August 7, 2014. Dear clients and friends, On August 6, 2014, Congress completed the approval of the main package of amendments to the secondary legislation required to implement the constitutional energy reform that entered into force on December 21, 2013. Only the promulgation and publication by the Federal Executive in the Official Gazette of the Federation remain pending. To read the full document, please click here. For additional information, please contact: Edmond Grieger, Partner+52 55 52 58 10 00, egrieger@vwys.com.mx Marco Tulio Venegas Cruz, Partner+52 55 52 58 10 00, mtvenegas@vwys.com.mx Luis Burgueño Colín, Partner+52 55 52 58 10 00, lburgueno@vwys.com.mx Fernando Moreno Gómez de Parada, Partner (Tax Practice)+52 55 52 58 10 00, fmoreno@vwys.com.mx On August 6, 2014, Congress completed the approval of the main package of amendments to the secondary legislation deriving from the constitutional energy reform that entered into force on December 21, 2013. Only the promulgation and publication by the Federal Executive in the Official Gazette of the Federation remain pending.The purpose of this reform is to regulate the Hydrocarbons sector, the Electric Power Industry and Geothermal Energy, as well as the new legal regime of Pemex and CFE, opening a new chapter in the country's energy sector. Thus, the modern history of the field moved from a nationalism with rigid government control over energy resources by the Mexican government (which over the years was gradually blurred by successive administrations through secondary administrative regulations) to a scheme very close to a free market that will apparently be controlled at the discretion of the State's regulatory bodies empowered to do so. With this structural energy reform, Mexico opens its doors to domestic and foreign private investment for the purpose of obtaining resources to boost the exploitation of its oil and conventional and non-conventional gas resources, as well as to promote the generation, marketing, transmission and distribution of electric power from various sources. The reforms will give rise to considerable controversy, above all because of the broad discretion granted to the new regulatory agents in implementing the economic, tax and environmental-risk aspects of the contracts and, likewise, with respect to the potential occupation of lands belonging to vulnerable social sectors for the execution of the new energy projects. We will see whether the economic success and social welfare budgeted for and publicized by those responsible for this reform ultimately justifies the shift in policy and legislation undertaken by the Mexican government.On the other hand, it is important to mention that, contrary to the trend and primacy given to the development of renewable energy in countries with more developed economies, the Mexican Congress has unfortunately temporarily set aside the discussion and approval of the corresponding reforms to specifically regulate and promote energy from renewable sources. As a result, for the time being the spirit of last December's Constitutional reform—consisting of promoting sustainability and the generation of energy from clean sources—was not observed. Approval of these reforms should be expected in the last quarter of this year.Likewise, one of the last relevant bills approved by Congress was the tax bill that contemplates the creation of the Hydrocarbons Income Law and the Mexican Petroleum Fund Law, in addition to various reforms and amendments in fiscal matters applicable to the energy sector. Specific comments on the scope and implications of this bill will be distributed shortly by our partner in charge of the firm's tax practice. Finally, a bill relating to the rescue of the substantial labor liabilities of PEMEX and CFE was also approved. Below are the observations and comments regarding each of the bills that make up this package of amendments to the secondary legislation of the energy sector BILL #1 Hydrocarbons Law ("HL or Law") The administrative act known as an "Assignment", provided for in Article 27 of the Constitution, is defined; through it the Federal Executive will grant exclusively to an Assignee (PEMEX or any other State productive enterprise), for a fixed period, the right to carry out hydrocarbon exploration and extraction activities in a specific area with a surface and depth to be determined by the Ministry of Energy ("SENER").In addition to Assignments, contracts for exploration and extraction (the "Contracts"), also provided for in Article 27 of the Constitution, are regulated; these will be entered into by the National Hydrocarbons Commission ("CNH") with PEMEX, any State productive enterprise, or a Mexican legal entity, whether individually, in a consortium or in a joint venture, for the purpose of carrying out hydrocarbon exploration and extraction in an area determined by SENER (the "Contractual Area") and for a fixed period. The types of Contracts are confirmed to be (i) services, (ii) shared profits, (iii) shared production, or (iv) license. The Law does not provide further explanation of the various types of Contracts; it only provides that SENER will establish the contracting model for each contractual area put out to tender. Specifically, this Law does not allow one to distinguish the conceptual difference, if any, between a license and a concession, the latter being expressly prohibited for the hydrocarbons industry under Article 27 of the Constitution. We estimate that the different types of Contracts will be regulated in greater detail in the Regulations to the Law, which must be issued within 180 calendar days following the entry into force of the Law. Contracts will be awarded through a public tender, the procedure for which is set out in the Law itself. Those interested in submitting bids must meet various technical, financial, execution and experience requirements to be established by SENER with the favorable opinion of PEMEX or the State productive enterprise. The CNH will have the power to administratively rescind the Contracts for serious causes, such as the suspension of activities for more than 180 continuous calendar days without justified cause, the Contractor's assignment of the operation or of the rights conferred under the Contract without CNH authorization, the submission on more than one occasion of false or incomplete reports, etc. The number of grounds for rescission is significantly lower than those provided for the rescission of service contracts entered into with PEMEX under the legislation applicable thereto. Among others, the failure to deliver guarantees and the loss of the technical, financial or operational capabilities that had been demonstrated for the award of the contract, etc., are eliminated. In the event of rescission of the Contracts, a settlement will be carried out. It is established that commercial arbitration will be the mechanism for resolving disputes relating to the Contracts, except in cases of administrative rescission. This unfortunately gives rise to the potential for parallel litigation that will hinder the swift and efficient resolution of matters.Both the Contracts and the Assignments must contain a clause referring to the minimum percentage of national content. The Ministry of Economy will determine the minimum percentage of national content and will publish it no later than within 180 calendar days following the entry into force of the Law.It is also provided that, once granted, Assignments may be migrated to Contracts. In such cases, PEMEX and the State productive enterprises may enter into alliances or associations with Mexican legal entities through public tenders. The associations or alliances will be governed by common law. The CNH must previously authorize the entry into alliances or associations in which "the corporate and management control of the Contractor is transferred". In cases where the Contractor undergoes a change in the structure of its capital stock that does not entail a change in its corporate or management control, it need only notify the CNH within 30 days following such change. If the legal entities are listed on the Mexican Stock Exchange, they will follow the provisions of the Securities Market Law for such cases.The entry into public-private partnership contracts with private parties for exploration and extraction activities is prohibited. The difference between Assignments and Contracts is that Assignments are granted by SENER to PEMEX or CFE and are granted only exceptionally, whereas the CNH enters into the Contracts with a Mexican legal entity, PEMEX or CFE. Works, services, supply or operation contracts, integrated exploration and production contracts, and financed public works contracts entered into with PEMEX prior to the entry into force of the HL will remain in force under the terms on which they were entered into and will not undergo modifications. The parties to exploration and production contracts and to financed public works contracts may request their early termination without any penalty and their migration to an Assignment or Contract without the need to exhaust the tender procedure. It is established that the CNH may grant authorizations for Surface Reconnaissance and Exploration to carry out prospecting activities regarding the possible existence of hydrocarbons in areas not subject to an Assignment or a Contract. There is a positive administrative silence rule (afirmativa ficta) in the event that the CNH does not issue a response within the term established by the Regulations to the HL. Holding such authorization does not imply any priority in obtaining the award of a Contract.SENER will establish Safeguard Zones in which exploration and extraction activity will be prohibited, such as, for example, Protected Natural Areas.PEMEX, any other State productive enterprise, parastatal entities or private parties may hold permits for the treatment and refining of oil, the processing of natural gas, and the export and import of hydrocarbons and oil products, issued by SENER, or permits for the transport, storage, distribution, compression, liquefaction, decompression, regasification and retail sale to the public of hydrocarbons, oil products or petrochemicals, issued by the Energy Regulatory Commission ("CRE"). Those who currently carry out the aforementioned activities must apply for their permit no later than June 30, 2015 before SENER and December 31, 2015 before the CRE.Applications for authorizations and permits filed prior to the entry into force of the Law will be processed in accordance with the legislation in force at that time. In general, the sanctions provided for in the HL are considerable (fines ranging from 7,500 to 7,500,000 times the amount of the minimum wage). One of the most controversial topics has been the elimination of expropriation and its replacement by a mechanism of temporary use and occupation. The temporary occupation does not establish a transfer of ownership; a transfer of possession is provided for. However, the duration of this temporary occupation is not provided for, which will evidently create legal uncertainty for those owners subject to this temporary occupation and will give rise to litigation on this point. The possibility is established for the authority to negotiate with the owners or holders of the lands, property or rights "necessary" for carrying out Exploration and Extraction activities. At first, it would appear that the property holder is not obligated to accept the encumbrance; however, if no agreement is reached within 180 calendar days following the start of negotiations, the Assignee or Contractor may seek, before a District Court or a Unitary Agrarian Tribunal, as applicable, the constitution of a "legal hydrocarbons easement". If it is not achieved through this route, the legal hydrocarbons easement will be decreed through administrative channels. The term of the easement may not exceed that of the Contract or the Assignment.The consideration for the temporary occupation will be negotiated between the Assignees/Contractors and the property holders, and in addition the latter will be granted a percentage of between 0.5% and 2% (3% for natural gas) of the revenues they obtain by virtue of their Contracts or Assignments.Only Contracts for the Exploration and Extraction of Natural Gas contained in and produced from coal seams may be awarded directly to the current holders of mining concessions, without a tender. To this end, the concessionaires must request the award within 90 calendar days following the entry into force of the Law and demonstrate that they have the economic solvency and the technical, administrative and financial capacity to carry out the aforementioned activity. On the other hand, for the activity of exploring and extracting natural gas associated with coal that is carried out without exploiting the coal, as well as for activity relating to hydrocarbons that exist in the area corresponding to a mining concession and that are not associated with coal, a public tender will indeed be required, for which it is not established that the mining concessionaire will have preference. In the event that, once the tender has concluded, the rights of the mining concessionaire are affected, 90 days are granted for the Assignee or Contractor and the mining concessionaire to reach an agreement on the coexistence of both activities in the same area and on the payment of consideration to the mining concessionaire. If they do not reach an agreement, the CNH will determine the consideration, which will be between 0.5% and 2% of the profit of the Assignee or Contractor.The Eighth Transitory Article of the Law provides that from its entry into force and until December 31, 2017, the CNH may directly award to PEMEX or CFE a contract for the marketing of hydrocarbons; however, as of January 1, 2018, such services will be contracted through a public tender. Permits granted prior to the HL relating to the hydrocarbons industry will remain in force under their terms, while permits for the recovery and use of natural gas associated with coal deposits will cease to have effect 180 calendar days following the entry into force of the Law.As regards the price of gasoline and diesel, from January 1, 2015 to December 31, 2017, price regulation will be established by the Federal Executive by agreement, taking into account developments in the international market. As of January 1, 2018, prices will be determined "under market conditions". Permits to import gasoline and diesel will be granted exclusively to PEMEX until December 31, 2016. As of January 1, 2017, they may be granted to any interested party if market conditions so permit. Permits for the retail sale of gasoline and diesel to the public will be granted by the CRE as of January 1, 2016.Franchise contracts with PEMEX cease to be mandatory and PEMEX may no longer rescind them unilaterally. The mandatory participation of Petróleos Mexicanos is provided for in those contractual areas where there is the possibility of finding cross-border deposits, understood as those deposits located within national jurisdiction that have physical continuity outside it, or those shared with other countries pursuant to the international treaties to which Mexico is a party.The decentralized public agency known as the National Natural Gas Control Center (CENAGAS) is created, whose purpose will be to guarantee the continuity and security of the gas supply within national territory.Foreign Investment LawForeign investment is permitted in specific fields of the hydrocarbons industry, such as basic petrochemicals, retail marketing of gasoline and distribution of liquefied gas, and the requirement to obtain an authorization from the National Foreign Investment Commission to hold an interest greater than 49% in activities involving the construction of pipelines for the transportation of oil and its derivatives, as well as the drilling of oil and gas wells, is eliminated; andMining Law A review by SENER prior to the granting of mining concessions is contemplated, so that SENER may determine that there is no possibility of hydrocarbon exploration and extraction and, therefore, that this takes precedence over the possible mining concession.Public-Private Partnerships LawThe implementation of public-private partnerships is permitted in the activities of oil refining and natural gas processing, as well as in the transport, storage and distribution of hydrocarbons, liquefied petroleum gas, oil products and petrochemicals, or the generation of electric power, within the national energy industry. BILL #2 Electric Power Industry Law Private participation is permitted in the sector of electricity generation and marketing.The Federal Electricity Commission ("CFE") is restructured as a State productive enterprise. The Ministry of Energy ("SENER") will coordinate the restructuring of the electric power industry, will define the timeframes of the restructuring period and will establish the policies and actions required to conduct the processes for its implementation.The decentralized public agency known as the National Energy Control Center ("CENACE") is created/restructured; it will be in charge of operating the National Electric System and will determine the elements of the National Transmission Grid and the General Distribution Networks and the operations thereof that correspond to the Wholesale Electricity Market.A scheme of obligations for the acquisition of Clean Energy Certificates is created, which basically consists of a title issued by the Energy Regulatory Commission ("CRE") certifying the production of a given amount of electric power through Clean Energy. In this regard, it is still pending for SENER to issue the requirements for the acquisition of these Certificates, as well as the criteria for their granting in favor of the different types of electricity generators using clean sources. The CRE will be the authority in charge of granting the Clean Energy Certificates and will subsequently issue the regulations to verify compliance with the obligations related thereto.A new Wholesale Electricity Market is defined, which will be operated by CENACE, in which Market Participants may carry out transactions relating to electric power, such as purchase and sale, ancillary services, capacity or products that guarantee resources to satisfy electricity demand, import and export of these products, financial transmission rights, Clean Energy Certificates and other related products.Market Participants are those persons who enter into the respective contract with CENACE in the capacity of Generator, Marketer, Supplier, Non-Supplier Marketer or Qualified User. It is established in the transitory provisions of the Law that load centers included in the Interconnection Contracts entered into as of the date of entry into force of the Law may be included in the registry of Qualified Users. During the first year the Law is in force, load centers reporting a demand equal to or greater than 3 Megawatts may be included, with this volume decreasing over the following two years until reaching a floor of 1 Megawatt.The CRE is granted the power to authorize the operating provisions of the electricity market, the model contracts entered into by CENACE with Market Participants, the agreements between CENACE and carriers and distributors, and the model interconnection and purchase-and-sale contracts with exempt generators and purchase and sale by basic supply users.The concept of Clean Energy is included, defined as those energy sources and electricity generation processes whose emissions or waste, when any, do not exceed the thresholds permitted for that purpose. Among them, various sources are mentioned, such as solar, wind, bioenergy, ocean, geothermal, and those derived from the use of methane and other gases at waste disposal sites, livestock farms and wastewater treatment plants. Likewise, nuclear energy (nucleoelectric) is considered a clean source, which is somewhat out of context for clean energy, given that the waste generated by this technology is the most dangerous of contaminants and takes thousands of years to degrade.It is established that the issuance of methodologies for determining the calculation and adjustment of the tariffs for the provision of the basic supply, transmission, distribution and CENACE operation services will be the responsibility of the CRE.The procedure, requirements and formalities are established for the surface occupation or encumbrance of real estate, plots, lands, property or rights necessary for the development of the activities of the electric power industry.The transition from generalized subsidy schemes to targeted subsidy schemes is established.Permits granted under the law being repealed will be respected. It is provided in the transitory articles that permits for self-supply, cogeneration, small-scale production, independent production, import, export and continuous own use will retain their original validity, and their holders may carry out the activities under the terms authorized by such permits. Likewise, the option is provided for the holders of these permits to exchange them for single generation permits, if they so wish, in order to carry out their activities under the new Electric Power Industry Law.The terms of the Legacy Interconnection Contracts will be respected, until the conclusion of their validity, including the recognition of self-supplied capacity, stamp wheeling (porteo estampilla), energy banking, and the other conditions granted for renewable energy generation and cogeneration projects.Applications for self-supply, cogeneration, independent production, small-scale production, import or export permits filed prior to the entry into force of the new Electric Power Industry Law will be resolved on the basis of the former Public Electric Power Service Law. Geothermal Energy LawThe mechanisms for the exploitation and exploration of geothermal resources for the use of the subsoil's thermal energy are established. The Concession is provided for as the legal act by which SENER will confer upon a private party, CFE or the State productive enterprises the rights to exploit the geothermal resources of a given area for the purpose of generating electric power or for various uses.Permits for the exploration of areas with geothermal potential will have a maximum extension of 150 km2, a validity of 3 years, and may be extended once, which grants considerable latitude for carrying out exploratory activities in this sector. The permits do not grant in rem rights to their holders and will generate a temporary right for exploration.The activities regulated by this Law are of public utility, taking precedence over any other use or exploitation of the subsoil of the lands, unless it involves uses or exploitations of the hydrocarbons industry. It is defined that SENER will be the body in charge of regulating and promoting the exploration and exploitation of geothermal areas, as well as the rational use and preservation of the nation's geothermal deposits. It is determined that SENER will be in charge of the Geothermal Registry, which will contain all registration aspects with respect to the concessions to be granted to private parties for the exploitation of geothermal deposits.The Round Zero mechanism is established, by virtue of which CFE may submit to SENER's consideration the geothermal deposits in which it has an interest in continuing to carry out exploration or exploitation work. Reforms and additions to the National Waters LawThe spheres of competence between the National Water Commission ("CONAGUA") and SENER are defined in order to ensure close coordination for the purpose of promoting the integrity of geothermal deposits during the exploration stage and maintaining the sustainability of the resource.The obligation to obtain a permit issued by CONAGUA for carrying out exploratory works or wells of geothermal deposits is provided for.A Concession Title issued by CONAGUA and, where applicable, a discharge permit, will be required for the exploitation, use, utilization and return of subsoil waters contained in hydrothermal geothermal deposits, as well as an authorization on environmental impact matters. Bill 3 (PEMEX and CFE Law) BILL #3Petróleos Mexicanos Law and Federal Electricity Commission Law1 The Federal Electricity Commission ("CFE") and Petróleos Mexicanos ("PEMEX") are defined as State productive enterprises, which implies that both will be the exclusive property of the Federal Government, and the latter will move from being an administrator of their resources to exercising the following ownership functions:Defining their purpose and the activities they will carry out;Appointing the members of the Board of Directors and setting their compensation;Appointing their external auditor;Defining the dividend they must deliver to the Federal Government, based on their financial results;Evaluating their performance and that of their Boards of Directors; andPeriodically receiving reports on the progress of each enterprise.Both CFE and PEMEX will have their own legal personality and assets and will enjoy technical, operational and management autonomy. CFE's purpose will be to provide the public service of transmission and distribution of electric power, for the account and on behalf of the Mexican State, while PEMEX will have the exploration and extraction of oil and solid, liquid or gaseous hydrogen carbides, as well as their collection, sale and marketing.Both PEMEX and CFE will be directed and managed by a Board of Directors and a Chief Executive Officer. The Chief Executive Officer will be appointed by the Federal Executive. The Board of Directors will be composed of ten directors, being the head of the Ministry of Energy (who will preside over it and will have a casting vote), the head of the Ministry of Finance and Public Credit, three Federal Government directors appointed by the Federal Executive, and five independent directors for PEMEX and four for CFE. The latter will be appointed by the Federal Executive and ratified by the Senate of the Republic, will exercise their functions on a part-time basis and will not have the status of public servants. Likewise, the Board may have the Audit, Human Resources and Compensation, Strategy and Investments, and Acquisitions, Leases, Works and Services Committees, which will assist it in the performance of its functions.The figure of subsidiary productive enterprises is created, which will have their own legal personality and assets. Those related to PEMEX will carry out hydrocarbon exploration and extraction activities, while those related to CFE will carry out electric power transmission and distribution activities. In addition, in both cases, they will carry out the activities determined by the Boards of Directors of CFE and PEMEX.The figure of affiliated productive enterprises is created, which will be those in which PEMEX or CFE participate, directly or indirectly, in more than 50% of the capital stock. They may be Mexican or foreign and their legal nature will conform to the private law of the place of their incorporation. They will not be considered parastatal entities.The creation, merger or spin-off of subsidiary and affiliated productive enterprises in which PEMEX or CFE participate directly will be authorized by the Board of Directors upon proposal of its Chief Executive Officer and in accordance with the rules issued by the Board itself.Both PEMEX and CFE will be governed on a supplementary basis by principles of private law and by the determinations of their governing bodies, and private-law statutes in commercial and civil matters will be applicable to them, but not administrative-law statutes as was previously the case. By virtue of the new legislation, the Boards of Directors are granted the power to determine the corporate structure that best suits them for the achievement of their purpose, optimizing human, financial and material resources, simplifying processes, and attending to transparency and to the best corporate and business practices at the national and international level. Among the most important functions of the Boards of Directors are: The central conduct and strategic direction of the business, economic and industrial activities;Approving, reviewing and, where appropriate, annually updating the Business Plan, which will be prepared and updated over a 5-year horizon and will contain at least the objectives, business lines and opportunities of CFE or PEMEX, the main commercial, financial and investment strategies, the large-scale and technological improvement projects, the priority acquisitions, a diagnosis of their operational and financial situation, as well as the results and performance indicators, and the main scenarios of strategic and commercial risks.Setting and adjusting the prices of the goods and services produced or provided by PEMEX and CFE and their subsidiary productive enterprises;Approving and issuing, upon proposal of the Chief Executive Officer, the Organic Bylaws of PEMEX and CFE;In the case of PEMEX, setting the general policies and bases for determining the profitability factor on the basis of which PEMEX and its subsidiary productive enterprises will participate in the tenders for the award of Contracts for the Exploration and Extraction of Hydrocarbons.Among the most important functions of the Chief Executive Officers are: Legally managing and representing the enterprise, with the broadest powers for acts of ownership, administration, litigation and collection, including those requiring special authorization, power of attorney or clause;Formulating and submitting for the Board of Directors' authorization the Business Plan and the annual operational and financial work program;Authorizing the extraordinary payments and donations, in cash or in kind, granted by PEMEX or CFE or their subsidiary productive enterprises, under the terms of the guidelines issued by the Board of Directors;Administering the enterprise's assets and disposing of its property in accordance with the provisions of both laws and with the policies and authorizations issued for that purpose by the Board of Directors.A new oversight and audit model is established, which will be defined by the Chief Executive Officer of PEMEX and CFE and will be independent of the Internal Control Bodies of public agencies, within which various bodies will be established, including an Audit Committee and both an external and an internal Auditor. Among the most important functions of these bodies are the following: Monitoring the management of PEMEX or CFE, their subsidiary productive enterprises and affiliated enterprises.Verifying and certifying the reasonableness and sufficiency of the accounting and financial information;Scheduling and requiring, at any time, the investigations and audits deemed necessary, except with respect to the actions of the Board of Directors.Establishing mechanisms that make it possible to anticipate, identify, manage, monitor and evaluate the risks that may arise from the development of the activities of PEMEX and CFE.A new scheme of acquisitions, leases, services and works is created for the State productive enterprises, under which the Public Sector Acquisitions, Leases and Services Law and the Public Works and Related Services Law will not be applicable to them, but rather the provisions established in the new laws.The Board of Directors of each will issue the provisions to which PEMEX and CFE and their subsidiary productive enterprises must be subject for the procedures of acquisitions, leases, contracting of services and execution of works with private parties that are established in Article 134 of the Constitution. In procedures other than open competition, persons that have the financial, technical, operational and other capacities necessary to fulfill the contracts, and that have experience in the activities or works to be carried out, will be invited.The minimum requirements that must be met by those interested in contracting with the State productive enterprises and their subsidiary productive enterprises, as well as the mechanisms for their evaluation, which must consider, among others:Technical and financial capacity for the execution of the project;Prior experience demonstrating the capacity to perform the contractual obligations; andThe status of their tax and labor obligations.The state dividend is defined, through which PEMEX and CFE will annually pay the State in accordance with the following: In the month of July of each year, the Board of Directors will send to the Ministry of Finance and Public Credit a report on:The financial situation of the State productive enterprise in question and of its subsidiary productive enterprises, and the plans, options and prospects for investment and financing.The Ministry of Finance and Public Credit, taking the foregoing into account, will determine the amount that they must deliver to the Federal Government as a state dividend.The contracts, agreements and other legal acts of acquisitions, leases and contracting of services and works entered into by CFE and PEMEX and their subsidiary agencies with private parties, that are in force upon the entry into force of both laws, will be respected under the agreed terms. Notwithstanding the foregoing, the productive enterprise and its former subsidiary agencies or the subsidiary productive enterprises may agree to their modification in order to adjust them to the provisions of the new laws and of the other applicable laws.The Federal Law of Parastatal Entities, the Public Sector Acquisitions, Leases and Services Law, and the Public Works and Related Services Law are amended in order to exclude their application with respect to PEMEX and CFE. Bill 4 (Regulatory Bodies and the National Agency of the Hydrocarbons Sector) BILL #4Law of Coordinated Regulatory Bodies in Energy Matters ("Regulatory Bodies Law")The National Hydrocarbons Commission ("CNH") and the Energy Regulatory Commission ("CRE") (together, the "Regulatory Bodies") are constituted as Coordinated Regulatory Bodies in Energy Matters; they will have technical, operational and management autonomy, will have legal personality and may dispose of the revenues derived from the fees and charges established in the Federal Duties Law or in the applicable laws for the services they provide in accordance with their powers and authorities. Their main functions are established as the following:Regulating, supervising, inspecting and sanctioning in the matters within their competence;Requiring information from the holders of permits, licenses and authorizations, as well as from related third parties;Conducting technical studies within the scope of their competence to improve the development of the energy and hydrocarbons sectors;Contracting consulting, advisory, study and research services required for the activities of the hydrocarbons sector and the energy sector.The Regulatory Bodies will be composed of a Governing Body made up of seven Commissioners, including its President, and an Executive Secretariat.The Regulatory Bodies must make public all of their decisions including, where applicable, dissenting votes, the minutes of the sessions, the administrative criteria on which they base their decisions, and must publish, at least quarterly, a Gazette for informational purposes. The Energy Sector Coordination Council (the "Council") is created as a mechanism to align the objectives and activities of the Regulatory Bodies in furtherance of compliance with energy policy.The Council will have various functions, among which the following stand out:Issuing recommendations on the annual programs of the Federal Executive in energy matters and on aspects of energy policy;Analyzing specific cases that may affect the development of the Federal Executive's public policies in energy matters and proposing coordination mechanisms among the Federal Executive, the relevant Ministries and the Regulatory Bodies.The general rules, acts or omissions of the Regulatory Bodies may be challenged only by means of an indirect amparo proceeding and will not be subject to suspension. Only in cases where they impose fines will these be enforced once the amparo proceeding that may be brought is resolved. When it comes to resolutions of such Regulatory Bodies issued from a procedure conducted in the form of a trial, only the resolution that puts an end to it may be challenged for violations committed during the procedure.The entry into contracts with Regulatory Bodies and the granting of authorizations and permits by them for the exploration and extraction of hydrocarbons, the laying of pipelines and electrical infrastructure, etc., will entail the declaration of public utility over the properties in which they are located and will be subject to the Federal Anti-Corruption Law in Public Procurement.The CRE and the CNH may dispose of the revenues derived from contributions and charges paid by private parties for the issuance of licenses, authorizations or permits, as a product of their services, through a public trust.In addition to the powers established in the Hydrocarbons Law, the CNH will be responsible for, among others, the following functions:Regulating and supervising surface reconnaissance and exploration, as well as the exploration and extraction of hydrocarbons, including their collection from the production points and up to their integration into the transport and storage system;Providing technical advice to the Ministry of Energy. In addition to the powers established in the Hydrocarbons Law and the Electric Power Industry Law, the CRE must regulate and promote the efficient development of the following activities:Those of transport, storage, distribution, compression, liquefaction and regasification, as well as the retail sale to the public of oil, natural gas, liquefied petroleum gas, oil products and petrochemicals;The transport by pipeline, storage, distribution and retail sale to the public of bioenergy products;The generation of electricity, the public services of electric transmission and distribution, the electric transmission and distribution that is not part of the public service, and the marketing of electricity, which consists of including the service of providing electric power by private parties and which will subject the market to new standards of competition.The rules and regulations issued by the CRE and the CNH prior to the entry into force of the Regulatory Bodies Law, that do not conflict with its provisions, will remain in force, without prejudice to their being adjusted, modified or replaced, under the terms of the provisions of this Law and the other applicable ones. The internal regulations of the CNH and the CRE will be issued within 180 calendar days following the entry into force of the Regulatory Bodies Law.The Organic Law of the Federal Public Administration is amended for the inclusion of the Regulatory Bodies and the granting of powers to them.Law of the National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector ("Agency Law")The National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector ("Agency") is created, which will regulate and supervise, in matters of industrial and operational safety and environmental protection, the facilities and activities in general and, specifically, those of dismantling and abandonment of hydrocarbons-sector facilities, as well as the integral control of the waste and polluting emissions of the hydrocarbons sector. The Agency Law will apply throughout the national territory and in the zones over which the Nation exercises sovereignty or jurisdiction. Thanks to the efforts of the Mexican Bar Association (Barra Mexicana Colegio de Abogados), as well as to the efforts made by the attorneys of Von Wobeser y Sierra in various political and legal forums, it was achieved that the scope of application of the Law in question likewise include the zones where the Nation exercises its sovereignty, and not only the national territory, which was the initial proposal. This is of great importance, since the Agency will also have jurisdiction over the exclusive economic zone, which is where a large part of the exploration and extraction of hydrocarbons in deep waters will be carried out.The activities of the hydrocarbons sector to which the Agency Law will be applicable are the following: Surface reconnaissance and exploration, and deep-water exploration and extraction of hydrocarbons; The treatment, refining, disposal, marketing, transport and storage of oil;The processing, compression, liquefaction, decompression and regasification, as well as the transport, storage, distribution and retail sale to the public of natural gas and oil products;The transport, storage, distribution and retail sale to the public of liquefied petroleum gas;The transport by pipeline and the storage that is linked to pipelines of petrochemicals produced from the processing of natural gas and the refining of oil.The functions of the Agency are defined, among which the following stand out: Regulating, supervising and sanctioning in matters of industrial and operational safety and environmental protection;Instituting, processing and resolving authorizations on environmental impact and risk matters; authorization to emit odors, gases or solid or liquid particles into the atmosphere; authorizations on hazardous waste matters in the hydrocarbons sector; authorization of proposals for the remediation of contaminated sites; authorizations on special-handling waste matters—notwithstanding that special-handling waste is under local jurisdiction, this Law provides that the Agency will grant permits in this matter; Instructing the adoption and observance of national and international technical standards in matters of industrial safety, which involves the prevention and containment of spills, as well as the physical and operational integrity of the facilities;Characterizing and classifying waste as hazardous and non-hazardous and managing hazardous waste generated in the hydrocarbons sector. It is worth mentioning that, although this Law does not mention the obligations regarding hazardous and non-hazardous waste for the holders of permits, authorizations or licenses, such matters are indeed regulated but only with respect to the authority. The figure of the Industrial Safety, Operational Safety and Environmental Protection Management Systems (hereinafter "Management Systems") is created, which must be installed by each enterprise of the hydrocarbons sector for the prevention, control and improvement of performance in industrial safety, operational safety and environmental protection.The enterprises of the hydrocarbons sector must have an area responsible for the implementation, evaluation and improvement of the Management System.The Ministry of the Environment and Natural Resources, the Ministry of Energy, the CNH and the CRE will continue to handle the matters within their competence in accordance with the previous legislation, until the entry into force of the Internal Regulations of the Agency, which will be within 270 days following the entry into force of the Agency Law. In matters relating to the obtaining of permits, authorizations or licenses that are being processed before the entry into force of the Internal Regulations of the Agency, the authority in charge of them will decree a suspension of the procedure and will refer them to the Agency within a term not exceeding fifteen business days in order to continue processing them under the guidelines established in the previous laws. Until the general administrative provisions and official Mexican standards issued by the Agency are enacted, the guidelines, technical and administrative provisions, agreements, criteria, as well as official Mexican standards, issued by the Ministry of the Environment and Natural Resources, the Ministry of Energy, the CNH and the CRE, will remain in force and will be mandatory for all regulated parties, provided that they do not conflict with the provisions of this Law, the Hydrocarbons Law, the Electric Power Industry Law and any other applicable law. August 7, 2014. Dear clients and friends, On August 6, 2014, Congress completed the approval of the main package of amendments to the secondary legislation required to implement the constitutional energy reform that entered into force on December 21, 2013. Only the promulgation and publication by the Federal Executive in the Official Gazette of the Federation remain pending. To read the full document, please click here. For additional information, please contact: Edmond Grieger, Partner+52 55 52 58 10 00, egrieger@vwys.com.mx Marco Tulio Venegas Cruz, Partner+52 55 52 58 10 00, mtvenegas@vwys.com.mx Luis Burgueño Colín, Partner+52 55 52 58 10 00, lburgueno@vwys.com.mx Fernando Moreno Gómez de Parada, Partner (Tax Practice)+52 55 52 58 10 00, fmoreno@vwys.com.mx On August 6, 2014, Congress completed the approval of the main package of amendments to the secondary legislation deriving from the constitutional energy reform that entered into force on December 21, 2013. Only the promulgation and publication by the Federal Executive in the Official Gazette of the Federation remain pending.The purpose of this reform is to regulate the Hydrocarbons sector, the Electric Power Industry and Geothermal Energy, as well as the new legal regime of Pemex and CFE, opening a new chapter in the country's energy sector. Thus, the modern history of the field moved from a nationalism with rigid government control over energy resources by the Mexican government (which over the years was gradually blurred by successive administrations through secondary administrative regulations) to a scheme very close to a free market that will apparently be controlled at the discretion of the State's regulatory bodies empowered to do so. With this structural energy reform, Mexico opens its doors to domestic and foreign private investment for the purpose of obtaining resources to boost the exploitation of its oil and conventional and non-conventional gas resources, as well as to promote the generation, marketing, transmission and distribution of electric power from various sources. The reforms will give rise to considerable controversy, above all because of the broad discretion granted to the new regulatory agents in implementing the economic, tax and environmental-risk aspects of the contracts and, likewise, with respect to the potential occupation of lands belonging to vulnerable social sectors for the execution of the new energy projects. We will see whether the economic success and social welfare budgeted for and publicized by those responsible for this reform ultimately justifies the shift in policy and legislation undertaken by the Mexican government.On the other hand, it is important to mention that, contrary to the trend and primacy given to the development of renewable energy in countries with more developed economies, the Mexican Congress has unfortunately temporarily set aside the discussion and approval of the corresponding reforms to specifically regulate and promote energy from renewable sources. As a result, for the time being the spirit of last December's Constitutional reform—consisting of promoting sustainability and the generation of energy from clean sources—was not observed. Approval of these reforms should be expected in the last quarter of this year.Likewise, one of the last relevant bills approved by Congress was the tax bill that contemplates the creation of the Hydrocarbons Income Law and the Mexican Petroleum Fund Law, in addition to various reforms and amendments in fiscal matters applicable to the energy sector. Specific comments on the scope and implications of this bill will be distributed shortly by our partner in charge of the firm's tax practice. Finally, a bill relating to the rescue of the substantial labor liabilities of PEMEX and CFE was also approved. Below are the observations and comments regarding each of the bills that make up this package of amendments to the secondary legislation of the energy sector BILL #1 Hydrocarbons Law ("HL or Law") The administrative act known as an "Assignment", provided for in Article 27 of the Constitution, is defined; through it the Federal Executive will grant exclusively to an Assignee (PEMEX or any other State productive enterprise), for a fixed period, the right to carry out hydrocarbon exploration and extraction activities in a specific area with a surface and depth to be determined by the Ministry of Energy ("SENER").In addition to Assignments, contracts for exploration and extraction (the "Contracts"), also provided for in Article 27 of the Constitution, are regulated; these will be entered into by the National Hydrocarbons Commission ("CNH") with PEMEX, any State productive enterprise, or a Mexican legal entity, whether individually, in a consortium or in a joint venture, for the purpose of carrying out hydrocarbon exploration and extraction in an area determined by SENER (the "Contractual Area") and for a fixed period. The types of Contracts are confirmed to be (i) services, (ii) shared profits, (iii) shared production, or (iv) license. The Law does not provide further explanation of the various types of Contracts; it only provides that SENER will establish the contracting model for each contractual area put out to tender. Specifically, this Law does not allow one to distinguish the conceptual difference, if any, between a license and a concession, the latter being expressly prohibited for the hydrocarbons industry under Article 27 of the Constitution. We estimate that the different types of Contracts will be regulated in greater detail in the Regulations to the Law, which must be issued within 180 calendar days following the entry into force of the Law. Contracts will be awarded through a public tender, the procedure for which is set out in the Law itself. Those interested in submitting bids must meet various technical, financial, execution and experience requirements to be established by SENER with the favorable opinion of PEMEX or the State productive enterprise. The CNH will have the power to administratively rescind the Contracts for serious causes, such as the suspension of activities for more than 180 continuous calendar days without justified cause, the Contractor's assignment of the operation or of the rights conferred under the Contract without CNH authorization, the submission on more than one occasion of false or incomplete reports, etc. The number of grounds for rescission is significantly lower than those provided for the rescission of service contracts entered into with PEMEX under the legislation applicable thereto. Among others, the failure to deliver guarantees and the loss of the technical, financial or operational capabilities that had been demonstrated for the award of the contract, etc., are eliminated. In the event of rescission of the Contracts, a settlement will be carried out. It is established that commercial arbitration will be the mechanism for resolving disputes relating to the Contracts, except in cases of administrative rescission. This unfortunately gives rise to the potential for parallel litigation that will hinder the swift and efficient resolution of matters.Both the Contracts and the Assignments must contain a clause referring to the minimum percentage of national content. The Ministry of Economy will determine the minimum percentage of national content and will publish it no later than within 180 calendar days following the entry into force of the Law.It is also provided that, once granted, Assignments may be migrated to Contracts. In such cases, PEMEX and the State productive enterprises may enter into alliances or associations with Mexican legal entities through public tenders. The associations or alliances will be governed by common law. The CNH must previously authorize the entry into alliances or associations in which "the corporate and management control of the Contractor is transferred". In cases where the Contractor undergoes a change in the structure of its capital stock that does not entail a change in its corporate or management control, it need only notify the CNH within 30 days following such change. If the legal entities are listed on the Mexican Stock Exchange, they will follow the provisions of the Securities Market Law for such cases.The entry into public-private partnership contracts with private parties for exploration and extraction activities is prohibited. The difference between Assignments and Contracts is that Assignments are granted by SENER to PEMEX or CFE and are granted only exceptionally, whereas the CNH enters into the Contracts with a Mexican legal entity, PEMEX or CFE. Works, services, supply or operation contracts, integrated exploration and production contracts, and financed public works contracts entered into with PEMEX prior to the entry into force of the HL will remain in force under the terms on which they were entered into and will not undergo modifications. The parties to exploration and production contracts and to financed public works contracts may request their early termination without any penalty and their migration to an Assignment or Contract without the need to exhaust the tender procedure. It is established that the CNH may grant authorizations for Surface Reconnaissance and Exploration to carry out prospecting activities regarding the possible existence of hydrocarbons in areas not subject to an Assignment or a Contract. There is a positive administrative silence rule (afirmativa ficta) in the event that the CNH does not issue a response within the term established by the Regulations to the HL. Holding such authorization does not imply any priority in obtaining the award of a Contract.SENER will establish Safeguard Zones in which exploration and extraction activity will be prohibited, such as, for example, Protected Natural Areas.PEMEX, any other State productive enterprise, parastatal entities or private parties may hold permits for the treatment and refining of oil, the processing of natural gas, and the export and import of hydrocarbons and oil products, issued by SENER, or permits for the transport, storage, distribution, compression, liquefaction, decompression, regasification and retail sale to the public of hydrocarbons, oil products or petrochemicals, issued by the Energy Regulatory Commission ("CRE"). Those who currently carry out the aforementioned activities must apply for their permit no later than June 30, 2015 before SENER and December 31, 2015 before the CRE.Applications for authorizations and permits filed prior to the entry into force of the Law will be processed in accordance with the legislation in force at that time. In general, the sanctions provided for in the HL are considerable (fines ranging from 7,500 to 7,500,000 times the amount of the minimum wage). One of the most controversial topics has been the elimination of expropriation and its replacement by a mechanism of temporary use and occupation. The temporary occupation does not establish a transfer of ownership; a transfer of possession is provided for. However, the duration of this temporary occupation is not provided for, which will evidently create legal uncertainty for those owners subject to this temporary occupation and will give rise to litigation on this point. The possibility is established for the authority to negotiate with the owners or holders of the lands, property or rights "necessary" for carrying out Exploration and Extraction activities. At first, it would appear that the property holder is not obligated to accept the encumbrance; however, if no agreement is reached within 180 calendar days following the start of negotiations, the Assignee or Contractor may seek, before a District Court or a Unitary Agrarian Tribunal, as applicable, the constitution of a "legal hydrocarbons easement". If it is not achieved through this route, the legal hydrocarbons easement will be decreed through administrative channels. The term of the easement may not exceed that of the Contract or the Assignment.The consideration for the temporary occupation will be negotiated between the Assignees/Contractors and the property holders, and in addition the latter will be granted a percentage of between 0.5% and 2% (3% for natural gas) of the revenues they obtain by virtue of their Contracts or Assignments.Only Contracts for the Exploration and Extraction of Natural Gas contained in and produced from coal seams may be awarded directly to the current holders of mining concessions, without a tender. To this end, the concessionaires must request the award within 90 calendar days following the entry into force of the Law and demonstrate that they have the economic solvency and the technical, administrative and financial capacity to carry out the aforementioned activity. On the other hand, for the activity of exploring and extracting natural gas associated with coal that is carried out without exploiting the coal, as well as for activity relating to hydrocarbons that exist in the area corresponding to a mining concession and that are not associated with coal, a public tender will indeed be required, for which it is not established that the mining concessionaire will have preference. In the event that, once the tender has concluded, the rights of the mining concessionaire are affected, 90 days are granted for the Assignee or Contractor and the mining concessionaire to reach an agreement on the coexistence of both activities in the same area and on the payment of consideration to the mining concessionaire. If they do not reach an agreement, the CNH will determine the consideration, which will be between 0.5% and 2% of the profit of the Assignee or Contractor.The Eighth Transitory Article of the Law provides that from its entry into force and until December 31, 2017, the CNH may directly award to PEMEX or CFE a contract for the marketing of hydrocarbons; however, as of January 1, 2018, such services will be contracted through a public tender. Permits granted prior to the HL relating to the hydrocarbons industry will remain in force under their terms, while permits for the recovery and use of natural gas associated with coal deposits will cease to have effect 180 calendar days following the entry into force of the Law.As regards the price of gasoline and diesel, from January 1, 2015 to December 31, 2017, price regulation will be established by the Federal Executive by agreement, taking into account developments in the international market. As of January 1, 2018, prices will be determined "under market conditions". Permits to import gasoline and diesel will be granted exclusively to PEMEX until December 31, 2016. As of January 1, 2017, they may be granted to any interested party if market conditions so permit. Permits for the retail sale of gasoline and diesel to the public will be granted by the CRE as of January 1, 2016.Franchise contracts with PEMEX cease to be mandatory and PEMEX may no longer rescind them unilaterally. The mandatory participation of Petróleos Mexicanos is provided for in those contractual areas where there is the possibility of finding cross-border deposits, understood as those deposits located within national jurisdiction that have physical continuity outside it, or those shared with other countries pursuant to the international treaties to which Mexico is a party.The decentralized public agency known as the National Natural Gas Control Center (CENAGAS) is created, whose purpose will be to guarantee the continuity and security of the gas supply within national territory.Foreign Investment LawForeign investment is permitted in specific fields of the hydrocarbons industry, such as basic petrochemicals, retail marketing of gasoline and distribution of liquefied gas, and the requirement to obtain an authorization from the National Foreign Investment Commission to hold an interest greater than 49% in activities involving the construction of pipelines for the transportation of oil and its derivatives, as well as the drilling of oil and gas wells, is eliminated; andMining Law A review by SENER prior to the granting of mining concessions is contemplated, so that SENER may determine that there is no possibility of hydrocarbon exploration and extraction and, therefore, that this takes precedence over the possible mining concession.Public-Private Partnerships LawThe implementation of public-private partnerships is permitted in the activities of oil refining and natural gas processing, as well as in the transport, storage and distribution of hydrocarbons, liquefied petroleum gas, oil products and petrochemicals, or the generation of electric power, within the national energy industry. BILL #2 Electric Power Industry Law Private participation is permitted in the sector of electricity generation and marketing.The Federal Electricity Commission ("CFE") is restructured as a State productive enterprise. The Ministry of Energy ("SENER") will coordinate the restructuring of the electric power industry, will define the timeframes of the restructuring period and will establish the policies and actions required to conduct the processes for its implementation.The decentralized public agency known as the National Energy Control Center ("CENACE") is created/restructured; it will be in charge of operating the National Electric System and will determine the elements of the National Transmission Grid and the General Distribution Networks and the operations thereof that correspond to the Wholesale Electricity Market.A scheme of obligations for the acquisition of Clean Energy Certificates is created, which basically consists of a title issued by the Energy Regulatory Commission ("CRE") certifying the production of a given amount of electric power through Clean Energy. In this regard, it is still pending for SENER to issue the requirements for the acquisition of these Certificates, as well as the criteria for their granting in favor of the different types of electricity generators using clean sources. The CRE will be the authority in charge of granting the Clean Energy Certificates and will subsequently issue the regulations to verify compliance with the obligations related thereto.A new Wholesale Electricity Market is defined, which will be operated by CENACE, in which Market Participants may carry out transactions relating to electric power, such as purchase and sale, ancillary services, capacity or products that guarantee resources to satisfy electricity demand, import and export of these products, financial transmission rights, Clean Energy Certificates and other related products.Market Participants are those persons who enter into the respective contract with CENACE in the capacity of Generator, Marketer, Supplier, Non-Supplier Marketer or Qualified User. It is established in the transitory provisions of the Law that load centers included in the Interconnection Contracts entered into as of the date of entry into force of the Law may be included in the registry of Qualified Users. During the first year the Law is in force, load centers reporting a demand equal to or greater than 3 Megawatts may be included, with this volume decreasing over the following two years until reaching a floor of 1 Megawatt.The CRE is granted the power to authorize the operating provisions of the electricity market, the model contracts entered into by CENACE with Market Participants, the agreements between CENACE and carriers and distributors, and the model interconnection and purchase-and-sale contracts with exempt generators and purchase and sale by basic supply users.The concept of Clean Energy is included, defined as those energy sources and electricity generation processes whose emissions or waste, when any, do not exceed the thresholds permitted for that purpose. Among them, various sources are mentioned, such as solar, wind, bioenergy, ocean, geothermal, and those derived from the use of methane and other gases at waste disposal sites, livestock farms and wastewater treatment plants. Likewise, nuclear energy (nucleoelectric) is considered a clean source, which is somewhat out of context for clean energy, given that the waste generated by this technology is the most dangerous of contaminants and takes thousands of years to degrade.It is established that the issuance of methodologies for determining the calculation and adjustment of the tariffs for the provision of the basic supply, transmission, distribution and CENACE operation services will be the responsibility of the CRE.The procedure, requirements and formalities are established for the surface occupation or encumbrance of real estate, plots, lands, property or rights necessary for the development of the activities of the electric power industry.The transition from generalized subsidy schemes to targeted subsidy schemes is established.Permits granted under the law being repealed will be respected. It is provided in the transitory articles that permits for self-supply, cogeneration, small-scale production, independent production, import, export and continuous own use will retain their original validity, and their holders may carry out the activities under the terms authorized by such permits. Likewise, the option is provided for the holders of these permits to exchange them for single generation permits, if they so wish, in order to carry out their activities under the new Electric Power Industry Law.The terms of the Legacy Interconnection Contracts will be respected, until the conclusion of their validity, including the recognition of self-supplied capacity, stamp wheeling (porteo estampilla), energy banking, and the other conditions granted for renewable energy generation and cogeneration projects.Applications for self-supply, cogeneration, independent production, small-scale production, import or export permits filed prior to the entry into force of the new Electric Power Industry Law will be resolved on the basis of the former Public Electric Power Service Law. Geothermal Energy LawThe mechanisms for the exploitation and exploration of geothermal resources for the use of the subsoil's thermal energy are established. The Concession is provided for as the legal act by which SENER will confer upon a private party, CFE or the State productive enterprises the rights to exploit the geothermal resources of a given area for the purpose of generating electric power or for various uses.Permits for the exploration of areas with geothermal potential will have a maximum extension of 150 km2, a validity of 3 years, and may be extended once, which grants considerable latitude for carrying out exploratory activities in this sector. The permits do not grant in rem rights to their holders and will generate a temporary right for exploration.The activities regulated by this Law are of public utility, taking precedence over any other use or exploitation of the subsoil of the lands, unless it involves uses or exploitations of the hydrocarbons industry. It is defined that SENER will be the body in charge of regulating and promoting the exploration and exploitation of geothermal areas, as well as the rational use and preservation of the nation's geothermal deposits. It is determined that SENER will be in charge of the Geothermal Registry, which will contain all registration aspects with respect to the concessions to be granted to private parties for the exploitation of geothermal deposits.The Round Zero mechanism is established, by virtue of which CFE may submit to SENER's consideration the geothermal deposits in which it has an interest in continuing to carry out exploration or exploitation work. Reforms and additions to the National Waters LawThe spheres of competence between the National Water Commission ("CONAGUA") and SENER are defined in order to ensure close coordination for the purpose of promoting the integrity of geothermal deposits during the exploration stage and maintaining the sustainability of the resource.The obligation to obtain a permit issued by CONAGUA for carrying out exploratory works or wells of geothermal deposits is provided for.A Concession Title issued by CONAGUA and, where applicable, a discharge permit, will be required for the exploitation, use, utilization and return of subsoil waters contained in hydrothermal geothermal deposits, as well as an authorization on environmental impact matters. Bill 3 (PEMEX and CFE Law) BILL #3Petróleos Mexicanos Law and Federal Electricity Commission Law1 The Federal Electricity Commission ("CFE") and Petróleos Mexicanos ("PEMEX") are defined as State productive enterprises, which implies that both will be the exclusive property of the Federal Government, and the latter will move from being an administrator of their resources to exercising the following ownership functions:Defining their purpose and the activities they will carry out;Appointing the members of the Board of Directors and setting their compensation;Appointing their external auditor;Defining the dividend they must deliver to the Federal Government, based on their financial results;Evaluating their performance and that of their Boards of Directors; andPeriodically receiving reports on the progress of each enterprise.Both CFE and PEMEX will have their own legal personality and assets and will enjoy technical, operational and management autonomy. CFE's purpose will be to provide the public service of transmission and distribution of electric power, for the account and on behalf of the Mexican State, while PEMEX will have the exploration and extraction of oil and solid, liquid or gaseous hydrogen carbides, as well as their collection, sale and marketing.Both PEMEX and CFE will be directed and managed by a Board of Directors and a Chief Executive Officer. The Chief Executive Officer will be appointed by the Federal Executive. The Board of Directors will be composed of ten directors, being the head of the Ministry of Energy (who will preside over it and will have a casting vote), the head of the Ministry of Finance and Public Credit, three Federal Government directors appointed by the Federal Executive, and five independent directors for PEMEX and four for CFE. The latter will be appointed by the Federal Executive and ratified by the Senate of the Republic, will exercise their functions on a part-time basis and will not have the status of public servants. Likewise, the Board may have the Audit, Human Resources and Compensation, Strategy and Investments, and Acquisitions, Leases, Works and Services Committees, which will assist it in the performance of its functions.The figure of subsidiary productive enterprises is created, which will have their own legal personality and assets. Those related to PEMEX will carry out hydrocarbon exploration and extraction activities, while those related to CFE will carry out electric power transmission and distribution activities. In addition, in both cases, they will carry out the activities determined by the Boards of Directors of CFE and PEMEX.The figure of affiliated productive enterprises is created, which will be those in which PEMEX or CFE participate, directly or indirectly, in more than 50% of the capital stock. They may be Mexican or foreign and their legal nature will conform to the private law of the place of their incorporation. They will not be considered parastatal entities.The creation, merger or spin-off of subsidiary and affiliated productive enterprises in which PEMEX or CFE participate directly will be authorized by the Board of Directors upon proposal of its Chief Executive Officer and in accordance with the rules issued by the Board itself.Both PEMEX and CFE will be governed on a supplementary basis by principles of private law and by the determinations of their governing bodies, and private-law statutes in commercial and civil matters will be applicable to them, but not administrative-law statutes as was previously the case. By virtue of the new legislation, the Boards of Directors are granted the power to determine the corporate structure that best suits them for the achievement of their purpose, optimizing human, financial and material resources, simplifying processes, and attending to transparency and to the best corporate and business practices at the national and international level. Among the most important functions of the Boards of Directors are: The central conduct and strategic direction of the business, economic and industrial activities;Approving, reviewing and, where appropriate, annually updating the Business Plan, which will be prepared and updated over a 5-year horizon and will contain at least the objectives, business lines and opportunities of CFE or PEMEX, the main commercial, financial and investment strategies, the large-scale and technological improvement projects, the priority acquisitions, a diagnosis of their operational and financial situation, as well as the results and performance indicators, and the main scenarios of strategic and commercial risks.Setting and adjusting the prices of the goods and services produced or provided by PEMEX and CFE and their subsidiary productive enterprises;Approving and issuing, upon proposal of the Chief Executive Officer, the Organic Bylaws of PEMEX and CFE;In the case of PEMEX, setting the general policies and bases for determining the profitability factor on the basis of which PEMEX and its subsidiary productive enterprises will participate in the tenders for the award of Contracts for the Exploration and Extraction of Hydrocarbons.Among the most important functions of the Chief Executive Officers are: Legally managing and representing the enterprise, with the broadest powers for acts of ownership, administration, litigation and collection, including those requiring special authorization, power of attorney or clause;Formulating and submitting for the Board of Directors' authorization the Business Plan and the annual operational and financial work program;Authorizing the extraordinary payments and donations, in cash or in kind, granted by PEMEX or CFE or their subsidiary productive enterprises, under the terms of the guidelines issued by the Board of Directors;Administering the enterprise's assets and disposing of its property in accordance with the provisions of both laws and with the policies and authorizations issued for that purpose by the Board of Directors.A new oversight and audit model is established, which will be defined by the Chief Executive Officer of PEMEX and CFE and will be independent of the Internal Control Bodies of public agencies, within which various bodies will be established, including an Audit Committee and both an external and an internal Auditor. Among the most important functions of these bodies are the following: Monitoring the management of PEMEX or CFE, their subsidiary productive enterprises and affiliated enterprises.Verifying and certifying the reasonableness and sufficiency of the accounting and financial information;Scheduling and requiring, at any time, the investigations and audits deemed necessary, except with respect to the actions of the Board of Directors.Establishing mechanisms that make it possible to anticipate, identify, manage, monitor and evaluate the risks that may arise from the development of the activities of PEMEX and CFE.A new scheme of acquisitions, leases, services and works is created for the State productive enterprises, under which the Public Sector Acquisitions, Leases and Services Law and the Public Works and Related Services Law will not be applicable to them, but rather the provisions established in the new laws.The Board of Directors of each will issue the provisions to which PEMEX and CFE and their subsidiary productive enterprises must be subject for the procedures of acquisitions, leases, contracting of services and execution of works with private parties that are established in Article 134 of the Constitution. In procedures other than open competition, persons that have the financial, technical, operational and other capacities necessary to fulfill the contracts, and that have experience in the activities or works to be carried out, will be invited.The minimum requirements that must be met by those interested in contracting with the State productive enterprises and their subsidiary productive enterprises, as well as the mechanisms for their evaluation, which must consider, among others:Technical and financial capacity for the execution of the project;Prior experience demonstrating the capacity to perform the contractual obligations; andThe status of their tax and labor obligations.The state dividend is defined, through which PEMEX and CFE will annually pay the State in accordance with the following: In the month of July of each year, the Board of Directors will send to the Ministry of Finance and Public Credit a report on:The financial situation of the State productive enterprise in question and of its subsidiary productive enterprises, and the plans, options and prospects for investment and financing.The Ministry of Finance and Public Credit, taking the foregoing into account, will determine the amount that they must deliver to the Federal Government as a state dividend.The contracts, agreements and other legal acts of acquisitions, leases and contracting of services and works entered into by CFE and PEMEX and their subsidiary agencies with private parties, that are in force upon the entry into force of both laws, will be respected under the agreed terms. Notwithstanding the foregoing, the productive enterprise and its former subsidiary agencies or the subsidiary productive enterprises may agree to their modification in order to adjust them to the provisions of the new laws and of the other applicable laws.The Federal Law of Parastatal Entities, the Public Sector Acquisitions, Leases and Services Law, and the Public Works and Related Services Law are amended in order to exclude their application with respect to PEMEX and CFE. Bill 4 (Regulatory Bodies and the National Agency of the Hydrocarbons Sector) BILL #4Law of Coordinated Regulatory Bodies in Energy Matters ("Regulatory Bodies Law")The National Hydrocarbons Commission ("CNH") and the Energy Regulatory Commission ("CRE") (together, the "Regulatory Bodies") are constituted as Coordinated Regulatory Bodies in Energy Matters; they will have technical, operational and management autonomy, will have legal personality and may dispose of the revenues derived from the fees and charges established in the Federal Duties Law or in the applicable laws for the services they provide in accordance with their powers and authorities. Their main functions are established as the following:Regulating, supervising, inspecting and sanctioning in the matters within their competence;Requiring information from the holders of permits, licenses and authorizations, as well as from related third parties;Conducting technical studies within the scope of their competence to improve the development of the energy and hydrocarbons sectors;Contracting consulting, advisory, study and research services required for the activities of the hydrocarbons sector and the energy sector.The Regulatory Bodies will be composed of a Governing Body made up of seven Commissioners, including its President, and an Executive Secretariat.The Regulatory Bodies must make public all of their decisions including, where applicable, dissenting votes, the minutes of the sessions, the administrative criteria on which they base their decisions, and must publish, at least quarterly, a Gazette for informational purposes. The Energy Sector Coordination Council (the "Council") is created as a mechanism to align the objectives and activities of the Regulatory Bodies in furtherance of compliance with energy policy.The Council will have various functions, among which the following stand out:Issuing recommendations on the annual programs of the Federal Executive in energy matters and on aspects of energy policy;Analyzing specific cases that may affect the development of the Federal Executive's public policies in energy matters and proposing coordination mechanisms among the Federal Executive, the relevant Ministries and the Regulatory Bodies.The general rules, acts or omissions of the Regulatory Bodies may be challenged only by means of an indirect amparo proceeding and will not be subject to suspension. Only in cases where they impose fines will these be enforced once the amparo proceeding that may be brought is resolved. When it comes to resolutions of such Regulatory Bodies issued from a procedure conducted in the form of a trial, only the resolution that puts an end to it may be challenged for violations committed during the procedure.The entry into contracts with Regulatory Bodies and the granting of authorizations and permits by them for the exploration and extraction of hydrocarbons, the laying of pipelines and electrical infrastructure, etc., will entail the declaration of public utility over the properties in which they are located and will be subject to the Federal Anti-Corruption Law in Public Procurement.The CRE and the CNH may dispose of the revenues derived from contributions and charges paid by private parties for the issuance of licenses, authorizations or permits, as a product of their services, through a public trust.In addition to the powers established in the Hydrocarbons Law, the CNH will be responsible for, among others, the following functions:Regulating and supervising surface reconnaissance and exploration, as well as the exploration and extraction of hydrocarbons, including their collection from the production points and up to their integration into the transport and storage system;Providing technical advice to the Ministry of Energy. In addition to the powers established in the Hydrocarbons Law and the Electric Power Industry Law, the CRE must regulate and promote the efficient development of the following activities:Those of transport, storage, distribution, compression, liquefaction and regasification, as well as the retail sale to the public of oil, natural gas, liquefied petroleum gas, oil products and petrochemicals;The transport by pipeline, storage, distribution and retail sale to the public of bioenergy products;The generation of electricity, the public services of electric transmission and distribution, the electric transmission and distribution that is not part of the public service, and the marketing of electricity, which consists of including the service of providing electric power by private parties and which will subject the market to new standards of competition.The rules and regulations issued by the CRE and the CNH prior to the entry into force of the Regulatory Bodies Law, that do not conflict with its provisions, will remain in force, without prejudice to their being adjusted, modified or replaced, under the terms of the provisions of this Law and the other applicable ones. The internal regulations of the CNH and the CRE will be issued within 180 calendar days following the entry into force of the Regulatory Bodies Law.The Organic Law of the Federal Public Administration is amended for the inclusion of the Regulatory Bodies and the granting of powers to them.Law of the National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector ("Agency Law")The National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector ("Agency") is created, which will regulate and supervise, in matters of industrial and operational safety and environmental protection, the facilities and activities in general and, specifically, those of dismantling and abandonment of hydrocarbons-sector facilities, as well as the integral control of the waste and polluting emissions of the hydrocarbons sector. The Agency Law will apply throughout the national territory and in the zones over which the Nation exercises sovereignty or jurisdiction. Thanks to the efforts of the Mexican Bar Association (Barra Mexicana Colegio de Abogados), as well as to the efforts made by the attorneys of Von Wobeser y Sierra in various political and legal forums, it was achieved that the scope of application of the Law in question likewise include the zones where the Nation exercises its sovereignty, and not only the national territory, which was the initial proposal. This is of great importance, since the Agency will also have jurisdiction over the exclusive economic zone, which is where a large part of the exploration and extraction of hydrocarbons in deep waters will be carried out.The activities of the hydrocarbons sector to which the Agency Law will be applicable are the following: Surface reconnaissance and exploration, and deep-water exploration and extraction of hydrocarbons; The treatment, refining, disposal, marketing, transport and storage of oil;The processing, compression, liquefaction, decompression and regasification, as well as the transport, storage, distribution and retail sale to the public of natural gas and oil products;The transport, storage, distribution and retail sale to the public of liquefied petroleum gas;The transport by pipeline and the storage that is linked to pipelines of petrochemicals produced from the processing of natural gas and the refining of oil.The functions of the Agency are defined, among which the following stand out: Regulating, supervising and sanctioning in matters of industrial and operational safety and environmental protection;Instituting, processing and resolving authorizations on environmental impact and risk matters; authorization to emit odors, gases or solid or liquid particles into the atmosphere; authorizations on hazardous waste matters in the hydrocarbons sector; authorization of proposals for the remediation of contaminated sites; authorizations on special-handling waste matters—notwithstanding that special-handling waste is under local jurisdiction, this Law provides that the Agency will grant permits in this matter; Instructing the adoption and observance of national and international technical standards in matters of industrial safety, which involves the prevention and containment of spills, as well as the physical and operational integrity of the facilities;Characterizing and classifying waste as hazardous and non-hazardous and managing hazardous waste generated in the hydrocarbons sector. It is worth mentioning that, although this Law does not mention the obligations regarding hazardous and non-hazardous waste for the holders of permits, authorizations or licenses, such matters are indeed regulated but only with respect to the authority. The figure of the Industrial Safety, Operational Safety and Environmental Protection Management Systems (hereinafter "Management Systems") is created, which must be installed by each enterprise of the hydrocarbons sector for the prevention, control and improvement of performance in industrial safety, operational safety and environmental protection.The enterprises of the hydrocarbons sector must have an area responsible for the implementation, evaluation and improvement of the Management System.The Ministry of the Environment and Natural Resources, the Ministry of Energy, the CNH and the CRE will continue to handle the matters within their competence in accordance with the previous legislation, until the entry into force of the Internal Regulations of the Agency, which will be within 270 days following the entry into force of the Agency Law. In matters relating to the obtaining of permits, authorizations or licenses that are being processed before the entry into force of the Internal Regulations of the Agency, the authority in charge of them will decree a suspension of the procedure and will refer them to the Agency within a term not exceeding fifteen business days in order to continue processing them under the guidelines established in the previous laws. Until the general administrative provisions and official Mexican standards issued by the Agency are enacted, the guidelines, technical and administrative provisions, agreements, criteria, as well as official Mexican standards, issued by the Ministry of the Environment and Natural Resources, the Ministry of Energy, the CNH and the CRE, will remain in force and will be mandatory for all regulated parties, provided that they do not conflict with the provisions of this Law, the Hydrocarbons Law, the Electric Power Industry Law and any other applicable law. Dear clients and friends, On August 6, 2014, Congress completed the approval of the main package of amendments to the secondary legislation required to implement the constitutional energy reform that entered into force on December 21, 2013. Only the promulgation and publication by the Federal Executive in the Official Gazette of the Federation remain pending. To read the full document, please click here. For additional information, please contact: Edmond Grieger, Partner+52 55 52 58 10 00, egrieger@vwys.com.mx Marco Tulio Venegas Cruz, Partner+52 55 52 58 10 00, mtvenegas@vwys.com.mx Luis Burgueño Colín, Partner+52 55 52 58 10 00, lburgueno@vwys.com.mx Fernando Moreno Gómez de Parada, Partner (Tax Practice)+52 55 52 58 10 00, fmoreno@vwys.com.mx On August 6, 2014, Congress completed the approval of the main package of amendments to the secondary legislation deriving from the constitutional energy reform that entered into force on December 21, 2013. Only the promulgation and publication by the Federal Executive in the Official Gazette of the Federation remain pending.The purpose of this reform is to regulate the Hydrocarbons sector, the Electric Power Industry and Geothermal Energy, as well as the new legal regime of Pemex and CFE, opening a new chapter in the country's energy sector. Thus, the modern history of the field moved from a nationalism with rigid government control over energy resources by the Mexican government (which over the years was gradually blurred by successive administrations through secondary administrative regulations) to a scheme very close to a free market that will apparently be controlled at the discretion of the State's regulatory bodies empowered to do so. With this structural energy reform, Mexico opens its doors to domestic and foreign private investment for the purpose of obtaining resources to boost the exploitation of its oil and conventional and non-conventional gas resources, as well as to promote the generation, marketing, transmission and distribution of electric power from various sources. The reforms will give rise to considerable controversy, above all because of the broad discretion granted to the new regulatory agents in implementing the economic, tax and environmental-risk aspects of the contracts and, likewise, with respect to the potential occupation of lands belonging to vulnerable social sectors for the execution of the new energy projects. We will see whether the economic success and social welfare budgeted for and publicized by those responsible for this reform ultimately justifies the shift in policy and legislation undertaken by the Mexican government.On the other hand, it is important to mention that, contrary to the trend and primacy given to the development of renewable energy in countries with more developed economies, the Mexican Congress has unfortunately temporarily set aside the discussion and approval of the corresponding reforms to specifically regulate and promote energy from renewable sources. As a result, for the time being the spirit of last December's Constitutional reform—consisting of promoting sustainability and the generation of energy from clean sources—was not observed. Approval of these reforms should be expected in the last quarter of this year.Likewise, one of the last relevant bills approved by Congress was the tax bill that contemplates the creation of the Hydrocarbons Income Law and the Mexican Petroleum Fund Law, in addition to various reforms and amendments in fiscal matters applicable to the energy sector. Specific comments on the scope and implications of this bill will be distributed shortly by our partner in charge of the firm's tax practice. Finally, a bill relating to the rescue of the substantial labor liabilities of PEMEX and CFE was also approved. Below are the observations and comments regarding each of the bills that make up this package of amendments to the secondary legislation of the energy sector BILL #1 Hydrocarbons Law ("HL or Law") The administrative act known as an "Assignment", provided for in Article 27 of the Constitution, is defined; through it the Federal Executive will grant exclusively to an Assignee (PEMEX or any other State productive enterprise), for a fixed period, the right to carry out hydrocarbon exploration and extraction activities in a specific area with a surface and depth to be determined by the Ministry of Energy ("SENER").In addition to Assignments, contracts for exploration and extraction (the "Contracts"), also provided for in Article 27 of the Constitution, are regulated; these will be entered into by the National Hydrocarbons Commission ("CNH") with PEMEX, any State productive enterprise, or a Mexican legal entity, whether individually, in a consortium or in a joint venture, for the purpose of carrying out hydrocarbon exploration and extraction in an area determined by SENER (the "Contractual Area") and for a fixed period. The types of Contracts are confirmed to be (i) services, (ii) shared profits, (iii) shared production, or (iv) license. The Law does not provide further explanation of the various types of Contracts; it only provides that SENER will establish the contracting model for each contractual area put out to tender. Specifically, this Law does not allow one to distinguish the conceptual difference, if any, between a license and a concession, the latter being expressly prohibited for the hydrocarbons industry under Article 27 of the Constitution. We estimate that the different types of Contracts will be regulated in greater detail in the Regulations to the Law, which must be issued within 180 calendar days following the entry into force of the Law. Contracts will be awarded through a public tender, the procedure for which is set out in the Law itself. Those interested in submitting bids must meet various technical, financial, execution and experience requirements to be established by SENER with the favorable opinion of PEMEX or the State productive enterprise. The CNH will have the power to administratively rescind the Contracts for serious causes, such as the suspension of activities for more than 180 continuous calendar days without justified cause, the Contractor's assignment of the operation or of the rights conferred under the Contract without CNH authorization, the submission on more than one occasion of false or incomplete reports, etc. The number of grounds for rescission is significantly lower than those provided for the rescission of service contracts entered into with PEMEX under the legislation applicable thereto. Among others, the failure to deliver guarantees and the loss of the technical, financial or operational capabilities that had been demonstrated for the award of the contract, etc., are eliminated. In the event of rescission of the Contracts, a settlement will be carried out. It is established that commercial arbitration will be the mechanism for resolving disputes relating to the Contracts, except in cases of administrative rescission. This unfortunately gives rise to the potential for parallel litigation that will hinder the swift and efficient resolution of matters.Both the Contracts and the Assignments must contain a clause referring to the minimum percentage of national content. The Ministry of Economy will determine the minimum percentage of national content and will publish it no later than within 180 calendar days following the entry into force of the Law.It is also provided that, once granted, Assignments may be migrated to Contracts. In such cases, PEMEX and the State productive enterprises may enter into alliances or associations with Mexican legal entities through public tenders. The associations or alliances will be governed by common law. The CNH must previously authorize the entry into alliances or associations in which "the corporate and management control of the Contractor is transferred". In cases where the Contractor undergoes a change in the structure of its capital stock that does not entail a change in its corporate or management control, it need only notify the CNH within 30 days following such change. If the legal entities are listed on the Mexican Stock Exchange, they will follow the provisions of the Securities Market Law for such cases.The entry into public-private partnership contracts with private parties for exploration and extraction activities is prohibited. The difference between Assignments and Contracts is that Assignments are granted by SENER to PEMEX or CFE and are granted only exceptionally, whereas the CNH enters into the Contracts with a Mexican legal entity, PEMEX or CFE. Works, services, supply or operation contracts, integrated exploration and production contracts, and financed public works contracts entered into with PEMEX prior to the entry into force of the HL will remain in force under the terms on which they were entered into and will not undergo modifications. The parties to exploration and production contracts and to financed public works contracts may request their early termination without any penalty and their migration to an Assignment or Contract without the need to exhaust the tender procedure. It is established that the CNH may grant authorizations for Surface Reconnaissance and Exploration to carry out prospecting activities regarding the possible existence of hydrocarbons in areas not subject to an Assignment or a Contract. There is a positive administrative silence rule (afirmativa ficta) in the event that the CNH does not issue a response within the term established by the Regulations to the HL. Holding such authorization does not imply any priority in obtaining the award of a Contract.SENER will establish Safeguard Zones in which exploration and extraction activity will be prohibited, such as, for example, Protected Natural Areas.PEMEX, any other State productive enterprise, parastatal entities or private parties may hold permits for the treatment and refining of oil, the processing of natural gas, and the export and import of hydrocarbons and oil products, issued by SENER, or permits for the transport, storage, distribution, compression, liquefaction, decompression, regasification and retail sale to the public of hydrocarbons, oil products or petrochemicals, issued by the Energy Regulatory Commission ("CRE"). Those who currently carry out the aforementioned activities must apply for their permit no later than June 30, 2015 before SENER and December 31, 2015 before the CRE.Applications for authorizations and permits filed prior to the entry into force of the Law will be processed in accordance with the legislation in force at that time. In general, the sanctions provided for in the HL are considerable (fines ranging from 7,500 to 7,500,000 times the amount of the minimum wage). One of the most controversial topics has been the elimination of expropriation and its replacement by a mechanism of temporary use and occupation. The temporary occupation does not establish a transfer of ownership; a transfer of possession is provided for. However, the duration of this temporary occupation is not provided for, which will evidently create legal uncertainty for those owners subject to this temporary occupation and will give rise to litigation on this point. The possibility is established for the authority to negotiate with the owners or holders of the lands, property or rights "necessary" for carrying out Exploration and Extraction activities. At first, it would appear that the property holder is not obligated to accept the encumbrance; however, if no agreement is reached within 180 calendar days following the start of negotiations, the Assignee or Contractor may seek, before a District Court or a Unitary Agrarian Tribunal, as applicable, the constitution of a "legal hydrocarbons easement". If it is not achieved through this route, the legal hydrocarbons easement will be decreed through administrative channels. The term of the easement may not exceed that of the Contract or the Assignment.The consideration for the temporary occupation will be negotiated between the Assignees/Contractors and the property holders, and in addition the latter will be granted a percentage of between 0.5% and 2% (3% for natural gas) of the revenues they obtain by virtue of their Contracts or Assignments.Only Contracts for the Exploration and Extraction of Natural Gas contained in and produced from coal seams may be awarded directly to the current holders of mining concessions, without a tender. To this end, the concessionaires must request the award within 90 calendar days following the entry into force of the Law and demonstrate that they have the economic solvency and the technical, administrative and financial capacity to carry out the aforementioned activity. On the other hand, for the activity of exploring and extracting natural gas associated with coal that is carried out without exploiting the coal, as well as for activity relating to hydrocarbons that exist in the area corresponding to a mining concession and that are not associated with coal, a public tender will indeed be required, for which it is not established that the mining concessionaire will have preference. In the event that, once the tender has concluded, the rights of the mining concessionaire are affected, 90 days are granted for the Assignee or Contractor and the mining concessionaire to reach an agreement on the coexistence of both activities in the same area and on the payment of consideration to the mining concessionaire. If they do not reach an agreement, the CNH will determine the consideration, which will be between 0.5% and 2% of the profit of the Assignee or Contractor.The Eighth Transitory Article of the Law provides that from its entry into force and until December 31, 2017, the CNH may directly award to PEMEX or CFE a contract for the marketing of hydrocarbons; however, as of January 1, 2018, such services will be contracted through a public tender. Permits granted prior to the HL relating to the hydrocarbons industry will remain in force under their terms, while permits for the recovery and use of natural gas associated with coal deposits will cease to have effect 180 calendar days following the entry into force of the Law.As regards the price of gasoline and diesel, from January 1, 2015 to December 31, 2017, price regulation will be established by the Federal Executive by agreement, taking into account developments in the international market. As of January 1, 2018, prices will be determined "under market conditions". Permits to import gasoline and diesel will be granted exclusively to PEMEX until December 31, 2016. As of January 1, 2017, they may be granted to any interested party if market conditions so permit. Permits for the retail sale of gasoline and diesel to the public will be granted by the CRE as of January 1, 2016.Franchise contracts with PEMEX cease to be mandatory and PEMEX may no longer rescind them unilaterally. The mandatory participation of Petróleos Mexicanos is provided for in those contractual areas where there is the possibility of finding cross-border deposits, understood as those deposits located within national jurisdiction that have physical continuity outside it, or those shared with other countries pursuant to the international treaties to which Mexico is a party.The decentralized public agency known as the National Natural Gas Control Center (CENAGAS) is created, whose purpose will be to guarantee the continuity and security of the gas supply within national territory.Foreign Investment LawForeign investment is permitted in specific fields of the hydrocarbons industry, such as basic petrochemicals, retail marketing of gasoline and distribution of liquefied gas, and the requirement to obtain an authorization from the National Foreign Investment Commission to hold an interest greater than 49% in activities involving the construction of pipelines for the transportation of oil and its derivatives, as well as the drilling of oil and gas wells, is eliminated; andMining Law A review by SENER prior to the granting of mining concessions is contemplated, so that SENER may determine that there is no possibility of hydrocarbon exploration and extraction and, therefore, that this takes precedence over the possible mining concession.Public-Private Partnerships LawThe implementation of public-private partnerships is permitted in the activities of oil refining and natural gas processing, as well as in the transport, storage and distribution of hydrocarbons, liquefied petroleum gas, oil products and petrochemicals, or the generation of electric power, within the national energy industry. BILL #2 Electric Power Industry Law Private participation is permitted in the sector of electricity generation and marketing.The Federal Electricity Commission ("CFE") is restructured as a State productive enterprise. The Ministry of Energy ("SENER") will coordinate the restructuring of the electric power industry, will define the timeframes of the restructuring period and will establish the policies and actions required to conduct the processes for its implementation.The decentralized public agency known as the National Energy Control Center ("CENACE") is created/restructured; it will be in charge of operating the National Electric System and will determine the elements of the National Transmission Grid and the General Distribution Networks and the operations thereof that correspond to the Wholesale Electricity Market.A scheme of obligations for the acquisition of Clean Energy Certificates is created, which basically consists of a title issued by the Energy Regulatory Commission ("CRE") certifying the production of a given amount of electric power through Clean Energy. In this regard, it is still pending for SENER to issue the requirements for the acquisition of these Certificates, as well as the criteria for their granting in favor of the different types of electricity generators using clean sources. The CRE will be the authority in charge of granting the Clean Energy Certificates and will subsequently issue the regulations to verify compliance with the obligations related thereto.A new Wholesale Electricity Market is defined, which will be operated by CENACE, in which Market Participants may carry out transactions relating to electric power, such as purchase and sale, ancillary services, capacity or products that guarantee resources to satisfy electricity demand, import and export of these products, financial transmission rights, Clean Energy Certificates and other related products.Market Participants are those persons who enter into the respective contract with CENACE in the capacity of Generator, Marketer, Supplier, Non-Supplier Marketer or Qualified User. It is established in the transitory provisions of the Law that load centers included in the Interconnection Contracts entered into as of the date of entry into force of the Law may be included in the registry of Qualified Users. During the first year the Law is in force, load centers reporting a demand equal to or greater than 3 Megawatts may be included, with this volume decreasing over the following two years until reaching a floor of 1 Megawatt.The CRE is granted the power to authorize the operating provisions of the electricity market, the model contracts entered into by CENACE with Market Participants, the agreements between CENACE and carriers and distributors, and the model interconnection and purchase-and-sale contracts with exempt generators and purchase and sale by basic supply users.The concept of Clean Energy is included, defined as those energy sources and electricity generation processes whose emissions or waste, when any, do not exceed the thresholds permitted for that purpose. Among them, various sources are mentioned, such as solar, wind, bioenergy, ocean, geothermal, and those derived from the use of methane and other gases at waste disposal sites, livestock farms and wastewater treatment plants. Likewise, nuclear energy (nucleoelectric) is considered a clean source, which is somewhat out of context for clean energy, given that the waste generated by this technology is the most dangerous of contaminants and takes thousands of years to degrade.It is established that the issuance of methodologies for determining the calculation and adjustment of the tariffs for the provision of the basic supply, transmission, distribution and CENACE operation services will be the responsibility of the CRE.The procedure, requirements and formalities are established for the surface occupation or encumbrance of real estate, plots, lands, property or rights necessary for the development of the activities of the electric power industry.The transition from generalized subsidy schemes to targeted subsidy schemes is established.Permits granted under the law being repealed will be respected. It is provided in the transitory articles that permits for self-supply, cogeneration, small-scale production, independent production, import, export and continuous own use will retain their original validity, and their holders may carry out the activities under the terms authorized by such permits. Likewise, the option is provided for the holders of these permits to exchange them for single generation permits, if they so wish, in order to carry out their activities under the new Electric Power Industry Law.The terms of the Legacy Interconnection Contracts will be respected, until the conclusion of their validity, including the recognition of self-supplied capacity, stamp wheeling (porteo estampilla), energy banking, and the other conditions granted for renewable energy generation and cogeneration projects.Applications for self-supply, cogeneration, independent production, small-scale production, import or export permits filed prior to the entry into force of the new Electric Power Industry Law will be resolved on the basis of the former Public Electric Power Service Law. Geothermal Energy LawThe mechanisms for the exploitation and exploration of geothermal resources for the use of the subsoil's thermal energy are established. The Concession is provided for as the legal act by which SENER will confer upon a private party, CFE or the State productive enterprises the rights to exploit the geothermal resources of a given area for the purpose of generating electric power or for various uses.Permits for the exploration of areas with geothermal potential will have a maximum extension of 150 km2, a validity of 3 years, and may be extended once, which grants considerable latitude for carrying out exploratory activities in this sector. The permits do not grant in rem rights to their holders and will generate a temporary right for exploration.The activities regulated by this Law are of public utility, taking precedence over any other use or exploitation of the subsoil of the lands, unless it involves uses or exploitations of the hydrocarbons industry. It is defined that SENER will be the body in charge of regulating and promoting the exploration and exploitation of geothermal areas, as well as the rational use and preservation of the nation's geothermal deposits. It is determined that SENER will be in charge of the Geothermal Registry, which will contain all registration aspects with respect to the concessions to be granted to private parties for the exploitation of geothermal deposits.The Round Zero mechanism is established, by virtue of which CFE may submit to SENER's consideration the geothermal deposits in which it has an interest in continuing to carry out exploration or exploitation work. Reforms and additions to the National Waters LawThe spheres of competence between the National Water Commission ("CONAGUA") and SENER are defined in order to ensure close coordination for the purpose of promoting the integrity of geothermal deposits during the exploration stage and maintaining the sustainability of the resource.The obligation to obtain a permit issued by CONAGUA for carrying out exploratory works or wells of geothermal deposits is provided for.A Concession Title issued by CONAGUA and, where applicable, a discharge permit, will be required for the exploitation, use, utilization and return of subsoil waters contained in hydrothermal geothermal deposits, as well as an authorization on environmental impact matters. Bill 3 (PEMEX and CFE Law) BILL #3Petróleos Mexicanos Law and Federal Electricity Commission Law1 The Federal Electricity Commission ("CFE") and Petróleos Mexicanos ("PEMEX") are defined as State productive enterprises, which implies that both will be the exclusive property of the Federal Government, and the latter will move from being an administrator of their resources to exercising the following ownership functions:Defining their purpose and the activities they will carry out;Appointing the members of the Board of Directors and setting their compensation;Appointing their external auditor;Defining the dividend they must deliver to the Federal Government, based on their financial results;Evaluating their performance and that of their Boards of Directors; andPeriodically receiving reports on the progress of each enterprise.Both CFE and PEMEX will have their own legal personality and assets and will enjoy technical, operational and management autonomy. CFE's purpose will be to provide the public service of transmission and distribution of electric power, for the account and on behalf of the Mexican State, while PEMEX will have the exploration and extraction of oil and solid, liquid or gaseous hydrogen carbides, as well as their collection, sale and marketing.Both PEMEX and CFE will be directed and managed by a Board of Directors and a Chief Executive Officer. The Chief Executive Officer will be appointed by the Federal Executive. The Board of Directors will be composed of ten directors, being the head of the Ministry of Energy (who will preside over it and will have a casting vote), the head of the Ministry of Finance and Public Credit, three Federal Government directors appointed by the Federal Executive, and five independent directors for PEMEX and four for CFE. The latter will be appointed by the Federal Executive and ratified by the Senate of the Republic, will exercise their functions on a part-time basis and will not have the status of public servants. Likewise, the Board may have the Audit, Human Resources and Compensation, Strategy and Investments, and Acquisitions, Leases, Works and Services Committees, which will assist it in the performance of its functions.The figure of subsidiary productive enterprises is created, which will have their own legal personality and assets. Those related to PEMEX will carry out hydrocarbon exploration and extraction activities, while those related to CFE will carry out electric power transmission and distribution activities. In addition, in both cases, they will carry out the activities determined by the Boards of Directors of CFE and PEMEX.The figure of affiliated productive enterprises is created, which will be those in which PEMEX or CFE participate, directly or indirectly, in more than 50% of the capital stock. They may be Mexican or foreign and their legal nature will conform to the private law of the place of their incorporation. They will not be considered parastatal entities.The creation, merger or spin-off of subsidiary and affiliated productive enterprises in which PEMEX or CFE participate directly will be authorized by the Board of Directors upon proposal of its Chief Executive Officer and in accordance with the rules issued by the Board itself.Both PEMEX and CFE will be governed on a supplementary basis by principles of private law and by the determinations of their governing bodies, and private-law statutes in commercial and civil matters will be applicable to them, but not administrative-law statutes as was previously the case. By virtue of the new legislation, the Boards of Directors are granted the power to determine the corporate structure that best suits them for the achievement of their purpose, optimizing human, financial and material resources, simplifying processes, and attending to transparency and to the best corporate and business practices at the national and international level. Among the most important functions of the Boards of Directors are: The central conduct and strategic direction of the business, economic and industrial activities;Approving, reviewing and, where appropriate, annually updating the Business Plan, which will be prepared and updated over a 5-year horizon and will contain at least the objectives, business lines and opportunities of CFE or PEMEX, the main commercial, financial and investment strategies, the large-scale and technological improvement projects, the priority acquisitions, a diagnosis of their operational and financial situation, as well as the results and performance indicators, and the main scenarios of strategic and commercial risks.Setting and adjusting the prices of the goods and services produced or provided by PEMEX and CFE and their subsidiary productive enterprises;Approving and issuing, upon proposal of the Chief Executive Officer, the Organic Bylaws of PEMEX and CFE;In the case of PEMEX, setting the general policies and bases for determining the profitability factor on the basis of which PEMEX and its subsidiary productive enterprises will participate in the tenders for the award of Contracts for the Exploration and Extraction of Hydrocarbons.Among the most important functions of the Chief Executive Officers are: Legally managing and representing the enterprise, with the broadest powers for acts of ownership, administration, litigation and collection, including those requiring special authorization, power of attorney or clause;Formulating and submitting for the Board of Directors' authorization the Business Plan and the annual operational and financial work program;Authorizing the extraordinary payments and donations, in cash or in kind, granted by PEMEX or CFE or their subsidiary productive enterprises, under the terms of the guidelines issued by the Board of Directors;Administering the enterprise's assets and disposing of its property in accordance with the provisions of both laws and with the policies and authorizations issued for that purpose by the Board of Directors.A new oversight and audit model is established, which will be defined by the Chief Executive Officer of PEMEX and CFE and will be independent of the Internal Control Bodies of public agencies, within which various bodies will be established, including an Audit Committee and both an external and an internal Auditor. Among the most important functions of these bodies are the following: Monitoring the management of PEMEX or CFE, their subsidiary productive enterprises and affiliated enterprises.Verifying and certifying the reasonableness and sufficiency of the accounting and financial information;Scheduling and requiring, at any time, the investigations and audits deemed necessary, except with respect to the actions of the Board of Directors.Establishing mechanisms that make it possible to anticipate, identify, manage, monitor and evaluate the risks that may arise from the development of the activities of PEMEX and CFE.A new scheme of acquisitions, leases, services and works is created for the State productive enterprises, under which the Public Sector Acquisitions, Leases and Services Law and the Public Works and Related Services Law will not be applicable to them, but rather the provisions established in the new laws.The Board of Directors of each will issue the provisions to which PEMEX and CFE and their subsidiary productive enterprises must be subject for the procedures of acquisitions, leases, contracting of services and execution of works with private parties that are established in Article 134 of the Constitution. In procedures other than open competition, persons that have the financial, technical, operational and other capacities necessary to fulfill the contracts, and that have experience in the activities or works to be carried out, will be invited.The minimum requirements that must be met by those interested in contracting with the State productive enterprises and their subsidiary productive enterprises, as well as the mechanisms for their evaluation, which must consider, among others:Technical and financial capacity for the execution of the project;Prior experience demonstrating the capacity to perform the contractual obligations; andThe status of their tax and labor obligations.The state dividend is defined, through which PEMEX and CFE will annually pay the State in accordance with the following: In the month of July of each year, the Board of Directors will send to the Ministry of Finance and Public Credit a report on:The financial situation of the State productive enterprise in question and of its subsidiary productive enterprises, and the plans, options and prospects for investment and financing.The Ministry of Finance and Public Credit, taking the foregoing into account, will determine the amount that they must deliver to the Federal Government as a state dividend.The contracts, agreements and other legal acts of acquisitions, leases and contracting of services and works entered into by CFE and PEMEX and their subsidiary agencies with private parties, that are in force upon the entry into force of both laws, will be respected under the agreed terms. Notwithstanding the foregoing, the productive enterprise and its former subsidiary agencies or the subsidiary productive enterprises may agree to their modification in order to adjust them to the provisions of the new laws and of the other applicable laws.The Federal Law of Parastatal Entities, the Public Sector Acquisitions, Leases and Services Law, and the Public Works and Related Services Law are amended in order to exclude their application with respect to PEMEX and CFE. Bill 4 (Regulatory Bodies and the National Agency of the Hydrocarbons Sector) BILL #4Law of Coordinated Regulatory Bodies in Energy Matters ("Regulatory Bodies Law")The National Hydrocarbons Commission ("CNH") and the Energy Regulatory Commission ("CRE") (together, the "Regulatory Bodies") are constituted as Coordinated Regulatory Bodies in Energy Matters; they will have technical, operational and management autonomy, will have legal personality and may dispose of the revenues derived from the fees and charges established in the Federal Duties Law or in the applicable laws for the services they provide in accordance with their powers and authorities. Their main functions are established as the following:Regulating, supervising, inspecting and sanctioning in the matters within their competence;Requiring information from the holders of permits, licenses and authorizations, as well as from related third parties;Conducting technical studies within the scope of their competence to improve the development of the energy and hydrocarbons sectors;Contracting consulting, advisory, study and research services required for the activities of the hydrocarbons sector and the energy sector.The Regulatory Bodies will be composed of a Governing Body made up of seven Commissioners, including its President, and an Executive Secretariat.The Regulatory Bodies must make public all of their decisions including, where applicable, dissenting votes, the minutes of the sessions, the administrative criteria on which they base their decisions, and must publish, at least quarterly, a Gazette for informational purposes. The Energy Sector Coordination Council (the "Council") is created as a mechanism to align the objectives and activities of the Regulatory Bodies in furtherance of compliance with energy policy.The Council will have various functions, among which the following stand out:Issuing recommendations on the annual programs of the Federal Executive in energy matters and on aspects of energy policy;Analyzing specific cases that may affect the development of the Federal Executive's public policies in energy matters and proposing coordination mechanisms among the Federal Executive, the relevant Ministries and the Regulatory Bodies.The general rules, acts or omissions of the Regulatory Bodies may be challenged only by means of an indirect amparo proceeding and will not be subject to suspension. Only in cases where they impose fines will these be enforced once the amparo proceeding that may be brought is resolved. When it comes to resolutions of such Regulatory Bodies issued from a procedure conducted in the form of a trial, only the resolution that puts an end to it may be challenged for violations committed during the procedure.The entry into contracts with Regulatory Bodies and the granting of authorizations and permits by them for the exploration and extraction of hydrocarbons, the laying of pipelines and electrical infrastructure, etc., will entail the declaration of public utility over the properties in which they are located and will be subject to the Federal Anti-Corruption Law in Public Procurement.The CRE and the CNH may dispose of the revenues derived from contributions and charges paid by private parties for the issuance of licenses, authorizations or permits, as a product of their services, through a public trust.In addition to the powers established in the Hydrocarbons Law, the CNH will be responsible for, among others, the following functions:Regulating and supervising surface reconnaissance and exploration, as well as the exploration and extraction of hydrocarbons, including their collection from the production points and up to their integration into the transport and storage system;Providing technical advice to the Ministry of Energy. In addition to the powers established in the Hydrocarbons Law and the Electric Power Industry Law, the CRE must regulate and promote the efficient development of the following activities:Those of transport, storage, distribution, compression, liquefaction and regasification, as well as the retail sale to the public of oil, natural gas, liquefied petroleum gas, oil products and petrochemicals;The transport by pipeline, storage, distribution and retail sale to the public of bioenergy products;The generation of electricity, the public services of electric transmission and distribution, the electric transmission and distribution that is not part of the public service, and the marketing of electricity, which consists of including the service of providing electric power by private parties and which will subject the market to new standards of competition.The rules and regulations issued by the CRE and the CNH prior to the entry into force of the Regulatory Bodies Law, that do not conflict with its provisions, will remain in force, without prejudice to their being adjusted, modified or replaced, under the terms of the provisions of this Law and the other applicable ones. The internal regulations of the CNH and the CRE will be issued within 180 calendar days following the entry into force of the Regulatory Bodies Law.The Organic Law of the Federal Public Administration is amended for the inclusion of the Regulatory Bodies and the granting of powers to them.Law of the National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector ("Agency Law")The National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector ("Agency") is created, which will regulate and supervise, in matters of industrial and operational safety and environmental protection, the facilities and activities in general and, specifically, those of dismantling and abandonment of hydrocarbons-sector facilities, as well as the integral control of the waste and polluting emissions of the hydrocarbons sector. The Agency Law will apply throughout the national territory and in the zones over which the Nation exercises sovereignty or jurisdiction. Thanks to the efforts of the Mexican Bar Association (Barra Mexicana Colegio de Abogados), as well as to the efforts made by the attorneys of Von Wobeser y Sierra in various political and legal forums, it was achieved that the scope of application of the Law in question likewise include the zones where the Nation exercises its sovereignty, and not only the national territory, which was the initial proposal. This is of great importance, since the Agency will also have jurisdiction over the exclusive economic zone, which is where a large part of the exploration and extraction of hydrocarbons in deep waters will be carried out.The activities of the hydrocarbons sector to which the Agency Law will be applicable are the following: Surface reconnaissance and exploration, and deep-water exploration and extraction of hydrocarbons; The treatment, refining, disposal, marketing, transport and storage of oil;The processing, compression, liquefaction, decompression and regasification, as well as the transport, storage, distribution and retail sale to the public of natural gas and oil products;The transport, storage, distribution and retail sale to the public of liquefied petroleum gas;The transport by pipeline and the storage that is linked to pipelines of petrochemicals produced from the processing of natural gas and the refining of oil.The functions of the Agency are defined, among which the following stand out: Regulating, supervising and sanctioning in matters of industrial and operational safety and environmental protection;Instituting, processing and resolving authorizations on environmental impact and risk matters; authorization to emit odors, gases or solid or liquid particles into the atmosphere; authorizations on hazardous waste matters in the hydrocarbons sector; authorization of proposals for the remediation of contaminated sites; authorizations on special-handling waste matters—notwithstanding that special-handling waste is under local jurisdiction, this Law provides that the Agency will grant permits in this matter; Instructing the adoption and observance of national and international technical standards in matters of industrial safety, which involves the prevention and containment of spills, as well as the physical and operational integrity of the facilities;Characterizing and classifying waste as hazardous and non-hazardous and managing hazardous waste generated in the hydrocarbons sector. It is worth mentioning that, although this Law does not mention the obligations regarding hazardous and non-hazardous waste for the holders of permits, authorizations or licenses, such matters are indeed regulated but only with respect to the authority. The figure of the Industrial Safety, Operational Safety and Environmental Protection Management Systems (hereinafter "Management Systems") is created, which must be installed by each enterprise of the hydrocarbons sector for the prevention, control and improvement of performance in industrial safety, operational safety and environmental protection.The enterprises of the hydrocarbons sector must have an area responsible for the implementation, evaluation and improvement of the Management System.The Ministry of the Environment and Natural Resources, the Ministry of Energy, the CNH and the CRE will continue to handle the matters within their competence in accordance with the previous legislation, until the entry into force of the Internal Regulations of the Agency, which will be within 270 days following the entry into force of the Agency Law. In matters relating to the obtaining of permits, authorizations or licenses that are being processed before the entry into force of the Internal Regulations of the Agency, the authority in charge of them will decree a suspension of the procedure and will refer them to the Agency within a term not exceeding fifteen business days in order to continue processing them under the guidelines established in the previous laws. Until the general administrative provisions and official Mexican standards issued by the Agency are enacted, the guidelines, technical and administrative provisions, agreements, criteria, as well as official Mexican standards, issued by the Ministry of the Environment and Natural Resources, the Ministry of Energy, the CNH and the CRE, will remain in force and will be mandatory for all regulated parties, provided that they do not conflict with the provisions of this Law, the Hydrocarbons Law, the Electric Power Industry Law and any other applicable law.
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