Mexico’s Federal Economic Competition Commission on the amendment to the CFE terms of legal separation

Mexico's Federal Economic Competition Commission (COFECE) has formally issued a non-binding opinion (the Opinion) on the recently amended Terms for the Strict Legal Separation of the state-owned power company, Comisión Federal de Electricidad (the CFE Separation Terms).

The CFE Separation Terms were initially issued by the Ministry of Energy (SENER) in early 2016 in the context of and as part of Mexico's Energy Reform in order to establish the terms for the accounting, operational, functional and legal separation between the power generation, transmission, distribution and marketing activities of Comisión Federal de Electricidad (CFE).

Earlier this year, SENER published in the Federal Register an amendment to the CFE Separation Terms (the Amendment) that was aimed at maximizing efficiency in CFE and its subsidiaries and also increasing CFE's competitiveness in Mexico's power industry.

COFECE has identified that the Amendment may compromise the horizontal and vertical legal separation of CFE, thus potentially leading to counterproductive results to the detriment of the efficiency and competitiveness of the power sector in Mexico and ultimately damaging end users and consumers.

When describing one of the potential negative impacts that the Amendment may have on the horizontal separation of CFE, the Opinion notes that the Amendment may lead to the concentration of substantial market power in the power generation sector in one or very few companies (as the Amendment allows the legal and/or factual integration of CFE generators).

In COFECE's opinion, this may (i) lead to unfair arrangements and treatment between related parties and (ii) encourage related parties to engage in anti-competitive practices by restricting the capacity in more efficient power plants and instead dispatching power capacity to less efficient power plants.

The Opinion also notes that compromising the vertical separation of CFE may discourage CFE from expanding and investing in interconnection infrastructure, thus creating a barrier limiting the entry of key new players (suppliers and generators).

As a result of the drawbacks laid out in the Opinion, COFECE is urging that SENER, CFE and the Energy Regulatory Commission (CRE) do the following:

• CFE will maintain a degree of functional and horizontal separation when restructuring the assets of its generation subsidiaries
• CFE will maintain a vertical separation between its distribution and marketing activities
• SENER and CRE will enforce the strict legal separation of CFE as provided for under the Electric Industry Law
• The CFE Separation Terms and its effects will be periodically audited by a third party (in accordance with the relevant provisions of the CFE Separation Terms)

While, as noted, the Opinion is non-binding, this marks the latest COFECE contribution to the energy sector in Mexico. COFECE has been very active in the past months in investigating potential cartel arrangements and other anti-monopolistic practices and in issuing other opinions, particularly ones that impact the oil and gas industry.