California's energy crisis has created a huge economic development opportunity for Baja California, according to Ambassador Paul Boeker, president of the Institute of the Americas. At the Dialogue's recent Forum Fronterizo, Boeker and Lic. Federico M. Ruanova-Guinea, an environmental attorney at Baker & McKenzie in Tijuana, presented both the opportunity and the challenges associated with it.

The key for Baja California, Boeker said, is to offer industrial investors a long-term supply of power that is more secure and better priced than the rest of Mexico can offer. In Mexico's heartland, Boeker noted, industrial investors are becoming increasingly doubtful that the state-owned energy monopolies, PEMEX and the Comision Federal de Electricidad (CFE), will be able to supply new factories with electric power and natural gas. A large problem is that private investors in electric power generation don't find it attractive to deal with PEMEX and CFE, and therefore are not investing.

But private investment in energy production is booming in Baja California, partly because of the opportunity to supply the California market, and also because PEMEX and CFE are not as dominant here in setting the rules of the game. PEMEX's gas pipeline network does not even reach Baja California.

Boeker believes that Baja California needs to do three things to secure its potential competitive advantage in energy. First, it must site a liquid natural gas (LNG) import facility so as not to be totally dependent on gas imported from the United States. Several global energy consortiums are reported to be vigorously pursuing this LNG opportunity, which could bring liquid natural gas by special tankers from as far away as Bolivia, Australia, or Algeria.

Second, Baja California needs to assure electric power generators that they can sell directly to industrial customers in Baja California, instead of being required, as they mostly are now, to sell to CFE, which then sells to industrial customers at whatever rates it determines within federal regulatory rules.

Third, Baja California needs to facilitate expansion of gas and power transmission infrastructure between Baja California and California. This is important because it is the energy export to California that vastly improves the chances of financing all this energy infrastructure in Baja California, including the LNG landing facilities, the power generators, and the gas and power transmission lines.

The result would be a unique set of energy assets for attracting power-intensive industries, including virtually the whole high-tech manufacturing sector. As Boeker put it, "Every Baja California official should have "these assets" on the state's calling card with international and Mexican export-oriented investors."

Ruanova-Guinea added a number of political complexities to the picture. Though they do not pose insurmountable obstacles, he said, they could slow down progress at a time when speed in seizing opportunities may be critical to success. For example:

1. There is little coordination between local (city and state) and Federal authorities when it comes to environmental permitting of power plants. While local authorities do not have much say regarding environmental impacts of power plants, they do have the ability to regulate land use and revoke a land-use permit if certain conditions are not met.

2. There is a perceived lack of a regulatory framework for some activities involving liquid natural gas.

3. There are environmental considerations on both sides of the border from new power plants in Baja California. The challenge is the disparity between air quality standards. California's standards are among the most stringent in the world. Companies in Mexico are not legally required to comply above and beyond Mexican federal law, but they may enter into voluntary agreements to comply with more stringent standards.

4. Current energy projects in Baja California rely on fossil fuels that must be brought to the region. Baja California has an array of renewable energy sources, including geothermal, microhydroelectric, biomass, wind, solar and tidal. To date, these renewable sources of energy have been largely neglected in Mexico, in part becaue they have required large subsidies.

5. The issue of fair trade practices and monopoly-prevention could also become important with respect to the LNG project. In particular, Ruonova-Guinea asked, is the Mexican government going to allow only one company to import, store and export natural gas? Or can there be many companies providing such service on the Mexican side of the border?

6. Constructing a gas distribution network involves third-party property rights. With no right of eminent domain, it is up to the owner of a proposed natural gas pipeline to negotiate with each property owner.

Despite the challenges, the dominant tone of the forum was one of solid optimism, arising out of the energy sector, for Baja California's economic future.