribution and supply to almost all end users in the
country. Electricity tariffs were set by the finance ministry and CFE's budget was granted by
the national treasury, resulting in power prices that did not reflect real market rates and a lack
of financial resources behind Mexico's power industry, according to an analysis from Mayer
Brown. There was no power trading or wholesale power market and private companies had
limited participation.
Under the reforms, CFE will be competing in a new wholesale generation market with
other generators and power marketers to sell and deliver power. It will also break off its
power generation, transmission and distribution businesses into subsidiaries by the end of
next year. A new government agency, CENACE, will oversee the wholesale market and manage the grid.
"The CFE is passing through a very significant transformation," says Alejandro de la Vega,
head of project finance at Santander Mexico. "I view the energy sector as positive. There will
be a lot more activity in the next few years."
Despite the mandates set out in the reforms, uncertainty remains over how and when the
reforms will actually play out at CFE, Latin America's largest utility by generating capacity,
and Mexico's power industry as a whole. Potential opportunities seem to be trumping this
uncertainty however, as investors and developers actively gauge tenders for pipelines, power
generation, transmission and distribution line projects.
"It's going to be quite interesting to see and compare and contrast. Pemex is getting all the
publicity and then we had this sharp drop in oil prices," says Arturo Carrillo, a partner at law
firm Paul Hastings. "We are probably going to see some partnerships between foreign and
local. That may even be part of the bidding requirements."

ON THE HORIZON: CFE plans to issue a
tender to develop more than 500MW of wind
in Oaxaca

that will transport natural gas from the US
to Mexico, as well as power plants, wind
farms and transmission lines.
"There is a huge appetite that is coming
to Mexico in the energy sector which will
be very beneficial for the development of
the country," says Jaime Calpe, chief executive officer of Tag Pipelines, an affiliate of
Pemex, adding that he gets a handful of
calls every week from international investors and developers asking to participate in
pipeline projects.
"The reform will significantly change the
way that the energy business is handled in
Mexico. Of course, with this reform, there
are a lot of opportunities for private com-
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