Frontier finance
n order to respond to the medium and long-term effects of
imbalances in the supply and demand for electricity (for example
California's recent power crisis), certain power developers are
developing ?cross-border? power projects which although located in
Mexico near the California, Arizona or Texas borders, serve the
demands of electricity consumers in both Mexico and the US.
The development of such cross-border plants presents a significant number of obstacles beyond those ordinarily encountered in power project development. These include physical constraints (for example Pemex indicates that it maintains only six gas interconnections with the United States and CFE maintains only two 230kV transmission lines to the US) as well as structural. In particular, there are a myriad of additional legal requirements that must be met for a cross-border project to be implemented in a manner that is in compliance with both US and Mexican regulatory regimes.
The purpose of this article is to present the basic elements of each of the Mexican and US legal and regulatory regimes that affect the implementation of cross-border power projects.
Although the article is not intended to provide an exhaustive discussion of all possible regulatory scenarios, certain fundamental issues are addressed.
Choice of Entity
The export into the US of electric energy from a power plant located in Mexico requires that a Mexican entity be formed. Pursuant to the Electric Energy Public Service Law (the ?Electric Law?), the electricity export permits available under Mexican law (i.e. the Independent Power Producer permit and the Small Producer permit) may only be granted to companies that are incorporated under Mexican law and domiciled in Mexico. In addition, Mexican law dictates that foreign investors only may own land in Mexico that is located within 100km from the border through a Mexican company.
The following represents a list of viable Mexican legal entities for a cross-border project in Mexico:
a) Sociedad en Comandita
In this type of partnership entity, there are general partners and limited partners. General partners are jointly and severally liable, and are entitled to participate in the day to day management of the partnership. The liability of limited partners, who are not allowed to participate in the day to day management of the partnership, is limited to their capital contribution. A variation on this entity is the Sociedad en Comandita por Acciones in which all capital contributions are represented by shares of stock.
b) Sociedad de Responsabilidad Limitada
This entity is similar to a closely held corporation in the United States. The rights and liability of each interest holder in this entity are limited to the interest holder's contribution. The number of interest holders is limited to fifty and there are restrictions on the transfer of corporate parts and the admission of new partners. The Sociedad de Responsabilidad Limitada qualifies as a ?pass-through? entity for US Federal Income Tax purposes.
c) Sociedad Anónima
This is the most common kind of entity in Mexico. This entity is directly analogous to a United States corporation and thus is not a ?pass-through? entity for US Federal Income Tax purposes. Liability is limited to the contributions of the owners, who are shareholders. A Sociedad Anónima. may be privately or publicly held. The Shareholders' Meeting is the most important feature of a Sociedad Anónima. Shareholders may appoint a Sole Director or a Board of Directors which are subordinated to the Shareholders' Meeting. Minority and inspection rights are also granted in this entity.
d) Variable Capital Modality
All of the above entities may be organized as variable capital entities. When an entity adopts this modality, it may authorize a variable amount of capital in addition to its stated amount of fixed capital. Unlike fixed capital, the shares representing variable capital may remain unissued until needed. Increases and reductions of capital are subject to less formal requirements than in a fixed capital entity.
US Regulatory Framework for Cross-Border Power Plants
Developing a power project outside of the US does not mean that the project will be free of US regulatory concerns. The Public Utility Holding Company Act of 1935 (?PUHCA?) is relevant to power projects outside the US in which a US entity holds an ownership interest. For power projects located outside the US but still tied to the US by infrastructure, the sale of output, and/or the purchase of natural gas fuel supplies or electricity, there are a number of other potential US regulatory hurdles.
The Public Utility Holding Company Act
In the US, a company that owns ten percent or more of the outstanding voting securities of an entity that owns or operates facilities used for the generation, transmission or distribution of electric energy for sale or facilities used for the retail distribution of natural or manufactured gas will, absent an exemption, be a holding company that will be regulated under PUHCA. Because regulation under PUHCA is onerous ? including regulation of securities transactions, acquisitions of interests in other electric or gas companies, acquisitions of the securities of other businesses ? companies engaged in the electricity industry historically have gone to great lengths to avoid PUHCA.
Fortunately, among the several ways to avoid PUHCA, foreign utility company status under Section 33 of PUHCA was specifically enacted in 1992 to allow investment by US entities in a company that owns or operates facilities that are not located in any State of the US and that are used for the generation, transmission or distribution of electric energy for sale or the distribution at retail of natural or manufactured gas. As long as that foreign entity does not derive any of its income, directly or indirectly from those activities within the US and neither the foreign entity nor any of its subsidiaries is a public utility in the US, the foreign entity will be exempt from all of the provisions of PUHCA. That exemption means that any upstream US owners of the foreign entity will not be holding companies regulated under PUHCA even if they own ten percent or more of the foreign entity.
However, because of the restrictions on US sources of income described above, foreign utility company status will not be available for power projects located in the border region that plan to sell output for delivery in the US market. Instead, exempt wholesale generator (?EWG?) status under Section 32 of PUHCA offers an exemption from regulation under PUHCA. To be an EWG, an entity must be engaged, directly or indirectly, exclusively in the business of owning or operating, or both owning and operating, all or part of one or more eligible facilities. An ?eligible facility? is defined in the statute to mean a facility that is either (a) used for the generation of electric energy at wholesale or (b) used for the generation of electric energy and leased to one or more public utility companies. Thus, unlike foreign utility company status, an EWG cannot be engaged in the transmission or distribution of electricity, though interconnection facilities necessary to make wholesale sales of electricity can be included in the ?eligible facility?.
Moreover, the ?exclusively in the business? requirement for EWGs limits the scope of activities that an EWG can conduct. Activities closely tied to the operation of the eligible generation facility, however, have been permitted.
Unlike foreign utility company status, which is obtained through a straight-forward notice filing with the Securities and Exchange Commission, EWG status is obtained by an application filed with and reviewed by the Federal Energy Regulatory Commission (?FERC?). The entity will be an EWG upon filing a good faith application but FERC has sixty days to review the application. Because FERC has now reviewed numerous EWG applications, the process is fairly routine.
Regulation of Cross-Border Transactions
A power project located in the US/Mexico border region may sell electricity to the US, purchase natural gas from the US or purchase electricity from the US. In each case, even with the North America Free Trade Agreement in place, certain regulatory approvals are required.
Sale of Output to the US
If power will be sold in the US (i.e., the delivery point for the sale is in the US), the seller and the sale will be subject to the requirements of the Federal Power Act. As a result, the owner of the power project will need to seek market-based rate authority from FERC in the same way that a merchant generator in the US does. The application process for obtaining market-based rate authority is straight-forward and, for a new generator, unlikely to be controversial.
In order to be granted market-based rate authority, the project owner will need to demonstrate that (a) it lacks generation or transmission market power, (b) that it cannot erect barriers to entry by competitors, (c) that it cannot engage in anticompetitive reciprocal dealing and (d) that it cannot transfer benefits from captive ratepayers to shareholders. A new generator is presumed under FERC's regulations to lack generation market power. Transmission market power is typically addressed if any transmission owning affiliate has an open access transmission tariff on file with FERC. There are no barriers to entry in US power markets. And, any concerns about affiliate abuse involving the captive ratepayers of a utility affiliate can be addressed through a code of conduct in a form previously accepted by FERC.
Purchase of Natural Gas from the US
In order to export natural gas from the US, authorization from the Department of Energy (?DOE?)must be obtained. There are two types of authorizations: (a) short-term blanket authorizations where there are no existing long-term contract (i.e., purchases will be made on the spot market) and (b) long-term authorizations when purchases will be made under contracts with a term of longer than two years. The processing time for these authorizations is relatively short, with blanket authorizations often being obtained in as short a time as two weeks.
Purchase of Electricity from the US
The purchase of electricity from the US for start-up power or other project uses in Mexico will also require DOE authorization under Section 202(e) of the Federal Power Act, which requires a finding that the export will not impair the electric power supply within the US To evaluate whether to grant an export authorization, DOE will evaluate whether sufficient generating resources exist and whether the export will cause operating parameters on regional transmission systems to fall outside accepted limits.
Because the delivery of electricity will take place over then existing transmission lines (which would also be true for the pipelines used to export of natural gas), compliance with the National Environmental Policy Act (?NEPA?) for this authorization is not difficult and, because of a categorical exclusion in the governing regulations, will not require an environmental assessment. The regulatory aspects of new electric transmission facilities are described below.
Mexican Regulatory Framework for Power Generating Facilities
Power General Permits
The Mexican Constitution grants the Mexican State a monopoly over the electricity sector. Notwithstanding the public sector's monopoly, the Mexican Constitution allows the participation of private entities in the electricity sector when their activities are deemed to not constitute a public service.
The Electric Law establishes that activities related to self-supply, cogeneration, generation for export, import for self-supply, small production, independent production and generation for emergency situations of electric energy do not constitute public service. Consequently, private entities may, upon securing an appropriate permit from the Energy Regulatory Commission (Comisión Reguladora de Energia) (?CRE?), the governmental agency in charge of regulating the public and private operators of electric energy and natural gas, undertake the above-mentioned activities related to the generation, wheeling and distribution of electric energy. Although power generation by private entities in Mexico is a relatively recent activity, the process to obtain a power generation permit is straight forward and can take approximately two to three months. The following is a list of permits that may be granted by CRE for such activities.
a) Self Supply Permit
Self Supply permits may be granted to owners of power plant facilities whose electric output is used exclusively by the owner. Alternatively, power consumers are entitled to obtain power for a self-supply project if they hold an equity interest in the self-supply company. Electricity may not be delivered to third parties that are not owners in the project entity at the time of approval of the project by CRE or that are not included in the expansion plans at such time. In order for such a non-authorized party to be allowed to receive energy an amendment to the permit would be necessary. Self supply in an amount less than 0.5MW does not require a permit.
b) Cogeneration Permit
A Cogeneration permit authorizes the generation of electric energy together with steam or other types of secondary thermal energy, or both, when the unused thermal energy is used for the generation of electric energy in facilities associated with the cogeneration, and as long as the energy and economic efficiency of the facility is raised and exceeds that obtained in conventional power plants. While power can be sold to the entities associated with the cogeneration process but the sale to third parties of the energy generated pursuant to this permit is forbidden.
c) Independent Production Permit
Independent Production permits may be granted to projects that sell their capacity and associated energy to CFE or that export electric energy. The sale of energy generated under this permit to any person other than CFE is forbidden, unless the energy is exported under an export permit.
The following are the requirements for a project to obtain an independent production permit:
(i) The permit holder must be an individual or an entity incorporated under Mexican law and domiciled in Mexico.
(ii) In the event that electric energy from the project will be sold to CFE, the project must have been previously included in CFE programs.
(iii) The permit holders must bind themselves to sell their whole production to CFE by means of long term agreements or to export the generated energy.
The Independent Production permit is the only permit with a maximum term (30 years). It is renewable once the 30 year period has elapsed.
d) Export Permit
A permit to export energy may be granted in connection with the Cogeneration, Independent Production and Small Production permits. If possible, the permit holder is bound to make its generation available to CFE in case of interruption due to force majeure or acts of god.
e) Import Permit
A permit to import electric energy may be granted as long as the energy is for the sole use of the importer. Any change in the supplier or increase of the imported energy amounts must be authorized through an amendment to the permit. The importer is not allowed to resell or otherwise transfer the imported energy to third parties.
f) Wheeling Permit
Any of the permits described above may include an authorization for the permit holder to wheel the electricity generated under the permit.
Taxation of Exports and Imports of Electricity
Section 2716 of the Mexican Export Tax Law (Ley del Impuesto General de Exportación), establishes that export of electric energy is exempt from export taxes. Similarly, the Value Added Tax Law (Ley del Impuesto al Valor Agregado) establishes a 0% value added tax for exports.
In contrast to exports, imports are assessed additional taxation under the Mexican Import Tax Law (Ley del Impuesto General de Importación) which sets a 10% ad valorem import tax for electric energy imports. Notwithstanding the foregoing, since 1998, the North America Free Trade Agreement has established that imports of electric energy from the United States and Canada are exempt from import tax.
US Regulation of Related Infrastructure
A power project located near the US/Mexico border may be interconnected directly with the US electric grid to facilitate sales into the US market. It also may receive gas imported into Mexico from the US When new transmission lines or pipelines are required to allow for that interconnection or gas import, the necessary US regulatory approvals must be obtained.
Unique to the border crossing nature of the facilities is a requirement for a Presidential Permit. The President has the authority to protect the territorial integrity of the United States. Based on that authority, a Presidential Permit is required for the construction and operation of electric transmission lines or natural gas pipelines that cross a US international border. A Presidential Permit for electric transmission lines is obtained by applying to the DOE. A Presidential Permit for natural gas pipelines is obtained by applying to FERC.
In addition to the Presidential Permit, the typical local, state and federal regulatory approvals for a transmission line or pipeline project ? such as local construction permits, state siting approval of transmission lines and approval by FERC under the Natural Gas Act of an interstate natural gas pipeline ? must be obtained. The Presidential Permit requirements for transmission lines and gas pipelines are as follows.
Presidential Permit for Electric Transmission Facilities
DOE will issue a Presidential Permit for electric transmission facilities found to be consistent with the public interest. DOE applies this public interest standard by examining two criteria: (a) the environmental impact of the project and (b) the impact of the project on electric reliability. Once DOE approves the project, it must obtain the concurrence of the Secretary of State and the Secretary of Defense before the Presidential Permit is issued.
Environmental Impact
NEPA requires that federal agencies give due consideration to the environmental impacts of their actions. In the context of a Presidential Permit this means that DOE must consider the environmental impact of approving or denying a request for a Presidential Permit.
The extent of the environmental analysis conducted by DOE will control the length of time it takes to obtain the Presidential Permit. If it is determined that the issuance of the permit is a major federal action that significantly affects the environment, DOE will require a full environmental impact statement. The development and review of an environmental impact statement could lead to a process that extends over eighteen months or more. Alternatively, if the issuance of permit is not found to be a major federal action that significantly affects the environment, a less extensive environmental assessment will be conducted for NEPA compliance, which can shorten the period for review by as much as a year.
A key factor affecting whether the requested Presidential Permit would be a major federal action that significantly affects the environment is how the scope of the federal action is defined. Is the federal action limited to the transmission line or does it encompass the power plant itself? In a series of cases involving challenges to the scope of an agency's NEPA review for a permitting action, the federal courts have interpreted NEPA as applying to non-federal actions linked to a federal permitting decision only if the federal government has substantial ?control and responsibility? over the non-federal actions. The courts have rejected the argument that an entire project becomes ?federalized? for purposes of applying NEPA simply because a federal approval was required for a portion of the project. This should mean that, based on the decisions of those courts, which have been followed by the Army Corp of Engineers and FERC in their NEPA reviews, DOE's review of a Presidential Permit application for a border crossing transmission line will be limited to the environmental impact of the line itself because the power plant located outside the US is not subject to substantial federal control and responsibility. Because the direct interconnection to the US of generating facilities outside the US has not been considered before by DOE, the scope of its review is still evolving.
Reliability Impact
The second criteria evaluated by DOE is the effect of the proposed transmission project on electric reliability in the US The assessment of reliability encompasses the ability of the US electric system to remain within acceptable voltage and stability limits during normal operation and in the event of contingencies, such as the loss of another transmission line. This inquiry is remarkably similar to the system impact studies conducted by transmission owners in response to a request either for an interconnection with its system or transmission service over its system. As a result, DOE's analysis is likely to be based upon such a system impact study.
Presidential Permit for Natural Gas Pipelines
FERC is charged with responsibility not only for Presidential Permits for border crossing pipeline facilities (where it applies the same public interest standard that DOE applies to transmission facilities) but also with the review and approval under the Natural Gas Act of new interstate pipeline facilities. As a result, an application for a Presidential Permit is likely to be reviewed in parallel with the application for approval of new facilities under the Natural Gas Act. FERC's review process, including its approach to environmental analysis, is well documented through a FERC handbook for pipeline permitting and through its published decisions on prior applications.
Mexican Regulation of Related Infrastructure
Transmission Lines
According to the Electric Law, the operation of facilities necessary for the transmission of energy is the full responsibility of the permit holder, who is required to undertake such operation with its own resources and personnel. Alternatively, the permit holder may request the CFE to provide such transmission services by interconnecting to the Mexican national transmission system. To that effect, the permit holder must enter into interconnection and wheeling arrangements with CFE. Transmission of electricity to or from Mexico requires prior authorization by the General Customs Administration of the Ministry of Finance (Administraci from Mexico requires prior authorization by the G).
Gas Lines
Mexico does not impose any requirements on the import or export of natural gas. Such transactions may be carried out without prior permission and without approval from the CRE. An importer must, however, periodically provide the CRE with information related to its trade activities, namely the volumes and sources of gas importation. Likewise, the prior authorization of the Ministry of Finance is also required for the import or export of natural gas.
Self-use Transportation Permit under Applicable CRE regulations
A self-use transport permit is required for any customer of an open-access transport system that seeks to transport gas from an interconnection point with an open-access pipeline to its own facilities where the gas will be consumed.
This self-use natural gas transportation activity requires obtaining a permit from CRE. This permit can only be granted to the consumer of the natural gas, or when there are two or more consumers, to a special purpose company organized to provide transportation services exclusively to its owners. Self-use transport companies are formed by two or more customers of an open access transport system, who are willing to transport gas through a jointly owned pipeline. This permit is granted to companies who will transport gas for themselves or to self-use companies only (i.e. not for re-sale to third parties). The maximum term of the permit is 30 years. Self-use transport permits are renewable for 15 year periods.
If the permit is requested for transport in an area where a distributor has exclusivity, the applicant must evidence an average use above sixty thousand daily cubic meters of gas, during the first two years of the exclusivity period and thirty thousand daily cubic meters during the third or fourth year of exclusivity. There is no minimum limit after the fourth year of exclusivity.
Conclusion
While the development of cross-border power plants may include additional regulatory considerations not typically found in a similar undertaking that does not cross international borders, developers have found these considerations do not outweigh the potential benefits of a successful cross-border project. In addition, these cross-border undertakings appear to enjoy strong support, at least at high levels within the respective executive branches of the Mexican and US federal governments. For example, the Report of the National Energy Policy Development Group (which sets forth the National Energy Policy of the US) recommends closer energy integration between Mexico and the US and recommends that reforms be proposed to the ?Presidential Permitting? process to make those processes more compatible for cross-border trade.
The development of such cross-border plants presents a significant number of obstacles beyond those ordinarily encountered in power project development. These include physical constraints (for example Pemex indicates that it maintains only six gas interconnections with the United States and CFE maintains only two 230kV transmission lines to the US) as well as structural. In particular, there are a myriad of additional legal requirements that must be met for a cross-border project to be implemented in a manner that is in compliance with both US and Mexican regulatory regimes.
The purpose of this article is to present the basic elements of each of the Mexican and US legal and regulatory regimes that affect the implementation of cross-border power projects.
Although the article is not intended to provide an exhaustive discussion of all possible regulatory scenarios, certain fundamental issues are addressed.
Choice of Entity
The export into the US of electric energy from a power plant located in Mexico requires that a Mexican entity be formed. Pursuant to the Electric Energy Public Service Law (the ?Electric Law?), the electricity export permits available under Mexican law (i.e. the Independent Power Producer permit and the Small Producer permit) may only be granted to companies that are incorporated under Mexican law and domiciled in Mexico. In addition, Mexican law dictates that foreign investors only may own land in Mexico that is located within 100km from the border through a Mexican company.
The following represents a list of viable Mexican legal entities for a cross-border project in Mexico:
a) Sociedad en Comandita
In this type of partnership entity, there are general partners and limited partners. General partners are jointly and severally liable, and are entitled to participate in the day to day management of the partnership. The liability of limited partners, who are not allowed to participate in the day to day management of the partnership, is limited to their capital contribution. A variation on this entity is the Sociedad en Comandita por Acciones in which all capital contributions are represented by shares of stock.
b) Sociedad de Responsabilidad Limitada
This entity is similar to a closely held corporation in the United States. The rights and liability of each interest holder in this entity are limited to the interest holder's contribution. The number of interest holders is limited to fifty and there are restrictions on the transfer of corporate parts and the admission of new partners. The Sociedad de Responsabilidad Limitada qualifies as a ?pass-through? entity for US Federal Income Tax purposes.
c) Sociedad Anónima
This is the most common kind of entity in Mexico. This entity is directly analogous to a United States corporation and thus is not a ?pass-through? entity for US Federal Income Tax purposes. Liability is limited to the contributions of the owners, who are shareholders. A Sociedad Anónima. may be privately or publicly held. The Shareholders' Meeting is the most important feature of a Sociedad Anónima. Shareholders may appoint a Sole Director or a Board of Directors which are subordinated to the Shareholders' Meeting. Minority and inspection rights are also granted in this entity.
d) Variable Capital Modality
All of the above entities may be organized as variable capital entities. When an entity adopts this modality, it may authorize a variable amount of capital in addition to its stated amount of fixed capital. Unlike fixed capital, the shares representing variable capital may remain unissued until needed. Increases and reductions of capital are subject to less formal requirements than in a fixed capital entity.
US Regulatory Framework for Cross-Border Power Plants
Developing a power project outside of the US does not mean that the project will be free of US regulatory concerns. The Public Utility Holding Company Act of 1935 (?PUHCA?) is relevant to power projects outside the US in which a US entity holds an ownership interest. For power projects located outside the US but still tied to the US by infrastructure, the sale of output, and/or the purchase of natural gas fuel supplies or electricity, there are a number of other potential US regulatory hurdles.
The Public Utility Holding Company Act
In the US, a company that owns ten percent or more of the outstanding voting securities of an entity that owns or operates facilities used for the generation, transmission or distribution of electric energy for sale or facilities used for the retail distribution of natural or manufactured gas will, absent an exemption, be a holding company that will be regulated under PUHCA. Because regulation under PUHCA is onerous ? including regulation of securities transactions, acquisitions of interests in other electric or gas companies, acquisitions of the securities of other businesses ? companies engaged in the electricity industry historically have gone to great lengths to avoid PUHCA.
Fortunately, among the several ways to avoid PUHCA, foreign utility company status under Section 33 of PUHCA was specifically enacted in 1992 to allow investment by US entities in a company that owns or operates facilities that are not located in any State of the US and that are used for the generation, transmission or distribution of electric energy for sale or the distribution at retail of natural or manufactured gas. As long as that foreign entity does not derive any of its income, directly or indirectly from those activities within the US and neither the foreign entity nor any of its subsidiaries is a public utility in the US, the foreign entity will be exempt from all of the provisions of PUHCA. That exemption means that any upstream US owners of the foreign entity will not be holding companies regulated under PUHCA even if they own ten percent or more of the foreign entity.
However, because of the restrictions on US sources of income described above, foreign utility company status will not be available for power projects located in the border region that plan to sell output for delivery in the US market. Instead, exempt wholesale generator (?EWG?) status under Section 32 of PUHCA offers an exemption from regulation under PUHCA. To be an EWG, an entity must be engaged, directly or indirectly, exclusively in the business of owning or operating, or both owning and operating, all or part of one or more eligible facilities. An ?eligible facility? is defined in the statute to mean a facility that is either (a) used for the generation of electric energy at wholesale or (b) used for the generation of electric energy and leased to one or more public utility companies. Thus, unlike foreign utility company status, an EWG cannot be engaged in the transmission or distribution of electricity, though interconnection facilities necessary to make wholesale sales of electricity can be included in the ?eligible facility?.
Moreover, the ?exclusively in the business? requirement for EWGs limits the scope of activities that an EWG can conduct. Activities closely tied to the operation of the eligible generation facility, however, have been permitted.
Unlike foreign utility company status, which is obtained through a straight-forward notice filing with the Securities and Exchange Commission, EWG status is obtained by an application filed with and reviewed by the Federal Energy Regulatory Commission (?FERC?). The entity will be an EWG upon filing a good faith application but FERC has sixty days to review the application. Because FERC has now reviewed numerous EWG applications, the process is fairly routine.
Regulation of Cross-Border Transactions
A power project located in the US/Mexico border region may sell electricity to the US, purchase natural gas from the US or purchase electricity from the US. In each case, even with the North America Free Trade Agreement in place, certain regulatory approvals are required.
Sale of Output to the US
If power will be sold in the US (i.e., the delivery point for the sale is in the US), the seller and the sale will be subject to the requirements of the Federal Power Act. As a result, the owner of the power project will need to seek market-based rate authority from FERC in the same way that a merchant generator in the US does. The application process for obtaining market-based rate authority is straight-forward and, for a new generator, unlikely to be controversial.
In order to be granted market-based rate authority, the project owner will need to demonstrate that (a) it lacks generation or transmission market power, (b) that it cannot erect barriers to entry by competitors, (c) that it cannot engage in anticompetitive reciprocal dealing and (d) that it cannot transfer benefits from captive ratepayers to shareholders. A new generator is presumed under FERC's regulations to lack generation market power. Transmission market power is typically addressed if any transmission owning affiliate has an open access transmission tariff on file with FERC. There are no barriers to entry in US power markets. And, any concerns about affiliate abuse involving the captive ratepayers of a utility affiliate can be addressed through a code of conduct in a form previously accepted by FERC.
Purchase of Natural Gas from the US
In order to export natural gas from the US, authorization from the Department of Energy (?DOE?)must be obtained. There are two types of authorizations: (a) short-term blanket authorizations where there are no existing long-term contract (i.e., purchases will be made on the spot market) and (b) long-term authorizations when purchases will be made under contracts with a term of longer than two years. The processing time for these authorizations is relatively short, with blanket authorizations often being obtained in as short a time as two weeks.
Purchase of Electricity from the US
The purchase of electricity from the US for start-up power or other project uses in Mexico will also require DOE authorization under Section 202(e) of the Federal Power Act, which requires a finding that the export will not impair the electric power supply within the US To evaluate whether to grant an export authorization, DOE will evaluate whether sufficient generating resources exist and whether the export will cause operating parameters on regional transmission systems to fall outside accepted limits.
Because the delivery of electricity will take place over then existing transmission lines (which would also be true for the pipelines used to export of natural gas), compliance with the National Environmental Policy Act (?NEPA?) for this authorization is not difficult and, because of a categorical exclusion in the governing regulations, will not require an environmental assessment. The regulatory aspects of new electric transmission facilities are described below.
Mexican Regulatory Framework for Power Generating Facilities
Power General Permits
The Mexican Constitution grants the Mexican State a monopoly over the electricity sector. Notwithstanding the public sector's monopoly, the Mexican Constitution allows the participation of private entities in the electricity sector when their activities are deemed to not constitute a public service.
The Electric Law establishes that activities related to self-supply, cogeneration, generation for export, import for self-supply, small production, independent production and generation for emergency situations of electric energy do not constitute public service. Consequently, private entities may, upon securing an appropriate permit from the Energy Regulatory Commission (Comisión Reguladora de Energia) (?CRE?), the governmental agency in charge of regulating the public and private operators of electric energy and natural gas, undertake the above-mentioned activities related to the generation, wheeling and distribution of electric energy. Although power generation by private entities in Mexico is a relatively recent activity, the process to obtain a power generation permit is straight forward and can take approximately two to three months. The following is a list of permits that may be granted by CRE for such activities.
a) Self Supply Permit
Self Supply permits may be granted to owners of power plant facilities whose electric output is used exclusively by the owner. Alternatively, power consumers are entitled to obtain power for a self-supply project if they hold an equity interest in the self-supply company. Electricity may not be delivered to third parties that are not owners in the project entity at the time of approval of the project by CRE or that are not included in the expansion plans at such time. In order for such a non-authorized party to be allowed to receive energy an amendment to the permit would be necessary. Self supply in an amount less than 0.5MW does not require a permit.
b) Cogeneration Permit
A Cogeneration permit authorizes the generation of electric energy together with steam or other types of secondary thermal energy, or both, when the unused thermal energy is used for the generation of electric energy in facilities associated with the cogeneration, and as long as the energy and economic efficiency of the facility is raised and exceeds that obtained in conventional power plants. While power can be sold to the entities associated with the cogeneration process but the sale to third parties of the energy generated pursuant to this permit is forbidden.
c) Independent Production Permit
Independent Production permits may be granted to projects that sell their capacity and associated energy to CFE or that export electric energy. The sale of energy generated under this permit to any person other than CFE is forbidden, unless the energy is exported under an export permit.
The following are the requirements for a project to obtain an independent production permit:
(i) The permit holder must be an individual or an entity incorporated under Mexican law and domiciled in Mexico.
(ii) In the event that electric energy from the project will be sold to CFE, the project must have been previously included in CFE programs.
(iii) The permit holders must bind themselves to sell their whole production to CFE by means of long term agreements or to export the generated energy.
The Independent Production permit is the only permit with a maximum term (30 years). It is renewable once the 30 year period has elapsed.
d) Export Permit
A permit to export energy may be granted in connection with the Cogeneration, Independent Production and Small Production permits. If possible, the permit holder is bound to make its generation available to CFE in case of interruption due to force majeure or acts of god.
e) Import Permit
A permit to import electric energy may be granted as long as the energy is for the sole use of the importer. Any change in the supplier or increase of the imported energy amounts must be authorized through an amendment to the permit. The importer is not allowed to resell or otherwise transfer the imported energy to third parties.
f) Wheeling Permit
Any of the permits described above may include an authorization for the permit holder to wheel the electricity generated under the permit.
Taxation of Exports and Imports of Electricity
Section 2716 of the Mexican Export Tax Law (Ley del Impuesto General de Exportación), establishes that export of electric energy is exempt from export taxes. Similarly, the Value Added Tax Law (Ley del Impuesto al Valor Agregado) establishes a 0% value added tax for exports.
In contrast to exports, imports are assessed additional taxation under the Mexican Import Tax Law (Ley del Impuesto General de Importación) which sets a 10% ad valorem import tax for electric energy imports. Notwithstanding the foregoing, since 1998, the North America Free Trade Agreement has established that imports of electric energy from the United States and Canada are exempt from import tax.
US Regulation of Related Infrastructure
A power project located near the US/Mexico border may be interconnected directly with the US electric grid to facilitate sales into the US market. It also may receive gas imported into Mexico from the US When new transmission lines or pipelines are required to allow for that interconnection or gas import, the necessary US regulatory approvals must be obtained.
Unique to the border crossing nature of the facilities is a requirement for a Presidential Permit. The President has the authority to protect the territorial integrity of the United States. Based on that authority, a Presidential Permit is required for the construction and operation of electric transmission lines or natural gas pipelines that cross a US international border. A Presidential Permit for electric transmission lines is obtained by applying to the DOE. A Presidential Permit for natural gas pipelines is obtained by applying to FERC.
In addition to the Presidential Permit, the typical local, state and federal regulatory approvals for a transmission line or pipeline project ? such as local construction permits, state siting approval of transmission lines and approval by FERC under the Natural Gas Act of an interstate natural gas pipeline ? must be obtained. The Presidential Permit requirements for transmission lines and gas pipelines are as follows.
Presidential Permit for Electric Transmission Facilities
DOE will issue a Presidential Permit for electric transmission facilities found to be consistent with the public interest. DOE applies this public interest standard by examining two criteria: (a) the environmental impact of the project and (b) the impact of the project on electric reliability. Once DOE approves the project, it must obtain the concurrence of the Secretary of State and the Secretary of Defense before the Presidential Permit is issued.
Environmental Impact
NEPA requires that federal agencies give due consideration to the environmental impacts of their actions. In the context of a Presidential Permit this means that DOE must consider the environmental impact of approving or denying a request for a Presidential Permit.
The extent of the environmental analysis conducted by DOE will control the length of time it takes to obtain the Presidential Permit. If it is determined that the issuance of the permit is a major federal action that significantly affects the environment, DOE will require a full environmental impact statement. The development and review of an environmental impact statement could lead to a process that extends over eighteen months or more. Alternatively, if the issuance of permit is not found to be a major federal action that significantly affects the environment, a less extensive environmental assessment will be conducted for NEPA compliance, which can shorten the period for review by as much as a year.
A key factor affecting whether the requested Presidential Permit would be a major federal action that significantly affects the environment is how the scope of the federal action is defined. Is the federal action limited to the transmission line or does it encompass the power plant itself? In a series of cases involving challenges to the scope of an agency's NEPA review for a permitting action, the federal courts have interpreted NEPA as applying to non-federal actions linked to a federal permitting decision only if the federal government has substantial ?control and responsibility? over the non-federal actions. The courts have rejected the argument that an entire project becomes ?federalized? for purposes of applying NEPA simply because a federal approval was required for a portion of the project. This should mean that, based on the decisions of those courts, which have been followed by the Army Corp of Engineers and FERC in their NEPA reviews, DOE's review of a Presidential Permit application for a border crossing transmission line will be limited to the environmental impact of the line itself because the power plant located outside the US is not subject to substantial federal control and responsibility. Because the direct interconnection to the US of generating facilities outside the US has not been considered before by DOE, the scope of its review is still evolving.
Reliability Impact
The second criteria evaluated by DOE is the effect of the proposed transmission project on electric reliability in the US The assessment of reliability encompasses the ability of the US electric system to remain within acceptable voltage and stability limits during normal operation and in the event of contingencies, such as the loss of another transmission line. This inquiry is remarkably similar to the system impact studies conducted by transmission owners in response to a request either for an interconnection with its system or transmission service over its system. As a result, DOE's analysis is likely to be based upon such a system impact study.
Presidential Permit for Natural Gas Pipelines
FERC is charged with responsibility not only for Presidential Permits for border crossing pipeline facilities (where it applies the same public interest standard that DOE applies to transmission facilities) but also with the review and approval under the Natural Gas Act of new interstate pipeline facilities. As a result, an application for a Presidential Permit is likely to be reviewed in parallel with the application for approval of new facilities under the Natural Gas Act. FERC's review process, including its approach to environmental analysis, is well documented through a FERC handbook for pipeline permitting and through its published decisions on prior applications.
Mexican Regulation of Related Infrastructure
Transmission Lines
According to the Electric Law, the operation of facilities necessary for the transmission of energy is the full responsibility of the permit holder, who is required to undertake such operation with its own resources and personnel. Alternatively, the permit holder may request the CFE to provide such transmission services by interconnecting to the Mexican national transmission system. To that effect, the permit holder must enter into interconnection and wheeling arrangements with CFE. Transmission of electricity to or from Mexico requires prior authorization by the General Customs Administration of the Ministry of Finance (Administraci from Mexico requires prior authorization by the G).
Gas Lines
Mexico does not impose any requirements on the import or export of natural gas. Such transactions may be carried out without prior permission and without approval from the CRE. An importer must, however, periodically provide the CRE with information related to its trade activities, namely the volumes and sources of gas importation. Likewise, the prior authorization of the Ministry of Finance is also required for the import or export of natural gas.
Self-use Transportation Permit under Applicable CRE regulations
A self-use transport permit is required for any customer of an open-access transport system that seeks to transport gas from an interconnection point with an open-access pipeline to its own facilities where the gas will be consumed.
This self-use natural gas transportation activity requires obtaining a permit from CRE. This permit can only be granted to the consumer of the natural gas, or when there are two or more consumers, to a special purpose company organized to provide transportation services exclusively to its owners. Self-use transport companies are formed by two or more customers of an open access transport system, who are willing to transport gas through a jointly owned pipeline. This permit is granted to companies who will transport gas for themselves or to self-use companies only (i.e. not for re-sale to third parties). The maximum term of the permit is 30 years. Self-use transport permits are renewable for 15 year periods.
If the permit is requested for transport in an area where a distributor has exclusivity, the applicant must evidence an average use above sixty thousand daily cubic meters of gas, during the first two years of the exclusivity period and thirty thousand daily cubic meters during the third or fourth year of exclusivity. There is no minimum limit after the fourth year of exclusivity.
Conclusion
While the development of cross-border power plants may include additional regulatory considerations not typically found in a similar undertaking that does not cross international borders, developers have found these considerations do not outweigh the potential benefits of a successful cross-border project. In addition, these cross-border undertakings appear to enjoy strong support, at least at high levels within the respective executive branches of the Mexican and US federal governments. For example, the Report of the National Energy Policy Development Group (which sets forth the National Energy Policy of the US) recommends closer energy integration between Mexico and the US and recommends that reforms be proposed to the ?Presidential Permitting? process to make those processes more compatible for cross-border trade.
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