Mexico urged to adopt OATTs

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Tuesday, November 14, 2017

Mexico is moving in the right direction with its energy reform and wholesale power market but the country must take more steps to eliminate the seams between the US and Mexican markets, according to a panelist at an energy conference.

Kenneth Irvin, a partner at US law firm Sidley Austin, said applying open access transmission tariffs (OATTs) in Mexico, which are applied in the US and Canada, would enable Mexican entities to obtain the authorization needed to participate in the US wholesale power market, ensuring non-discriminatory access.

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He also highlighted the need for standardized contracts in Mexico's wholesale power market as a means to eliminate what he called "gap risk" and to overcome dissimilar standard definitions and technology.

"Too many bespoke individualized contracts signed by an energy firm are inefficient and ineffective, because they often imply too much time wasted negotiating agreements, as each contract is negotiated differently," Irvin said.

Also read: Mexico's wholesale power market makes slow progress

A harmonization of contracts would benefit Mexican companies that are new to the market by setting up a contractual framework that eases cross-border transactions and smoothens the relationship between companies in both countries, he added.

He said that establishing industry standards for energy trading would make the interaction between energy market participants simpler.

"Another reason for standardization is because compliance matters and because it paves the way for free competition."

As an example of a move toward greater US-Mexico electric power market integration, Irvin pointed to the fact that the North American Energy Standards Board (AESB) has drawn up a contract addendum for the Mexican market, a move that has been welcomed by Mexico's energy regulator CRE.

Using industry standard contracts facilitates the operation of the market, and by drawing up such an addendum for Mexico, the NAESB is providing a bridge to deeper US-Mexico gas market integration, he said.

"Eliminating seams is essential to the success of Mexico's energy reforms, and which can be eliminated by standardized definitions and terminology, for transmission and contract rights."

Irvin also highlighted credit risk and settlement risk as two challenges that participants in Mexico's wholesale power market must overcome, the former being the risk posed by a counterparty being unable to pay amounts stipulated in a contract, and the latter the risk that the seller of energy will not be paid in a timely manner under the terms of a power-purchase agreement.