Two major transmission line projects under tender this year in Mexico are attracting substantial interest from potential bidders.
Both projects are based on a new model that allows private companies to enter into services agreements or public-private partnerships with public entities to finance, construct and operate transmission lines. These are activities that, prior to the 2013 energy reforms, were controlled by the Mexican government and the state-owned utility, Comisión Federal de Electricidad or CFE.
The first project is being tendered by the Mexican Ministry of Energy, known as SENER, and will interconnect Mexico's national interconnected system with Baja California's state grid, which is not connected to the national grid and is only connected to California's state grid. The project is structured under a design, finance, build, operate and transfer (DBFOT) model and involves a DC-transmission system with an estimated length of 1,400 circuit kilometers at a voltage level of ± 500 kilovolts and a total transmission capacity of 1,500 megawatts. The estimated investment for this project is approximately US$1.1 billion.
The second project is being tendered by CFE Transmisión, a subsidiary of CFE and the entity responsible for power transmission service in Mexico. This project is intended to transport the power generated by a significant number of renewable power plants in the Istmo de Tehuantepec region of southeast Mexico to Mexico's central, industrialized region. It includes the design, procurement, construction, operation and maintenance of a ± 500 kilovolt DC-transmission line of 1,200 circuit kilometers from Ixtepec, Oaxaca to Yautepec, Morelos, with a transmission capacity of 3,000 megawatts. This project also includes some reinforcement works in alternate current or AC. The direct current or DC portion of the works is structured on a build, operate and transfer (BOT) model, while the structure for the AC portion will follow a build, lease and transfer (BLT) model. The estimated investment for this project, including both AC and DC portions, is approximately US$1.6 billion.
Each project requires setting up an administration trust that will hold all relevant rights, interests and assets needed for the project. SENER and CFE Transmisión will be the beneficiaries of the trusts.
Participants in SENER’s tender must grant a bid bond of approximately US$25 million, while CFE’s tender requires a bid bond of approximately US$10 million.
A key difference between the two projects is in the procurement of the rights of way for the transmission lines. CFE has a defined transmission line route and has acquired and negotiated a large portion of the private rights of way required for the CFE project. As such, the winning bidder will be obligated to reimburse CFE for the amounts paid to acquire them. In addition, the winning bidder must acquire the pending rights of way as well as any additional rights of way required as a consequence of any modifications to the project and its route. While site visits are being conducted by interested parties with CFE, it remains undisclosed whether the remaining portion of the rights of way to be acquired by the auction winner pose any particular concerns or difficulties, making the risk hard to assess fully prior to bid submission.
On the other hand, the transmission line route in SENER’s tender will be defined by the bid winner, who will be obligated to secure all the project rights of way. Although there is a commitment from SENER to assist the winner in securing the necessary rights of way, ultimately it will be the winning bidder's responsibility. Construction activities will only begin once 100% of the rights of way have been secured.
Another important consideration for both projects is the government authorizations that will be required. Under the SENER tender, the bidder is responsible for getting all government authorizations, while SENER must provide support and information to the winning bidder so that it can obtain the required permits, but at no expense to SENER. In the CFE tender, the winning bidder will also be responsible for securing permits and authorizations for the project, but CFE has already secured certain federal permits, such as the environmental impact assessment. In addition, CFE entered into coordination agreements with the governments of the states where the transmission line will be built. This should help the winning bidder get the state and municipal authorizations in each such state.
The winning bidders will have to find their own financing for the projects. The project contracts for both auctions have standard lender step-in rights to allow project bankability.
Another key difference between the tenders concerns the technical experience requirements of participants. CFE’s tender does not include a prequalification phase and only requires participants to demonstrate O&M experience in converter stations at levels equal to or greater than ± 250 kV. On the contrary, SENER’s initial tender guidelines require participants to satisfy prequalification requirements and prove their experience in the operation, construction and maintenance of electricity transmission lines at tension levels equal to or greater than 400 kV.
One very significant consideration is that, under SENER’s tender, the participants are not allowed to prove experience through third-party subcontractors, thus significantly limiting the pool of potential participants in the tender.
On labor matters, the winner of CFE’s tender must enter into a collective bargaining agreement with CFE Transmisión’s workers union, known as “SUTERM.” As a result, the construction works and the services must be performed using SUTERM’s workers. This is not a requirement in SENER’s tender.
A key consideration for all participants in both tenders is that payments will be made in Mexican pesos, on a monthly basis, commencing on the commercial operation date and subject to deductions based on performance. For CFE’s tender, compensation will be divided into a fixed capacity charge, a fixed O&M charge and a fixed modernization charge, the value of which must be proposed by the winning bidder in its offer. In SENER’s tender, the monthly payment will be determined as one twelfth of the constant annual contract price proposed by the winning bidder.
In both cases, the consideration will be adjusted on an annual basis, considering only Mexican inflation, based on the Mexican producer price index. Moreover, the model of services agreement expressly provides that the contractor will assume the risk of exchange rate fluctuations and such variations do not entitle the contractor to a price adjustment. This has been one of the main concerns of industry participants in both tenders, given that the costs of most equipment for the projects will be in US dollars or euros, and the tenders allocate all risk associated to exchange rate, as well as any hedging costs to cover such risks, to the winning bidder.
The source of payment for both projects will be the transmission tariff charged by the Mexican independent system operator, CENACE, to the Mexican wholesale electricity market participants. However, there are slight differences between both projects regarding the contractual scheme for the receipt of such funds. While in SENER’s tender the winning bidder will execute an agreement directly with CENACE to deposit the funds from the transmission tariff into an administration trust, in CFE’s tender, the entity that will enter into such an agreement will be CFE Transmisión, which will act as an intermediary and be responsible for making payments to the contractor.
Given the magnitude of the CFE’s project, its tender has an atypical timeline. Bidders have only five months to submit offers, with a filing deadline of June 21, 2018. Execution of the services agreement is scheduled to occur no later than July 25, 2018. The commercial operations date is expected by December 2021.
Although SENER’s tender schedule allows more time to participants to prepare their bids, the process is expected to face several challenges. Unlike CFE, SENER lacks experience in conducting these type of tenders. In addition, considering that both tenders will be conducted during similar time frames, CFE may not be able to assist SENER with the technical evaluation of the bids for its tender. Thus, it would not be surprising if SENER’s tender schedule is extended. Under the current schedule, offers must be presented on August 17. Execution of the services agreement is scheduled to occur no later than November 16, 2018.