Energy Reform 2025 – Electricity Sector

On January 29, 2025, President Claudia Scheinbaum submitted to the Senate a major bill for the enactment of a package of new secondary laws concerning the Mexican energy industry, and a series of amendments to other related laws (the "Bill"). This newsletter focuses on the part of the Bill relating to the electricity sector, in particular the new proposed Law of Comisión Federal de Electricidad ("LCFE") and Electricity Sector Law ("LSE"). In subsequent newsletters we will address the matter related to the hydrocarbons sector and other areas of the energy industry.

The main purpose of the Bill is to harmonize the secondary laws concerning the energy industry with the constitutional reform published in the Federal Register ("DOF") on October 31, 2024, regarding strategic areas and companies, and the constitutional reform published in the DOF on December 20, 2024, regarding administrative simplification.

These constitutional reforms provided for the following changes, among others

• the transformation of Comisión Federal de Electricidad ("CFE") and Petróleos Mexicanos ("Pemex") into State-owned public companies, with a vertically integrated structure, establishing that their activities will not be considered monopolistic;
• establishing the exploitation of lithium as an exclusive strategic area of the State
• establishing the prevalence of CFE in the generation of electricity and the prohibition of profit in the provision of essential services;
• establishing that the planning in the energy sector will be binding, under the leadership of the Ministry of Energy ("SENER")
• establishing the internet service provided by the State as a new strategic area;
• establishing the basis for the Energy Regulatory Commission and the National Hydrocarbons Commission to cease to exist, transferring their functions to SENER.

Law of Comision Federal de Electricidad

The purpose of the new proposed LCFE is to regulate the organization, administration, functioning, operation, control, evaluation and accountability of CFE, as a State-owned public company, as well as to establish its special regime. The following are some of its most important aspects:

• CFE, as a State-owned public company, will be an entity of the Federal Public Administration sectored under SENER, with technical, operational and management independence, legal personality, special regime and its own assets, whose purpose is to procure energy justice for the people of Mexico and the sustainable development of the activities of generation, storage, transmission, distribution, marketing and supply of electricity, as well as to contribute to the provision of internet and telecommunications services with the Mexican State.

The essence of CFE will be to comply with its social responsibility and guarantee the continuity, accessibility, safety and reliability of the electricity utility service and its activities do not constitute monopolies.

• CFE will directly provide the electricity transmission and distribution utility service and will directly perform the basic supply and marketing activities. In addition, CFE may carry other activities necessary for the fulfillment of its purpose, in Mexico or abroad, directly or through affiliates, companies in which it has a minority interest or by entering into contracts, agreements, alliances, associations or any legal act, with individuals or legal entities of the public, private or social sectors, domestic or international, which may include any of the terms permitted by applicable law.
• With respect to activities related to transmission and distribution in particular, CFE may enter into contracts with its subsidiaries or with individuals to carry out, among others, the installation, maintenance and expansion of the necessary infrastructure. It may also carry out such activities in association or alliance with third parties, through affiliates or companies in which CFE has a minority interest or other forms of association.
• CFE will be managed and administered by:
  • A Board of Directors composed of the heads of SENER (who presides and has a casting vote), the Ministry of Finance and Public Credit ("SHCP"), the Ministry of Environment and Natural Resources, the Ministry of Science, Humanities and Technology, the General Director of Pemex, two independent board members proposed by the President and ratified by the Senate, and one board member appointed by CFE's workers.
  • A General Director, responsible for the management, operation, functioning and execution of CFE's objectives, in accordance with the strategies, policies and guidelines approved by the Board of Directors. The General Director will be appointed by the President.

In addition, several committees of the Board of Directors are contemplated (including new committees for Affiliates and Sustainability), and a special pricing committee composed of two representatives of SHCP and a representative of SENER, which shall issue a favorable opinion regarding the prices of the products and services produced or rendered by CFE.

• The Auditing Committee, an Internal Auditor and an External Auditor will be responsible for monitoring and auditing CFE and its affiliates. Each of the Internal Auditor and the External Auditor will be headed by a person appointed by the Board of Directors, at the proposal of the Auditing Committee. The Federal Superior Auditing Office will have authority to audit CFE and there will be an Examiner appointed by the Minister of Anti-Corruption and Good Governance, who will evaluate the performance of CFE, its Board of Directors and its committees, and will submit an annual report to the House of Representatives.
• A special regime is established for CFE regarding affiliates, remuneration and austerity, acquisitions, leases, services and works, assets, administrative responsibilities, budget and accounting, debt, and sustainability:
  • Affiliates will be those companies in which CFE has has an interest of more than 50%, which may be incorporated under Mexican or foreign law. Such affiliates will not be parastatal entities and their creation, merger, spin-off or liquidation shall be authorized by the Board of Directors, at the proposal of the Chief Executive Officer.  In matters of acquisitions, leases, contracting of services and works, the proposed LCFE establishes that the Law of Acquisitions, Leases and Services of the Public Sector and the Law of Public Works and Related Services will not be applicable and the corresponding procedures will be governed by the provisions issued by the Board of Directors, in accordance with the guidelines established in the LCFE itself. The acquisitions, leases and contracting of services and works will be awarded through open bids, except in the exceptional cases established by the LCFE.  A Board of Directors composed of the heads of SENER (who presides and has a casting vote), the Ministry of Finance and Public Credit ("SHCP"), the Ministry of Environment and Natural Resources, the Ministry of Science, Humanities and Technology, the General Director of Pemex, two independent board members proposed by the President and ratified by the Senate, and one board member appointed by CFE's workers.
  • A General Director, responsible for the management, operation, functioning and execution of CFE's objectives, in accordance with the strategies, policies and guidelines approved by the Board of Directors. The General Director will be appointed by the President. In addition, several committees of the Board of Directors are contemplated (including new committees for Affiliates and Sustainability), and a special pricing committee composed of two representatives of SHCP and a representative of SENER, which shall issue a favorable opinion regarding the prices of the products and services produced or rendered by CFE.
  • The acts that are developed within the contracting procedures up to the time of the award, as well as the acts tending to the execution of the relevant contract will be of an administrative nature. Once executed, the contracts and all acts or aspects deriving therefrom are of a private nature and are governed by the commercial or private law.
  • The acquisition of electricity and associated products will be governed by the mechanisms established in the LSE and the transactions carried out in the wholesale electricity market will be governed by the Market Rules and the specific regulations that regulate them.
  • CFE's real estate, personal property and bank accounts will be subject to the public domain regime of the Federation and are therefore unseizable and not subject to adverse possession.
  • CFE will have budgetary autonomy and will be subject only to the financial balance and the personal services spending ceiling approved by the House of Representatives, as well as the special budgetary regime set forth in the LCFE. CFE will not be subject to the General Law of Governmental Accounting, so international financial reporting standards shall be applied. The subsidiary productive enterprises of CFE will be extinguished when the LCFE becomes effective and CFE will be subrogated in all their rights and obligations. Within 30 days following the installation of the Board of Directors, the Director General shall submit, for the approval of the Board of Directors, the program and scheme for the organizational restructuring of CFE, its Organization Statute and the necessary appointments.
  • CFE's public debt obligations will not be obligations guaranteed by the Mexican State. The Board of Directors will approve, at the proposal of the General Director, the general characteristics and policies for the contracting of direct and contingent public debt, subject to the rules established in this regard in the LCFE. Electricity Sector Law The proposed LSE will have the purpose of regulating (i) the planning and control of the National Electric System ("SEN"), the electricity transmission and distribution public utility service, the basic supply and the operation of the Wholesale Electricity Market ("MEM") (as exclusive strategic areas and activities of the State), and (ii) the other activities of the electricity sector: generation, storage and marketing of electricity, and the supply of primary inputs for the electricity sector. The following are some of the most important novelties and aspects of the proposed LSE:
  • CFE and its subsidiaries shall, among others, have a program to reduce the environmental impact of their activities, a regulatory compliance program and a Code of Ethics, shall contribute to the sustainable development and social welfare of the communities where they operate, and shall establish and implement due diligence measures in business or commercial agreements with third parties.
  • CFE will be subject to the applicable laws regarding transparency and access to information, oversight and accountability and anti-corruption, in order to prevent, identify, investigate and punish acts or omissions that contravene them. In addition, the Board of Directors shall provide the necessary measures to make available to the general public, on a regular basis and through its website, updated information that allows the general public to know the financial, administrative, operational, economic and legal situation of CFE and its subsidiaries, as well as their risks, in accordance with the Securities Market Law and the administrative provisions applicable to securities issuers.
• Domestic disputes involving CFE will be subject to the jurisdiction of the Mexican federal courts and CFE is exempted from granting the guarantees required by law to the parties, even in cases of judicial disputes. However, CFE may agree to alternative means of dispute resolution, including arbitration clauses or commitments. In the case of legal acts or contracts that take effect or are executed outside of Mexico, CFE may agree to the application of foreign law, the jurisdiction of foreign courts in commercial matters and enter into arbitration agreements.

The subsidiary productive enterprises of CFE will be extinguished when the LCFE becomes effective and CFE will be subrogated in all their rights and obligations. Within 30 days following the installation of the Board of Directors, the Director General shall submit, for the approval of the Board of Directors, the program and scheme for the organizational restructuring of CFE, its Organization Statute and the necessary appointments.

Electricity Sector Law

The proposed LSE will have the purpose of regulating (i) the planning and control of the National Electric System ("SEN"), the electricity transmission and distribution public utility service, the basic supply and the operation of the Wholesale Electricity Market ("MEM") (as exclusive strategic areas and activities of the State), and (ii) the other activities of the electricity sector: generation, storage and marketing of electricity, and the supply of primary inputs for the electricity sector.

The following are some of the most important novelties and aspects of the proposed LSE:

General Aspects

The proposed LSE introduces the concept of Energy Justice (actions or strategies aimed at reducing energy poverty, social and gender inequalities in the use of energy and promoting regional development and shared prosperity through access to reliable, affordable, safe and clean energy and energy infrastructure to meet basic needs and reduce impacts on health and the environment), as an objective of the policy, planning, regulation and oversight of the electricity sector through SENER and the National Energy Commission ("CNE", the new regulatory body of the energy sector).

Profit (defined as the economic surplus after covering operating costs and guaranteeing resources for investment, modernization, expansion and Energy Justice) in the basic supply shall be avoided.

The proposed LSE reiterates the preference of the State over private parties in the generation and marketing activities and establishes that the planning of the electricity sector will be binding and shall guarantee such preference of the State, in order to provide the people of Mexico with electricity at the lowest possible price.

SENER will be in charge of the energy policy and planning of the SEN. The planning of the SEN shall be conducted with policies of national security, Energy Justice, efficiency, sustainability, and taking into consideration the criteria of mitigation and adaptation to the climate change phenomenon encouraging the installation of sufficient infrastructure to meet the demand of the SEN. Such planning will be reflected in the National Energy Transition Strategy, the Energy Sector Program, the Electricity Sector Development Plan ("PLADESE", a document that will contain the medium and long term planning of the SEN, and brings together the binding programs for the installation and retirement of power plants, and for the expansion and modernization programs of the National Transmission Network ("RNT") and the General Distribution Networks ("RGDs")), the Hydrocarbons Sector Development Plan and the Plan for the Energy Transition and the Sustainable Use of Energy.

Regarding the prevalence of the State in generation matters, the State shall maintain at least 54% of the average energy injected to the grid in a calendar year; however, the State's prevalence shall be achieved within a MEM operation framework based on an economic dispatch of loads, subject to reliability and safety restrictions. The economic dispatch of loads is defined as the process whereby the generation, controllable demand and storage resources are scheduled to satisfy the demand, minimizing their variable production costs and satisfying the operational, reliability and safety restrictions of the SEN. The LSE is not clear about the mechanisms to achieve the prevalence of the State in the marketing of electricity.

All government levels shall contribute to the development of electric power generation, transmission and distribution projects, through procedures and coordination bases that expedite and guarantee the granting permits and authorizations within their scope of authority. SENER and the Ministry of the Environment and Natural Resources shall coordinate the administrative procedures for the issuance of permits and authorizations necessary for the execution of strategic projects within the terms established in the binding planning and for the fulfillment of the goals established in the Electricity Sector Development Program.

The proposed LSE considers the following figures for participation in the electricity sector:

• Transporter: State-owned public company (that is, CFE).
• Distributor: State-owned public company.
• Generators and Exempt Generators: State-owned public company or affiliate, private parties or mixed development projects that generate electricity for selfconsumption or for the MEM.
• Basic Services Suppliers: State-owned public company that offers basic supply to all persons who request it (except qualified users), provided it is technically feasible and complies with the applicable provisions, under non unduly discriminatory conditions.
• Qualified Service Suppliers: State-owned public company or affiliate, private parties or mixed development projects that offer qualified supply to qualified users under conditions of free competition.
• Last Resort Suppliers: State-owned public company or affiliate, private parties or mixed development projects that offer last resort supply to the load centers of qualified users that require it and that are located in the areas where they operate, provided that it is technically feasible and complies with the applicable provisions, under conditions that are not unduly discriminatory.
• Marketers: State-owned public company or affiliate, private parties or mixed development projects that carry out the marketing activities provided for in Article 60 of the LSE. When they do not provide electricity supply services, they are called Non-Supplier Marketers.
• Market Participant Qualified Users: end-users of electricity registered as such with the CNE.
• Importers and Exporters.
• Electric Energy Storage Systems: systems of a Stateowned public company or affiliate, private parties or mixed development projects that allow extracting electricity from an electric grid or energy source and storing it for its subsequent use or injection, which may offer energy and associated products to increase operational flexibility and contribute to the accessibility, reliability, quality, safety, efficiency and sustainability of the SEN, in accordance with the Market Rules; in the understanding that the same capacity or available energy shall not participate in more than one service and shall be offered in its entirety to CENACE for the purposes of the efficient operation of the SEN. the Market Rules; in the understanding that the same capacity or available energy shall not participate in more than one service and shall be offered in its entirety to CENACE for the purposes of the efficient operation of the SEN.

The proposed LSE contemplates the establishment of regulated rates determined in accordance with the methodologies issued by the CNE for transmission and distribution services, the operation of the basic services supplier, the costs of the operation, research, updating and development services of the National Center for Energy Control ("CENACE"), and ancillary services not included in the MEM.

The activities of generation, storage, transmission, distribution, supply, marketing, planning and operational control of the SEN will be of public utility, when provided by the State, and are subject to public and universal service obligations in terms of the LSE. CENACE will be in charge of the operative control of the SEN, the operation of the MEM and access, when technically feasible, to the RNT and RGDs.

The generation, marketing and supply of primary inputs for the electricity sector shall be carried out independently of each other and under conditions of legal separation of their activities. Likewise, the marketing modalities shall be separated; however, the generation, marketing and supply of inputs carried out by CFE will not be subject to such legal separation rules (but they will maintain certain functional and operative separation for purposes of CFE's participation in the MEM).

The Ministry of Economy shall (i) define, with the opinion of SENER, strategies for the industrial promotion of local productive chains and for the promotion of direct investment in the electricity sector, with special attention to small and medium enterprises, and (ii) establish the methodology to measure the degree of national content in the electricity sector, as well as its verification, with the support of an independent third party or the authorities of the sector. SENER, with the opinion of the Ministry of Economy, may establish, in the contracts for the development of mixed investment projects and those resulting from the mechanisms for the allocation of energy and associated products entered by the participants in the electricity sector that, under the same circumstances, including equal price, quality and timely delivery, preference is given to the procurement of domestic goods, and the contracting of services of domestic origin.

The proposed LSE contemplates the temporary intervention of facilities by SENER to correct irregularities in the management or operation of any permit holder that may jeopardize the quality, reliability, continuity and security of the electricity supply. Likewise, the LSE establishes that in case of natural disaster, war, strike, serious alteration of public order or when there is an imminent danger to national security, the internal security of the country, the national economy or the continuity of the electricity supply, the Federal Government may take over the real estate and personal properties necessary for the electricity supply; in these cases, except in the case of international war or armed conflict, the affected persons shall be compensated by paying the damages and losses at their real value.

Generation

The generation of electricity may be carried out by the State, private parties by themselves or jointly through mixed investment schemes. For this purpose, the LSE establishes the following figures:

distributed generation, self-consumption and generation for the MEM:

• Distributed Generation;
• Self-consumption; and
• Generation for the MEM.

Power plants with a capacity equal to or greater than 0.7 MW require a permit from the CNE. Power plants with a capacity of less than 0.7 MW are Exempt Generators, do not require a permit and may only sell their electricity and associated products through a Supplier or use their production for their own consumption. Exempt Generators may also sell electricity and associated products through a Qualified Service Supplier, as long as the power plants do not share their metering with the load center of a basic supply user.

Power plants of any capacity that are intended exclusively for self-use in emergencies or during power outages do not require a permit.

All power plants with generation permits that participate in the MEM shall be represented by a MEM Participant Generator.

With respect to the production of their own power plants, Generators may carry out marketing activities, except for the electricity supply. The legal separation does not apply to such activities.

Distributed Generation

Distributed Generation is a modality of electricity generation in power plants with a capacity of less than 0.7 MW, which are interconnected in a distribution circuit that contains a high concentration of load centers in terms of the Market Rules, the applicable general administrative provisions. It does not require a permit from the CNE.

The electricity and associated products of Distributed Generation may be used for its own consumption or its sale under the terms of the LSE. Distributed Generation may sell electricity and associated products through the Basic Services Supplier, according to the contract models and calculation methodologies, criteria and bases to determine and update the applicable considerations that reflect the economic value that it produces to the Supplier (which will be issued by the CNE).

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