Client Alert
May 24, 2017
THIRD POWER AUCTION AND CLEARINGHOUSE TRANSACTIONS
On May 8, 2017, the Mexican Ministry of Energy and the National Center of Energy Control
published the tender documents for the third long-term power auction (“Third Auction”) (also referred to
as the first 2017 auction), which differ from those published for the two previous auctions in several
important ways. This Alert summarizes the most significant changes. Capitalized terms not defined
herein will have the meanings set forth in the Third Auction tender documents.
I.
PLAYERS
The most significant change to be effected in the Third Auction is that it will be open to potential
buyers that are not affiliated with the Mexican Federal Electricity Commission (“CFE”), which was the
sole buyer in the two previous power auctions. All of the following types of companies are therefore
potential buyers in the Third Auction:
II.
•
Basic Services Suppliers
•
Qualified Suppliers
•
Last Resource Suppliers
•
Qualified Users as Market Participants
CLEARINGHOUSE
To accommodate the new potential players, a power clearinghouse for bilateral agreements
(Cámara de Compensación para Contratos de Cobertura, or “CdeC”) has been implemented through a
new document titled “Guidelines for the Clearinghouse of Bilateral Agreements” (“CdeC Guidelines”),
which introduces the most important and relevant topic to consider with respect to the Third Auction.
This clearinghouse will represent all Buyers before the Sellers, and all Sellers before the Buyers, serving
as an intermediary to guarantee to the extent possible that Buyers receive the Products for which they
have contracted and that Sellers receive the payments for which they have contracted.
The CdeC will collect and hold the guarantees the Buyers will be required to provide in favor of
the Sellers as well as those the Sellers will be required to provide in favor of the Buyers. The CdeC will
administer these guarantees to assure to the extent possible that all payments contracted for are made, and
that all Products contracted for are delivered. Any losses suffered by Sellers due to uncollectable
accounts receivable will be absorbed by all Sellers in proportion to their respective shares of the total
accounts receivable. Any shortages of Products suffered by Buyers due to failures of Sellers to deliver
them will be absorbed by all Buyers in proportion to their respective shares of the total amount of
Products contracted for by all Buyers.
Third Power Auction and Clearinghouse Transactions
Client Alert
May 24, 2017
The principal change to be implemented through the CdeC is that the guarantees of performance
under the contracts awarded through the Third Auction will be provided through the CdeC, whereas in the
two previous auctions such guarantees were provided by CFE, a Mexican governmental entity historically
known by financial institutions for its creditworthiness. Therefore, it will now be necessary for Potential
Sellers to assess the credit risk resulting from relying on the guarantees provided through the CdeC, the
creditworthiness of which will not have been rated at the time of the Third Auction. To address this
problem, the CdeC Guidelines contain several provisions designed to ensure an adequate overall credit
quality and to assure all participants that the risks they will need to assess will be measurable and/or
acceptable.
Historically in Mexico, under legacy agreements (those structured under the previous Mexican
electricity legislation), the risk in a Power Purchase Agreement (“PPA”) was assessed based on the offtaker’s credit rating, which risk was mitigated through several different types of instruments such as
standby letters of credit or parent guarantees by creditworthy companies. However, the payment risk will
now be assumed by the Mexican power market as a whole. To that end, Section 3.2 of the CdeC
Guidelines describes specific guarantees that must be delivered to the CdeC by Sellers and Buyers, the
minimum amounts of which will depend on whether the guarantor is a Seller or a Buyer. The
determinations of such minimum amounts will be made in accordance with the Long-Term Auction
Guidelines in the case of Sellers and the CdeC Guidelines in the case of Buyers. The CdeC will
determine the creditworthiness of all Buyers in accordance with specific criteria, exposures, and risks,
which will include analysis of:
•
Collection Amounts Exposure
•
Market Value Exposure
•
Future Changes Exposure
•
Buyer’s Creditworthiness Risk
•
Exchange Rate Risk
Another important attribute of the CdeC is the so-called “Safety Net,” which is comprised of a
series of actions that CdeC is empowered to take in order to protect the financial interests of Sellers and
Buyers, including assertion of claims on guarantees, suspension of Product deliveries, accessing a
Reserve Fund (another novelty), collection of liquidated damages for early termination of PPAs, and even
collection through compensation of any amounts in the Wholesale Power Market by the National Center
of Energy Control (CENACE).
On the other hand, differing preferences between Sellers and Buyers with respect to PPA tenures
may create additional issues that will need to be addressed by the CdeC. Legacy PPAs often had 15-, 20-,
or 25-year terms, since the discounts from the official electricity rates offered by self-generators were
attractive to off-takers, and such long-term PPAs provided sufficient revenue to service the long-term
debt the self-generators needed to incur to develop and construct their power plants. However, it was
clear from the first documents that resulted from the Mexican Energy Reform that off-takers were no
longer seeking long-term PPAs (for several reasons), but self-generators were still seeking long-term
2
Third Power Auction and Clearinghouse Transactions
Client Alert
May 24, 2017
PPAs with sufficient commitments to assure their ability to retire the debt they would need to incur to
develop and construct their power plants. The risks associated with such differences in preferred PPA
tenure can be buffered by the CdeC as described above as well as through sophisticated financial
instruments such as electricity derivatives or hedges. To that end, Mexico will need to create instruments
with underlying value (subyacente) and test them in the real world.
III.
OTHER
Finally, we have identified some other points of interest and changes from the rules governing the
two previous power auctions, including without limitation the following:
•
January 1, 2020 set as the standard commercial operation date
•
Notification proceedings and the legal significance of such notifications
•
Substitution of COPASU for SAS (Sistema de Administración de Subastas)
•
Capacity determined in accordance with the (relatively new) Capacity Balance Market Rules
•
Plate capacity rulings
•
Export capacity
•
Offers by Load Responsible Entities in proportion to the same portfolio of Products that is
included in the Accepted Buying Offers from Basic Services Suppliers (CFE)
•
Specific prohibitions designed to avoid conflicts between Potential Buyers and Potential
Sellers, and corporate and control restrictions are now included (since the Third Auction
contemplates several Potential Buyers rather than only CFE as in the two previous auctions)
•
Cancellation of the Third Auction if no Basic Services Supplier other than CFE registers as a
Potential Buyer, or all of the Basic Services Suppliers that register fail to submit Purchase
Offers by the deadline
•
Elimination of requirements for page numbering of documents
•
New specified percentages for amounts of required guarantees
•
Consideration of new rules for reduction of the Compliance Guarantee with the Financial
Guarantee when an interconnection application has been accepted by CENACE
•
Grounds to dismiss proposals are redefined
•
Reduction of reconsideration term regarding a Non-Favorable Report from five to three days
•
Participation of the social witness in the registration of Potential Buyers
3
Third Power Auction and Clearinghouse Transactions
Client Alert
May 24, 2017
Please contact the Thompson & Knight attorney with whom you regularly work or one of the
following attorneys to discuss this development.
CONTACTS:
Claudio Rodríguez Galán
+52.55.3602.0610
[email protected]
Alejandro Sanchez-Mujica Almada
+52.81.8215.7729
[email protected]
This Client Alert is sent for the information of our clients and friends. It is not intended as legal
advice or an opinion on specific circumstances.
©2017 Thompson & Knight LLP
4
Third Power Auction and Clearinghouse Transactions