The Mexican power industry, similar to other jurisdictions, is comprised of generation, transmission, distribution, commercialisation and supply activities, as well as the planning and control of the National Electric System (Sistema Eléctrico Nacional) and the administration and operation of the Wholesale Electricity Market (Mercado Eléctrico Mayorista).

The main laws that govern the Mexican power industry are the following:

• Articles 25, 27 and 28 of the Mexican (Federal) Constitution (Constitución Política de los Estados Unidos Mexicanos) as well as the transitory articles of the Energy Constitutional Reform enacted in December 2013;
• the Power Industry Law (Ley de la Industria Eléctrica) and its Regulations (Reglamento de la Ley de la Industria Eléctrica);
• the Market Rules (Reglas del Mercado);
• the general administrative provisions issued by the Energy Regulatory Commission (Comisión Reguladora de Energía, CRE) and the Ministry of Energy (Secretaría de Energía, SENER);
• the Federal Electricity Commission Law (Ley de la Comisión Federal de Electricidad); and
• the Law of the Regulators for the Energy Sector (Ley de los Órganos Reguladores en Materia Energética).

Pursuant to the transitory articles of the Energy Constitutional Reform and the Power Industry Law (fundamentally, Article 8 thereof), generation, transmission, distribution and supply (commercialisation) of power are subject to a strict legal separation principle, meaning that these activities shall be performed independently one from the other. In essence, for example, the same company cannot hold a generation permit and, on the other hand, own the transmission grid or provide transmission services.

Moreover, basic power supply (ie, the supply of power provided under a regulated tariff to most of the end users who constitute the general public in Mexico – that is, low-demand residential and commercial customers) is further separated from the rest of the commercialisation modalities (ie, qualified power supply, last-resource power supply and non-supply energy trading). As a result, in theory, power activities in Mexico are unbundled. Nevertheless, note that the same economic group may control companies which own generation and transmission assets (such as the Comisión Federal de Electricidad (CFE)) or execute transactions between generation and commercialisation permit holders also controlled by such corporations subject to the rules issued by the regulator (which is the case for many private companies operating in Mexico, including Iberdrola).

Furthermore, according to applicable law, generation, commercialisation and supply of power are open to private investment and are subject to a free competition regime. In that context, state-owned utilities still own a significant number of power generation assets and serve a substantial portion of the load across Mexico. Conversely, planning and control of the National Electric System and the transmission and distribution activities are considered public services and “strategic areas” reserved to the State. Private companies are not allowed to participate in such reserved activities, but may be contracted or may associate with governmental entities to finance, construct and operate transmission and distribution infrastructure.

The principal state-owned entity in the Mexican power industry is the CFE. The CFE’s generation subsidiaries own the majority of the power plants in Mexico, whereas CFESuministrador de Servicios Básicos (a power supply subsidiary of the CFE) is the main load serving entity in the country, especially for domestic end users. CFE Transmisión and CFE Distribución (which are also wholly owned subsidiaries of the CFE) own the transmission and distribution infrastructure required for providing the transmission and distribution public services.

The Energy Regulatory Commission (Comisión Reguladora de Energía, CRE) is the autonomous regulator of the power industry, although it is co-ordinated by the Ministry of Energy (Secretaría de Energía, SENER) which, in turn, is the governmental agency responsible for energy policy. The National Centre of Energy Control (Centro Nacional de Control de Energía, CENACE) is a decentralised governmental entity in charge of the planning and control of the National Electric System as well as of the administration and operation of the Wholesale Electricity Market.

There are multiple private power generation and supply companies that participate in the Mexican power market. Iberdrola, Enel, Engie, EDF, Mitsui, Acciona and Ammper, among many others, have become major stakeholders within the power sector. Nonetheless, the CFE does and will continue to hold a significant share of the market, provided that its position is further strengthened as a result of the transaction announced by the President in Mexico in April 2023 (albeit yet to close) whereby the Mexican government will purchase from Iberdrola 13 power plants (most of them gas-fired power plants under the independent power production scheme set forth by the former power law), all of which will be operated by the CFE.

Pursuant to applicable laws and regulations, foreign investment is allowed to participate in power generation, commercialisation and supply activities with no restrictions. As a result, there are no power industry-specific foreign investment review processes or limit thresholds.

If certain foreign investment protection standards are breached by the Mexican government, foreign investors may validly file claims under free trade and investment protection agreements to demand damages and losses from the Mexican government. While foreign investors also have access to domestic courts, it is more common for their Mexican subsidiaries to exercise legal actions in local courts against private third parties (for example, civil/commercial lawsuits under commercial agreements) or governmental authorities (especially, constitutional challenges called juicios de amparo).

The Federal Economic Competition Commission (Comisión Federal de Competencia Económica, COFECE) is the constitutional autonomous entity responsible for the oversight of free competition in markets such as power generation and supply.

The Federal Economic Competition Law (Ley Federal de Competencia Económica) is the main law in connection with free competition and antitrust-related matters. Pursuant to this law, mergers and acquisitions (including, in the context of the power industry) are subject to the filing of a notice with COFECE, and its approval is required where the relevant transaction exceeds at least one of certain monetary thresholds set forth by law, regardless of whether such transactions present a competitive concern or not.

As a result, the information required to determine whether a transaction is notifiable consists of:

• the value of assets and updated capital stock of the target according to the financial statements of the last fiscal year and the most updated financial statements available;
• the value of target sales originating in Mexico according to the financial statements of the last fiscal year and the most recent financial statements available;
• confirmation of the total value of the transaction; and
• the total value of assets and consolidated sales of the buyer and seller according to the financial statements of the last fiscal year and the most updated financial statements available.

It is important to consider that the fact that a transaction does not require the COFECE’s approval does not limit the COFECE’s power to investigate and analyse such transaction. If the COFECE considers that the concentration under investigation is contrary to the provisions of the Federal Economic Competition Law, it may order the partial or total disinvestment of the concentrated assets, as well as the imposition of other sanctions.

The COFECE is expected to become the “gatekeeper” for purposes of the purchase of many power plants that the CFE intends to execute within the coming months, particularly the Iberdrola transaction mentioned in 1.2 Principal State-Owned or Investor-Owned Entities.

Additionally, the approval of the energy regulator (CRE) would be required if the merger results in the assignment of the corresponding power generation or power supply permit by the merging company to the surviving entity. That said, the approval of the energy regulator should not be required in connection with the acquisition of the shares representing the capital stock of the permit holder so long as the relevant acquisition does not affect or change the characteristics of the generation assets or power generation/supply activities that are the subject matter of the permit.

As explained in 1.2 Principal State-Owned or Investor-Owned Entities, the CENACE is responsible for the planning and control of the National Electric System – which includes the power and responsibility to ensure the reliability, sustainability, continuity, quality and safety of the grid in order to adequately cover power demand. The CENACE also participates in the preparation of grid expansion and modernisation plans together with the SENER, CRE and CFE.

The most material changes in laws and regulations regarding the power industry over the past year have been the following.

• Acuerdo por el que se reanudan plazos y términos legales en el Centro Nacional de Control de Energía, published on 11 November 2022, whereby the CENACE lifted the suspension of legal terms and filings that had applied for almost three years as a result of the COVID-19 pandemic. While this resolution seems positive on paper, it also provides that filings with the CENACE will be reviewed progressively and, thus, will not be fully regularised until 2025 (ie, 24 months after the publication of the resolution).
• Acuerdo A/004/2023 de la Comisión Reguladora de Energía por el que se reanudan los plazos y términos legales de manera ordenada y escalonada, published on 28 February 2023, whereby the CRE lifted the suspension of legal terms and filings that had applied since March 2020 due to the COVID-19 pandemic. Similar to the CENACE’s resolution, the CRE resolution also provides that filings will be reviewed progressively and, thus, will not be fully regularised until the last quarter of 2024.
• Acuerdo A/018/2023, published on 26 May 2023, whereby the CRE modified the values and criteria applicable to the methodologies for purposes of calculating the efficiency of cogeneration power plants. Although highly technical in nature (as it relates to how different technologies considered “cogeneration” may be deemed “efficient” vis-à-vis clean energy specifications/benefits), some stakeholders within the Mexican power space have reacted against this change in law as, presumably (according to such stakeholders), it would result in certain fossil-fueled power plants owned by the CFE receiving clean energy attributes that they should not be entitled to, affecting the clean energy certificates (Certificados de Energía Limpia, CELs) market.

Overall, the Mexican power industry is still awaiting the definitive rulings by the Mexican Supreme Court in connection with the dozens of amparo lawsuits filed against the Reform to the Power Industry Law enacted by the Mexican Congress in March 2021 (the “LIE Reform”). In April 2022, the Mexican Supreme Court ruled on the unconstitutionality action (acción de inconstitucionalidad) filed by certain members of the Senate against the LIE Reform (the Supreme Court did not reach a qualified majority for declaring the reform unconstitutional, but set a precedent that will be used in the resolution of the multiple amparos). Although it remains uncertain when the amparo lawsuits will be resolved, it is reasonably expected that the LIE Reform will be annulled in its majority.

The current policy of the Mexican government has not changed since the beginning of its term in 2018. Strengthening the CFE (as the publicly owned utility) and reducing the participation of private investment in the power sector has been the main focus of the Mexican government’s energy policy, and is expected to continue that way for the remainder of the administration.

In this regard, the CRE is also expected to approve, in the short-term, a new set of rules for distributed generation projects (that is, power plants with a capacity of less than 0.5 MW interconnected to the Generation Distribution Grids) that may become a new roadblock for energy transition in the country. These new rules for distributed generation are still subject to a public consultation process with the relevant regulatory agency (Comisión Nacional de Mejora Regulatoria, CONAMER).

While counterintuitive given the Mexican government’s policies, international decarbonisation goals and nearshoring in Mexico will probably trigger the need for exponential growth of generation capacity, transmission and distribution infrastructure upgrades and power supply solutions (especially under “green” principles) to satisfy the load demand that nearshoring is expected to create.

Mexican stakeholders (ie, federal and local governments, power generators, transmission and distribution providers, suppliers and end users) should focus on finding a path forward that could certainly benefit thousands of Mexicans.

The Wholesale Electricity Market is administered and operated by the CENACE as the independent system operator. The Wholesale Electricity Market is essentially comprised of a Short-Term Energy Market (where energy and ancillary services are sold/purchased) and a Capacity Market. Energy, ancillary services and capacity may also be transferred and acquired by means of bilateral hedging agreements between market participants, provided that such products are still settled through the Wholesale Electricity Market in terms of Financial Bilateral Transactions (Transacciones Bilaterales Financieras) or Bilateral Capacity Transactions (Transacciones Bilaterales de Potencia), as applicable, pursuant to the Market Rules. CELs are also traded – via bilateral arrangements – between power generators, suppliers and certain end users registered with the CRE.

Generators, traders, suppliers and qualified end users that participate directly in the market sell and purchase energy through offers in the Short-Term Energy Market. Sale offers from power plants must be made in accordance with their production (variable) costs (although this is not exempt from controversy as a result of the LIE Reform, which provides for total unit costs – that is, fixed and variable costs). Theoretically, the more cost-efficient power plants are dispatched by the CENACE and receive, as payment, the local marginal price which corresponds to the (marginal) cost of the last (marginal) power plant to be dispatched.

Additionally, within the context of the Wholesale Electricity Market, mid-term and long-term auctions were called by the CENACE in 2015, 2016 and 2017 for load serving entities to hedge their portfolios of energy, capacity and CELs. While the long-term auctions were a success, as of 2018 the current Mexican government decided to halt them in order to redirect energy policy for the purposes of strengthening the CFE.

Imports and exports of electricity from/to other jurisdictions are permitted in terms of applicable laws and regulations. Importation of power from a power plant located abroad and connected exclusively to the National Electric System requires an authorisation from the CRE. Likewise, in addition to a power generation permit (which is required for power plants with an installed capacity equal to or greater than 0.5 MW), plants that generate power under an isolated supply modality (abasto aislado – that is, without using the National Transmission Grid or the General Distribution Grids) must also obtain an export authorisation from the CRE.

The major transmission interconnections are ERCOT (Texas) and CAISO (California) in the northern border of Mexico. There are also interconnections with the transmission systems of Guatemala and Belize.

Imports of energy are made through sale offers in the Wholesale Electricity Market; whereas exports are made by means of purchase offers. Both such offers are settled at the local marginal price of the price node associated with the Mexico-Foreign Country interconnection.

As explained above, imports or exports of electricity may also be carried out on an isolated supply basis (ie, independent of the Wholesale Electricity Market when the assets are not interconnected to the National Electric System).

During 2022, gross statistics indicate that around 55% of the power supply in Mexico came from combined cycle power plants and 14% from other conventional (thermal) power sources. Clean energy output from hydro, wind and solar photovoltaic assets accounted for approximately 10%, 6% and 6%, respectively. The remaining 9%, in aggregate, was produced from other sources such as nuclear, geothermal and cogeneration.

There are no specific concentration limits for power generation or commercialisation activities. The Federal Economic Competition Law establishes the terms and conditions for the oversight, by the COFECE, of free competition in the context of power generation and supply activities for purposes of avoiding monopolistic practices (which are defined by law) from industry participants.

Where the COFECE considers that there is a concentration contrary to the provisions of the Federal Economic Competition Law, it may order the partial or total de-concentration of the concentrated assets, as well as the imposition of other sanctions.

Additionally, the CRE (the regulator) and the SENER (the policymaker) have certain oversight authorities regarding the power industry. The CRE is responsible for the oversight of the Wholesale Electricity Market, including – for instance – verifying that sale offers from power plants comply with certain cost parameters set forth by the Market Rules. Moreover, the CRE also has the authority to order accounting, operational or functional separation of power industry participants for the purposes of the adequate performance of the industry.

Conversely, the SENER may order the legal separation of entities (both public and private) in order to promote open access to the grid and the efficient operation of the power sector.

Mexico has signed international agreements/treaties such as the Kyoto Protocol and the Paris Agreement in order to establish commitments for purposes of reducing greenhouse gas emissions. Consistent with such international agreements/treaties, the main law regarding climate change is the General Climate Change Law (Ley General de Cambio Climático) enacted in June 2012 and which is still in force. The carbon market (sistema de comercio de emisiones) set forth by the General Climate Change Law is a foundational piece of Mexico’s environmental policy going forward.

In the context of the power industry, the main law associated with energy transition is the Energy Transition Law (Ley de Transición Energética) which regulates the sustainable use of energy and promotes the development of clean energy sources.

There are no specific programmes for encouraging the early retirement of carbon-based generation or compensation mechanisms in the event that coal-fired generation facilities are retired. In fact, the current policy of the Mexican government is to avoid the retirement of power plants owned by the CFE. The CFE is the owner of the vast majority of carbon-based (particularly coal-fired) power plants in Mexico.

The Energy Transition Law establishes that, by 2024, 35% of power production in Mexico must come from clean energy sources. As a matter of fact, CELs were created pursuant to the Power Industry Law as a mechanism for developing new clean energy projects to comply with this clean energy target.

Furthermore, long-term auctions were originally designed to incentivise the procurement by load-serving entities, especially CFE Suministrador de Servicios Básicos, of power generation from new clean power plants. Nonetheless, as mentioned previously, the Mexican government has decided not to continue with the long-term auction programme until further notice.

From a tax standpoint, investments in the purchase of machinery and equipment for energy production from renewable resources (eg, wind turbines, solar panels, trackers and inverters) are subject to a 100% income tax deduction. Furthermore, the Income Tax Law (Ley del Impuesto sobre la Renta) also establishes certain tax benefits vis-à-vis the payment of dividends by renewable generators through the CUFIN Verde instrument.

Additionally, equipment and facilities to be installed for the purposes of renewable energy generation assets may be subject to certain benefits with respect to the payment of import duties as per applicable Mexican laws and free trade agreements signed by the Mexican government. Likewise, the Electricity Sectorial Program (PROSEC) issued by the Mexican Ministry of Economy (Secretaría de Economía) grants certain benefits to renewable energy developers and sponsors with respect to exemptions or reductions of import duties (for example, regarding the importation of solar panels and other equipment associated with solar energy projects such as inverters).

Unfortunately, some of the key “bottlenecks” for purposes of renewable energy development are the transmission constraints that the Mexican power grid faces. Public bidding processes for multi-state high-voltage transmission lines (in North-West and South-East Mexico) were unilaterally cancelled by the current Federal Administration in 2019 and could have contributed to solving some of such constraints to the benefit of installation of new renewable generation capacity.

The Power Industry Law, the Market Rules and the General Administrative Provisions issued by the CRE (including the Grid Code, Código de Red, which establishes certain technical requirements and obligations – eg, in terms of voltage, frequency response and reliability related curtailments – for the interconnection and operation of power plants) are the principal laws and regulations that govern the construction and operation of power generation facilities in Mexico.

Power plants with an installed capacity equal to or greater than 0.5 MW need to obtain a power generation permit from the CRE. For the CRE to issue such permits, the relevant applicant must provide evidence about its legal, technical and financial capacity as well as the description of its power generation project. The new rules for obtaining generation permits, issued by the CRE on March 2022, also establish more burdensome requirements than in the past for such purposes, including the obligation of the applicant to deliver more detailed information about the direct and indirect shareholders of the project companies as well as evidence of advanced interconnection studies.

As a result of the recent LIE Reform (which, as mentioned in 1.6 Recent Changes in Law or Regulation, has been challenged by dozens of participants and whose entry into force has been suspended by Mexican courts), new power generation permits may be subject to the power sector planning criteria of the SENER, though it is still unknown if and how these planning criteria would be implemented vis-à-vis the issuance of such new power generation permits.

Power generation permits should be issued by the CRE within a timeframe of six to eight months. However, for the last three years, the CRE has either exceeded these statutory timeframes or, following lawsuits demanding an answer, has simply denied (apparently without sufficient legal grounds) new permit applications. This situation is not expected to change in the short-term because of the February 2023 resolution, whereby the CRE lifted the suspension of legal terms and filings due to the COVID-19 pandemic.

In addition to the CRE power generation permit, generation projects are also required to obtain other governmental authorisations, such as:

• interconnection studies and agreements;
• resolution of a social impact assessment (EVIS);
• environmental permits; and
• construction and operation licences from various federal, state and municipal authorities.

Prior to commencing commercial operation, power plants must fulfil a set of technical requirements (including completion of several commissioning and performance tests) in compliance with Procedimiento de Operación para la Declaración de Entrada en Operación Comercial de Centrales Eléctricas y Centros de Carga overseen by the CENACE.

The typical terms and conditions of power generation permits include:

• a description of the power plant associated with the power generation permit (eg, technology, capacity, estimated energy output and location);
• a works schedule and scheduled commercial operation date;
• standard obligations to comply with applicable laws and regulations;
• delivery of periodic energy output reports;
• payment of annual supervision fees to the CRE; and
• exclusively for grandfathered projects under self-supply (autoabastecimiento) and cogeneration schemes, the change of associated shareholders/partners and their load points who may benefit from the energy produced by these kinds of projects.

To obtain an amendment of a term/condition under a power generation permit, the approval of the CRE’s board of commissioners is generally required. Amendment of power generation permits should take between six to eight months. However, see 4.2 Obtaining Approvals for the Construction and Operation of Generation Facilities – the CRE has extended the time period for resolution or approval of new permits.

As a general rule, construction and operation of power generation facilities does not grant eminent domain, condemnation or expropriation rights.

Nevertheless, for power plants that “require a specific location”, legal easements may be created for the construction, installation and maintenance of such assets. According to the CRE, the only technologies that “require a specific location” are geothermal and hydro power plants. Developers of these types of power generation facilities must, prior to filing for a legal easement, follow a burdensome process with the corresponding landowners and competent authorities in order to obtain the real estate rights necessary for the construction, operation and maintenance of their projects. This process includes:

• notices to the landowners;
• negotiation periods;
• appraisals and compensation determined in accordance with parameters set forth by a governmental agency; and
• “validation” by local courts.

Complying with all of these requirements may become an administrative nightmare and result in significant delays to the commercial operation date of the relevant projects.

The Power Industry Law and the Market Rules establish certain requirements for a power plant to be decommissioned. These requirements include filing of certain information with the CENACE, and, as a general rule, that the power plant owner must notify the CENACE of the decommissioning of the asset, at least one year in advance.

Prior to authorising the decommissioning of a power plant, the CENACE must assess whether the power plant intended to be decommissioned is required for maintaining the reliability of the National Electric System. There is no specific obligation set forth by power industry-related laws or regulations to fund decommissioning of a power plant beyond the physical life of the facility or at the end of its physical or economic life; however, it is presumed that the owner of the generation asset should be responsible for such costs. Other conditions for the decommissioning of a power plant as stipulated in environmental authorisations may apply.

The principal laws and regulations that govern the ownership, development, financing, construction, operation and maintenance of transmission lines and associated facilities are the following:

• the Power Industry Law, which contains the key principles of the transmission activities within the Mexican power industry, including the transmission public service and the associations between the State and private parties for the deployment of transmission infrastructure;
• the General Administrative Provisions issued by the CRE regarding the transmission and distribution public services, which elaborate on the key principles set forth by the Power Industry Law, including the open and non-unduly discriminatory access to the grid; and
• the Grid Code, which establishes certain technical requirements and considerations associated with the planning and operation of transmission infrastructure.

The General Environmental Law (Ley General de Equilibrio Ecológico y Protección al Ambiente) may also establish requirements and conditions that transmission projects should comply with – for instance, an environmental impact assessment.

Even though the transmission public service is reserved to the State, the SENER and CFE may call for public-private partnerships in order to develop, finance, construct, operate and/or maintain transmission infrastructure. These projects must be justified by technical and cost-benefit assessments and shall be subject to public bidding proceedings, provided further that:

• CFE Transmisión will remain the sole transmission public service provider; and
• the public domain assets relating to public service transmission projects cannot be mortgaged, pledged or collateralised.

In this regard, the Power Industry Law and its associated regulations do not require a permit or licence to construct or operate transmission infrastructure. Nonetheless, federal, state and municipal authorisations (particularly from an environmental and social standpoint) may be required to construct and operate transmission-related facilities.

Likewise, generation permits typically include the right to build and operate a (private) transmission line to connect the generation facility with the national grid. The relevant works for these private transmission lines may require general state and/or municipal permits for development and construction, such as:

• constructions licences;
• land use permits;
• environmental authorisations; and
• social consultation.

See 5.2 Obtaining Approvals for the Construction and Operation of Transmission Lines and Associated Facilities.

Pursuant to the Power Industry Law, transmission of power is deemed a “social and public interest” activity; therefore, it has priority over any other activity intended to be developed on a certain plot of land. Consequently, legal easements may be created in accordance with the Power Industry Law for constructing and operating transmission facilities. Please note that proponents of transmission projects must, prior to filing for a legal easement, follow the same burdensome process as described in 4.4 Eminent Domain, Condemnation or Expropriation Rights.

Under the premise that the transmission public service is reserved to the State in terms of the Mexican Constitution and the Power Industry Law, CFE Transmisión (which, again, is a State-owned company) is the only entity that may provide the transmission public service in Mexico. As a result, CFE Transmisión has the monopoly on the transmission public service across the whole country. Transmission and distribution public services are some of the few monopolies authorised in the Mexican Constitution.

The Power Industry Law, as well as the general administrative provisions and resolutions issued by the CRE, are the main laws and regulations that govern the provision of the transmission public service and the associated regulated tariff for the transmission public service.

The transmission public service is provided by CFE Transmisión at a regulated tariff, which is determined by the CRE on a yearly basis through a rate case process that determines the revenue requirement of the transmission service provider, and takes into consideration:

• exploitation costs of CFE Transmisión (eg, labour costs and taxes);
• asset costs of CFE Transmisión (eg, depreciation, return on assets and interest-related expenses);
• new transmission infrastructure investments made for the National Electric System that reached operation during the previous year;
• a reasonable profit return; and
• an inflation and foreign-currency-exchange adjustment factor.

Once the CRE has determined the revenue requirement for the transmission public service, the relevant amount is shared 70% by end users and 30% by generators. The transmission tariff is charged by CFE Transmisión – on a Mexican-pesos-per-kWh basis – by means of calculating the energy injected by the generators and the energy consumed by the end users into/from the grid (depending on their voltage level – that is, above 220 kV or below such threshold).

On 31 March 2023, the CRE published the new rules for calculating the regulated tariff for the transmission public service (Acuerdo A/044/2022) that had been “in the making” for almost five years. These new rules will apply for the calculation of the 2024 transmission rate, and while they are conceptually similar to the existing methodology, it is yet to be determined whether this change in regulation will result in an increase of the current tariffs upon its implementation.

Pursuant to the transitory articles of the 2013 Constitutional Energy Reform as well as to the Power Industry Law, the transmission public service must be provided on an open-access and non-discriminatory basis. As a result, and unless it is not technically possible (including due to the lack of available transmission capacity), CFE Transmisión must allow the interconnection of power plants and load points to the grid for the purposes of injecting or consuming power, as applicable. CFE Transmisión will charge a regulated transmission tariff to the generators and end users (see 5.6 Transmission Charges and Terms of Service).

To be legally entitled to interconnect to the grids operated by CFE Transmisión, the applicant must follow an interconnection studies process with the CENACE (as the independent system operator), in accordance with the Interconnection Manual (Manual para la Interconexión de Centrales Eléctricas y Conexión de Centros de Carga), to assess whether interconnection and reinforcement works are required for the requested interconnection to the National Electric System.

Upon completion and acceptance of the interconnection studies, as well as the delivery by the applicant of a performance bond in favour of the CENACE to secure the performance of the interconnection and reinforcement works set forth by the studies, the CENACE will instruct CFE Transmisión to execute the corresponding interconnection agreement (which is a standard form of contract approved by the regulator) with the applicant. The interconnection agreement contains the key terms and conditions for the interconnection of the relevant power plant or load point to the grid, including the scheduled commercial operation date of the corresponding facilities.

See 5.1 Regulation of the Construction and Operation of Transmission Lines and Associated Facilities, which also applies to power distribution.

See 5.2 Obtaining Approvals for the Construction and Operation of Transmission Lines and Associated Facilities regarding public-private partnerships.

See 5.2 Obtaining Approvals for the Construction and Operation of Transmission Lines and Associated Facilities regarding public-private partnerships, which also applies to power distribution.

See 5.4 Eminent Domain, Condemnation or Expropriation Rights, which also applies to power distribution.

See 5.5 Monopoly Rights to Provide Transmission Services, which also applies to power distribution by CFE Distribución.

The Power Industry Law, as well as the general administrative provisions and resolutions issued by the CRE, are the main laws and regulations that govern the provision of the distribution public service and the associated regulated tariff for the distribution public service.

The distribution public service is provided by CFE Distribución at a regulated tariff, which is determined by the CRE on a yearly basis through a rate case process that determines the revenue requirement of the distribution service provider, taking into consideration:

• exploitation costs of CFE Distribución (eg, labour costs and taxes);
• asset costs of CFE Distribución (eg, depreciation, return on assets and interest-related expenses);
• new distribution infrastructure investments made for the National Electric System that reached operation during the previous year;
• a reasonable profit return; and
• an inflation and economy-of-scale adjustment factor.

Once the CRE has determined the revenue requirement for the distribution public service, the relevant amount is divided among 16 distribution divisions in proportion to the revenue obtained from the distribution public service during 2021. The resulting distribution tariff is charged to end users on a Mexican-pesos-per-kWh or kW basis depending on five different distribution categories.