Subject: fw : the road to competitive electricity markets in mexico
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from : sandputil @ standardandpoors . com [ mailto : sandputil @ standardandpoors . com ]
sent : thursday , december 20 , 2001 10 : 02 am
to : rohauer , tanya
subject : the road to competitive electricity markets in mexico
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need for capital investment
the push toward competitive electricity markets in mexico is driven by the need for investment in power generation and the reluctance of the mexican government to continue to add off - balance sheet debt in the form of the ipp contracts . mexico is forecast to require investments in the power sector of about $ 5 billion per year during the next 10 years to keep up with demand , most of which is expected to come from private investors . although the current economic conditions may adjust this forecast downward , substantial investment will still be required in the sector . even though the ipp program has been successful thus far , standard & poor ' s views these contracts as off - balance sheet debt of cfe , which puts negative pressure on cfe ' s credit rating . because the obligations under many of these contracts cross default with cfe ' s debt , which in turn cross defaults with some of the sovereign debt , these contracts also apply negative pressure to the sovereign rating . while this pressure is not substantial today , if the ipp program continues to be the sole source of new generation in mexico , these obligations will have a greater affect on the sovereign rating over time . therefore , a move to a fully competitive electricity market , where private investors take all of the financing risks , will alleviate credit pressure on the sovereign from the electric sector .
in the interim , the comision reguladora de energia ( cre ) is working on creating a framework for the potential liberalization of the industry . cre envisions the creation of an independent system operator to manage generation commitment , dispatch , and billing . state - owned generators would be divided into regional entities to promote competition . the distribution sector would also be divided into several regional entities , and a concession for the operation and maintenance of these systems could be granted . the transmission network would remain as a single public entity , although concessions for new transmission projects could be granted .
liberalization of the electricity sector
during the past nine years , mexico has gradually liberalized the restrictions on the power market . cfe enjoyed a monopoly in the electric power sector for many years , although reforms instituted in 1992 allowed ipps to sell power to cfe and industrial customers under self - supply regulations . in 1996 , cfe devised a financing plan to meet projected electric demand growth . the objectives of the plan were to lower the company ' s debt leverage , finance projects at a lower cost , and extend the maturities of these obligations . as a result , for the first time , several new projects were structured as build - lease transfers ( blt ) , which are similar to lease transactions . under this structure , a third party finances and builds a plant ( or transmission line , or transformer ) and leases the plant to cfe for a period during which the investment is amortized . at the end of this timeframe , ownership of the asset is transferred to cfe . these blt arrangements indirectly assigned much of the operating risk to cfe , as cfe was required to pay for service even if the asset was unavailable . new facilities are now being constructed under ipp contracts . these arrangements are structured as take - and - pay power purchase agreements whereby cfe will not pay for power if it is not delivered . the next step would appear to be the creation of an open market system where participants are free to buy and sell electricity . yet , the outlook for the creation of such a system is unclear in mexico , given the highly politicized tripartisan environment that governs the decision - making process .
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