pressor station, near El Paso, to the Samalayuca site. The US$35 million pipeline project, car-
ried out in 1997, involved the construction of 22 miles of pipeline in the United States and 23
miles in Mexico. It is a 50/50 joint venture between two business units of El Paso Energy
Corporation – El Paso Natural Gas and El Paso Energy International Company – and Pemex.
Background
The project sponsors and the Mexican government had to resolve many legal issues related
to the contract structure and financing of the Samalayuca II project, issues that had never pre-
viously been raised in Mexico.
Evolution of IPPs in Mexico
In the early 1990s, before the creation of the North American Free Trade Area, there was
growing interest among Mexican authorities and US developers in creating an independent
power industry in Mexico. To meet expected power needs, the Comision Federal de
Electricidad (CFE) planned for an increase in installed power-plant capacity from 33,000
MW, projected for 1995, to 45,000 MW in 2005. About half of the new capacity and one
quarter of total capacity was expected to come from IPPs. The government of President
Carlos Salinas started to negotiate two projects, the Carbon Dos coal-fired project with
Mission Energy, and the Rosarito project with a US-Canadian-Mexican group. A Mexican
law authorising IPPs was passed in 1993. It seemed to be a ‘win-win’ situation, since Mexico
needed the power and the US developers, right next door, had the skills to make it happen.
Late in 1993 regulations to interpret and implement the enabling IPP legislation were
issued. Power projects larger than 30 MW would be required to go through a competitive bid-
ding process. Additional rules were spelled out for projects smaller than 30 MW. The
Samalayuca II project, which was competitively bid and awarded in March 1992, was not
affected by the legislation, but some other large project proposals had to be scrapped. The
Carbon Dos and Rosarito projects kept moving during this period.
Also in 1993 the pactoamong government, business groups and labour unions was rene-
gotiated. The price of power was reduced to help businesses become more competitive. As a
result, the Carbon Dos and Rosarito projects, and many proposals for small ‘inside the fence’
power projects, became uneconomical and were cancelled. A power project ‘inside the fence’
is located within a company’s industrial plant or complex, is owned by the company and is
intended to serve mainly the needs of that plant or complex. Sometimes excess power is sold
to other users. Developers that had been interested in Mexico diverted their attention to other
countries with brighter prospects, such as Argentina. Prospects for new IPP ventures were
further dimmed by the economic slowdown after the devaluation of the Mexican peso in
December 1994.
Throughout this period negotiations between the sponsors and the Mexican government
on the Samalayuca II project kept moving along, albeit at a delayed pace. The industry was
watching the progress of this project to determine whether IPPs could become viable in
Mexico. After the Samalayuca II project financing closed in May 1996, perceptions were gen-
erally favourable. The energy minister, the head of the CFE and President Ernesto Zedillo
made reinforcing statements to the effect that the country was committed to IPPs. Developers
became excited about Mexico again. The request for proposal (RFP) for the natural-gas-fired
SAMALAYUCA II, MEXICO