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Mexico, Cuba: Next Hot Spots for Energy?

Fortnightly Magazine - July 15 2000

Inc. and Shell Generating Ltd.)

CRE also is issuing permits for smaller generating capacity to domestic and international producers, with these projects typically under 30 MW. El Gallo, a $15 million, 30-MW hydroelectric project, for example, was scheduled to start up at the beginning of the second quarter in Guerrero state on the Cutzamala River, through the development of Hidroelectricidad Mexhidro S.A., or Mexhidro. While the Mexican generator plans to serve a domestically owned steel company and a foam company, it notes that it also has plans to approach Chrysler, Ford, GM, and a host of other multinational companies with offers of power. CRE indicates that the El Gallo plant is one of more than 100 such small generators permitted thus far, with associated investments of some $2.5 billion.

Mexico's opening electric sector also may mean an increase in exports and imports of power and natural gas crossing the U.S. border.

For example, a subsidiary of American Electric Power Co., Energia de Mexicali, will build a 258-MW plant at Mexicali, near the U.S. border, to export electricity by March of next year to Southern California, where Integral Energy Services Inc. will market the power.

In the other direction, the U.S. utility El Paso Electric was contracted to begin supplying 80 MW of electricity into the Mexican grid in June, with plans to increase the supply to 100 MW until October 2001. The power would be generated from El Paso assets in Texas, Arizona, and New Mexico. In fact, one analyst suggested that the Mexican government would permit the winning bidder on a Mexican project solicitation to build the power plant in the United States if the developer would agree to sign an exclusive 25-year power purchase agreement to export the electricity back to Mexico.

The Politics of Reform

Before he leaves office at the end of calendar year 2000, Mexican President Ernesto Zedillo apparently intends to set up initiatives that would at least begin opening up the electric distribution and transmission sectors, as well. Embassy specialist Dessommes explains the move.

"In February, President Zedillo launched an initiative to open up private capital investment in distribution and commercialization of electricity. At the same time the Mexico City area utility, LyFC, and CFE, the national utility serving all areas outside the capital region, will most likely undergo a deep restructuring process to allow for this transcendental transformation.

Dessommes notes that the changes Zedillo has in mind will require amendment of the Mexican constitution.

"The reform proposed has an intermediate term [two-year] objective to be implemented, which means that the current administration will not participate in any divestiture of the electric industry assets," he says. "Instead, the ground work will be laid down to allow for the creation of an energy market."

Dessommes adds that reform in the wires sector may not mean the end of federal involvement. "Some clear-cut definitions are set as premises: The government will retain control of the transmission network by the creation of a specific para-state company."

Such a move would facilitate the later sale on the open market of