â€œThis is not a reform, this is a revolution on an unprecedented scale... this transformation touches every sector of the Mexican energy industry and goes well beyond.â€? Fatih Birol, Executive Director, International Energy Agency
Mexico has left behind an energy monopoly that lasted over 70 years. It did so in less than three. From the proclamation of the much-hailed Energy Reform in 2013 to the first two long-term electricity auctions in 2016, the country has achieved something that many market participants did not believe possible on such short notice. While the energy regulators did their part, the government piled on the pressure by agreeing to energy efficiency and climate change targets with the UN’s COP21 that look to implement a much greener energy mix by the middle of the century.
In this new and dynamic environment, solar and wind power technologies are storming the industry as the main winners of the power auctions, while both the CFE and private players are starting to revamp old and inefficient hydrocarbon-fueled plants to run the nation’s baseload capacity on much cleaner and cheaper natural gas. Among other developments, 2017 will see the entry of private sector players as partners with CFE in transmission, starting with the highly awaited tender for a HVDC line connecting Oaxaca and the Valley of Mexico.
The launch of the wholesale electricity market in January 2016 was a breakthrough in the transformation of Mexico’s electricity industry, bringing it closer to modern standards of power generation and trading. Novelty and uncertainty are keeping some companies from entering the new model but growing interest from generators, qualified suppliers, off-takers and traders has started to lift the barriers, supported by the performance of public entities. Other obstacles, however, remain. With over 180 interviews, Mexico Energy Review 2017 paints the picture of the country’s radically transformed power market, bringing relevant players, old and new, together in one book.
ALL RIGHTS RESERVED ÂŠ Toguna, S. de R.L. de C.V., 2016. This annual publication contains material protected under International, United States and Mexican Laws and international Treaties. Any unauthorized reprint or use of this material is prohibited. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system without express written permission from Toguna S.A. de C.V. Mexico Energy Review is a registered trademark. The publisher has made all reasonable efforts to provide accurate information, and the information contained in this publication is derived from sources believed to be true and accurate. However, the information in this publication should not be considered to be complete or definitive, and may contain inaccuracies or typographical errors. The publisher accepts no responsibility regarding the accuracy of information and use of such information is at your own risk. The publisher will not be liable to any party for any direct, indirect, special or other consequential damages arising out of any use of information in this publication. The publisher provides no representations or warranties, express or implied, including any implied warranties of fitness for a particular purpose, merchantability or otherwise in relation to any information provided by the publisher in this publication.
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TABLE OF CONTENTS
STATE OF THE INDUSTRY
NATURAL GAS & COGENERATION
POWER GENERATION & EFFICIENCY
TRANSMISSION & DISTRIBUTION
La Caridad power plant, Sonora, Grupo MĂŠxico
STATE OF THE INDUSTRY
After getting most of the regulations and guidelines out of the way, 2016 was the year when everything actually started to happen in the new Mexican energy market. The authorities launched the power auctions that saw private generators offer some of the worldâ€™s lowest electricity prices in long-term contracts with the CFE, initiating a process that could produce a wildly different energy environment for the heavily industry-dependent country in just a few years.
This chapter provides a glance at what happened during the last year from the perspective of some of the most important players in the sector, from the regulators who built the framework to the industry leaders that provided insight and worked side by side with lawyers and international institutions to achieve the best possible outcome for the countryâ€™s energy liberalization. It also explores some of the pending matters and yet-to-be developed opportunities on the horizon as public and private participants alike find a firmer footing in this new terrain.
CHAPTER 1: STATE OF THE INDUSTRY 8
THE YEAR IN REVIEW: Welcome to the Free Market
VIEW FROM THE TOP: Pedro Joaquín Coldwell, Ministry of Energy
VIEW FROM THE TOP: César Hernández Ochoa, Ministry of Energy
INSIGHT: Leonardo Beltrán, Ministry of Energy
VIEW FROM THE TOP: Jaime Hernández, CFE
VIEW FROM THE TOP: Guillermo García Alcocer, CRE
VIEW FROM THE TOP: Jesús Serrano, CRE
VIEW FROM THE TOP: Marcelino Madrigal, CRE
VIEW FROM THE TOP: David Madero, CENAGAS
VIEW FROM THE TOP: Roberto Ramírez de la Parra, CONAGUA
INSIGHT: Jaime de la Rosa, AME
INSIGHT: Roberto Martínez, OECD Mexico Centre
INSIGHT: Francisco Barnés, Mario Molina Center
VIEW FROM THE TOP: Víctor Ramírez, ANES
VIEW FROM THE TOP: Joana Torrents, CAMESCOM
RESEARCH: Renewable Resources in the Paso del Norte region
VIEW FROM THE TOP
SOUND POLICIES AT LOCAL AND GLOBAL LEVELS PEDRO JOAQUÍN COLDWELL 12
Minister of Energy
Q: What strategies has Mexico incorporated into its
We have 15 connection points on the US-Mexico border
energy policy to better face the global market?
through which natural gas is imported and distributed to
A: Despite the complex global landscape and price
the country’s manufacturing centers. When it comes to
volatility in the international market, the Reform is
pipelines, there are four US companies that are building
maintaining a favorable position and legal certainty, which
them, either on national territory or the border. The
in turn creates a trustworthy environment for investors.
opening of diesel and gas imports to Mexico has driven
When it comes to the electricity sector, the Reform
some US companies to create projects for importing oil
created innovative mechanisms to further open the
through the development of transportation infrastructure.
market and incentivize the entrance of new participants.
In electricity we are expanding and modernizing the points
The objective is to generate a higher supply of electricity,
of interconnection to increase our electricity commerce
giving priority to clean energies. In less than a year, we
and support infrastructure in the event of contingencies.
successfully executed two long-term power auctions that
There are 11 points of electricity interconnection with the
are promoting the construction of higher capacity and
US and we are working on creating three more.
sustainable infrastructure. In a few months, we will launch a third one. We have also introduced the CELs mechanism
Q: What are the ministry’s main goals for the next two
that establishes minimum percentages for renewable
years regarding the energy sector's development?
electricity consumption for large electricity consumers. In
A: The Ministry of Energy has defined four goals for the
2018, the requirement will be at least 5 percent and by
initial phase of the Energy Reform. The first involves igniting
2019 it will increase to 5.8 percent. We are also expanding
major public and private investment through the oil rounds.
the transmission grid to better deliver the energy
Our second goal is consolidating the energy market and
produced in areas of the country with high potential for
promoting new supply options to end users. The ministry
clean generation. We are working on making the Mexican
will continue liberalizing the natural gas market to make
energy sector more competitive, strengthening the
sure the pipelines administered by CENAGAS operate under
national industry and making sure it stays at the forefront
a capacity reserve scheme starting in 2017, along with a
of policies oriented toward the energies of the future.
further liberalization of prices in most parts of the country. The third objective is to continue expanding the National
Q: How are energy policies in Mexico affected by the
Pipeline Network as part of our Comprehensive Strategy
agreements at the North American Leader’s Summit?
for Natural Gas Supply. The government is committed to a
A: Mexico and the US have built a robust agenda of
considerable expansion of the national network of pipelines.
cooperation on topics such as energy exchange and
In the last four years we have obtained firm commitments
strategic integration. With the Energy Reform Mexico took
for 7,762km of pipelines up to 2019. The electricity sector
an important step toward the integration of the North
agenda is equally ambitious. The ministry plans to advance
American markets which will help transform the region
clean energy generation – our fourth objective – and we are
into one of the most competitive in the world. Of the
working on the design of the third power auction with the
48 new companies that are participating in the national
idea of launching it in April 2017. This auction will differ from
energy sector, eight are from the US. The numbers show
the previous ones because the private sector will be allowed
the interest and mutual benefits that can be achieved
to acquire energy, capacity and CELs. We are also working
through an interconnected economy.
on the tender for the first HVDC line in Mexico that will connect the Tehuantepec Isthmus with the central region,
Pedro Joaquín Coldwell has been Mexico’s Minister of Energy since the
the first ever opened to private players in this segment. We
start of President Enrique Peña Nieto’s government in 2012 and has
will also announce the tender guidelines for a transmission
overseen deep changes in the country as a result of the Energy Reform.
line to connect Baja California with the national grid.
VIEW FROM THE TOP
ENERGY REFORM PAST POINT OF NO RETURN CÉSAR HERNÁNDEZ OCHOA Deputy Minister of Electricity
Q: To what extent has the first year of the spot market
have already established the requirements that will be
fulfilled the Ministry’s expectations?
imposed on industry participants that are obligated to
A: The electricity market was expected to grow gradually
obtain CELs in the first and second year of this market.
since its inception and it will become increasingly open
We defined 5 percent as the mandatory percentage of
as it matures. Other countries took up to five years to
clean energy that these players must comply with in the
develop a short-term electricity market. We did it in two.
first year and 5.8 percent for the second. In March 2017
The market began operations with only three participants
we will determine the requirements for 2020. We need
and finished 2016 with more than 10, including some
to have all the regulatory mechanisms ready for 2018
private qualified suppliers. We expect the market to
when the law will be implemented but we are on the
gain more participants throughout 2017 and have all the
right path. In the end, CELs are not new in the world.
characteristics it was designed to have incorporated by
This certification mechanism is the Mexican version of an
the end of that year.
international system called Renewable Portfolio Standard (RPS), which has already proven to be effective in other
Q: What will be the main drivers of electricity tariffs
parts of the world.
under the new market landscape? A: The market is designed to stimulate competition so
Q: How is the Ministry of Energy preparing the field to
it operates under a model where cheaper energy is sold
ensure continuity in the Reform’s implementation?
first, favoring models and technologies that generate
A: The changes made in the electricity sector are
energy at lower costs. In the long term we believe these
irreversible at this point. We have already passed the point
models will bring electricity costs down through the
of no return. The process is so advanced that it would be
incorporation of new technologies and the displacement
more difficult to stop it than to continue going forward.
of older plants. Competition will generate incentives
The Ministry of Energy’s goal is to leave all the market
to improve services or lower costs but this is a market
rules ready for the market to continue its development
process and thus price determination is not under the
naturally. CRE will eventually take full responsibility for this
control of any regulatory entity.
but up to now it has been a joint effort and the Ministry has taken this process seriously. We expect to have all the
This new scheme will also cause electricity prices to
crucial financial and regulatory instruments in place by the
fluctuate depending on demand during the year. In
end of 2017.
periods when there is significant demand, prices will rise and vice versa. However, final users are often protected
The major challenge for 2017 is to continue operating
from these fluctuations so they do not perceive them.
under these new regulations as they imply a paradigm
In other countries, we have seen that energy markets
change. The Mexican electricity industry operated under
begin to show up to 25 percent lower tariffs after three
a monopolistic model for more than 70 years and it
to five years.
now has to get used to a brand-new model focused on competitiveness and structural separation. We must not
Q: What advances have been made toward the launching
forget that many of the market mechanisms did not exist
of the CELs market in 2018?
in Mexico before. It is a new field for all of us. The results
A: The creation of a regulatory system to allow the
have been positive so far but it is not an easy process.
efficient use of this instrument has been the greatest advance. CELs were foreseen since the constitutional
César Hernández was named Deputy Minister of Electricity at the
reform of 2013. Our role is to issue the regulations that
Ministry of Energy in Feb. 2014. His position oversees the development
will ensure these certificates work as expected. We
of the new Mexican electricity industry.
VIEW FROM THE TOP
NEW ROBUST SYSTEM TO BOOST COMPETITIVENESS JAIME HERNÁNDEZ Director General of CFE
Q: Which of the major events of 2016 will shape the future
will contribute to the government’s goal of expanding the
National Pipeline System by 75 percent in 2018. Having a
A: The Energy Reform’s approval in 2013 ignited one of the
more robust system will not only benefit CFE as a large
biggest transformations the Mexican energy industry has
natural gas consumer but also other Mexican industries.
experienced in decades, particularly in the electricity sector because it created open markets for electricity generation
Q: What are the main challenges faced by CFE’s new
and commercialization. The Wholesale Electricity Market
(MEM) was created with the fundamental principle of
A: Transmission and distribution will become core
dispatching the cheapest energy first, which will benefit
businesses for CFE in the short term and both will remain
the pockets of Mexican families. This market mechanism
under regulated tariffs. Among the major challenges in
also works as an incentive for power producers to optimize
these areas is to continue pushing the modernization and
their production costs, an area CFE has been focusing on.
expansion of the grid, using the tools introduced by the Reform to boost revenue. Another challenge we are facing
CFE’s restructuring process was another highlight of the
in the transmission and distribution sectors is the need to
year. From January 2017 our subsidiaries and affiliates
reduce our technical and nontechnical losses. CFE lost 16
started working independently, adding another milestone
percent of the energy it produced due to these causes
to the company’s new phase. We now have 13 companies
in 2012 but we managed to reduce that to 12 percent in
under one roof, which we need to continue consolidating
the last period measured. Our goal is to further lower our
financially in the coming months while respecting the
losses to 10-11 percent by 2018, a reachable objective given
strict legal separation principles. CFE’s new organization
our past achievements. In the case of CFE Calificados,
includes six generation companies competing against each
which mainly serves industrial users, we face the challenge
other as well as other private producers, one transmission
of upcoming competition, which is driving us to reshape
subsidiary working at the national level to ensure the
our approach to the sector. Regarding our generation
system’s security and one distribution subsidiary with 16
subsidiaries, the main challenge is to attract private capital
independent business units. We also have a subsidiary
to push for the development of new power plants.
to serve the basic segment, CFE Básico, and an affiliated company for qualified users, CFE Calificados. The company
Q: What actions is CFE taking to change its employees’
has two new units to commercialize hydrocarbon fuels
mindset to meet the needs of a productive enterprise?
in Mexico and the US, an interesting opportunity also
A: Creating this new operational structure has been a long
made possible by the Reform. By entering the natural
and complex process but CFE’s employees and their union
gas commercialization business, we expect to reduce our
(SUTERM) have risen to the occasion. We could not have
generation costs considerably as 80 percent of these are
accomplished the successful separation of CFE without the
fuel-related. To increase our competitiveness, we have
active participation of our employees. I have paid over 20
committed to the development of 85 strategic projects,
visits to our facilities in the past couple of months where I
totaling over US$25 billion in investments. These projects
have witnessed firsthand the enthusiasm and commitment
include new power generation facilities, transmission and
of our team members. CFE’s employees are its main asset.
distribution assets as well as natural gas pipelines. We
We serve a portfolio of over 40 million clients, generating
have 26 projects related to natural gas transportation that
annual sales of MX$300 billion (US$14.5 billion). This is only possible thanks to our 100,000 employees, who
Jaime Hernández is an economist and PhD in Political Economy from
are highly experienced professionals committed to the
Essex University. Before being appointed to the helm of the CFE in
development of the Mexican energy industry. Different
August of 2016, he served as the state-owned company’s CFO.
generations of CFE’s employees made it possible for
98.5 percent of the Mexican population to have access to
CFE CORPORATE ORGANIZATION STRUCTURE
electricity. I have no doubts about my team’s capabilities and commitment to implement the changes brought by
the Reform and to safely bring CFE to the next stage of
CFE Generación I: Production and commercialization of electricity through different technologies, excepting supplying activities.
its existence. But it is true that we need to change the company’s culture. CFE used to act as an authority to a
CFE Generación II: Production and commercialization of through different technologies, excepting supplying activities.
certain degree and we need to understand that now, in some segments, we are just another competitor. We need to reshape our strategy to better serve the needs of our
CFE Generación III: Production and commercialization of electricity through different technologies excepting supplying activities.
clients, understanding their concerns and offering more attractive services and tariffs.
CFE Generación IV: Production and commercialization of electricity through different technologies, excepting supplying activities.
Q: How has CFE’s relationship with the private sector changed since the Energy Reform? A: CFE was the main promoter of large energy infrastructure
CFE Generación V: Represents existent and upcoming power plants with legacy IPP contracts.
projects in the past, many of which were developed in collaboration with private companies. The Energy Reform has changed the context for CFE’s collaboration with the
CFE Generación VI: Production and commercialization of electricity through different technologies, excepting supplying activities.
private sector, allowing us to establish alliances and share each of the projects’ risks and benefits. The guidelines for CFE’s legal restructuring were among the fundamental
CFE Transmisión: Performs all the activities needed to provide electricity transmission services, included financing, O&M and infrastructure operation.
elements of the Reform. We expect the industry to remain vigilant about compliance with these, ensuring CFE passes through this transformation without losing its competitiveness but allowing the establishment of a level
CFE Distribución: Performs all the activities needed to provide electricity distribution services, included financing, O&M and infrastructure operation. (Divided in 16 business units)
playing field for other participants. In this context CFE is fully prepared and willing to continue collaborating with the private sector in the development of a robust and
CFE Suministrador de Servicios Básicos: Supplies electricity services to basic users according to the terms of the Electricity Industry Law.
competitive electricity market. It is important to highlight that Mexico’s Energy Reform is taking place amid a rising demand scenario as the country’s electricity demand is growing at around 3 percent annually. This feature makes
Mexico a distinctive case and ensures there is enough
Business Unit Nuclear Generation: Manages Laguna Verde, Mexico's only nuclear power plant, located in Veracruz.
room for CFE but also for new participants to capitalize on this market. Q: What is the future of CFE’s energy mix? A: Mexico has established the goal of producing 35 percent of its electricity from clean energy sources by 2024 and CFE is moving at the right pace to reach this target on time. The system’s stability is another key factor for us so we are also investing heavily in baseload technologies. In this area, CFE is pursuing an ambitious strategy to substitute expensive and polluting fuels for more sustainable alternatives. Between 2012 and 2015 we reduced our fuel oil and coal usage significantly, decreasing our GHG emissions by 50 percent. Using natural gas for power generation represents around 25 percent of the cost of using fuel oil, so we have also reduced our generation costs considerably. Our end goal is to have a diversified portfolio of technologies and fuels so we can react quickly to sudden changes in the international market or technological changes with the potential of disrupting the industry.
Affiliates CFE Calificados: Supplies electricity services to qualified users according to the terms of the Electricity Industry Law. It also represents Exempted Generators in the MEM and commercializes electricity and ancillary services in Mexico and abroad. CFE Intermediación de Contratos Legados: Administrates legacy interconnection contracts and represents legacy power plants and load centers in the MEM under the Intermediary Generator figure. CFEnergía (under Mexican law): Imports, exports, contracts transport and storage, and buys and sells fuels in Mexico and abroad. It also administrates assets and fuels and participates in the electricity market of Mexico and other countries. CFE International (under US law): Imports, exports, contracts transport and storage, and buys and sells fuels and electricity. Source: MBP with information from CFE
VIEW FROM THE TOP
INTERNATIONAL COLLABORATION STRENGTHENS STANDARDS ODÓN DE BUEN Director General of the National Commission for the Efficient Use of Energy (CONUEE)
Q: How has CONUEE’s strategy changed as a result of the
integration of technology to monitor temperature flows,
new energy landscape?
energy usage and atypical events. They can analyze
A: The impact has been collateral. The Energy Transition Law
was the most significant because it added new requirements
figure out what they are doing wrong or how to make
to include more planning. Our relationship with PEMEX and
their systems more efficient.
seconds instead of spending years trying to
CFE has been one of the most impacted areas. Before the
Reform, both state-owned companies had an obligation
Q: Which binding mechanisms can CONUEE use to ensure
regarding energy-efficiency programs due to their status
compliance with its recommendations?
as parastatals but with their transformation into productive
A: The Internal Control Organ can sanction institutions that
enterprises of the state they are no longer obliged to have
are part of the federal administration if they fail to comply
these types of programs. We continue to work together,
with CONUEE’s programs. The scheme that applies to large
especially with CFE, to exchange information and implement
energy users is established in the Law of Administrative
a program for street lighting in municipalities. The relationship
Processes, which defines the penalties applicable for users
keeps changing and we continue to adapt to it.
who do not comply with providing the information we request. The program itself implies more challenges for
Q: What windows of opportunity has the regulatory
CONUEE because we only have two lawyers against 3,000
framework opened for boosting energy efficiency?
users that have many more lawyers. We compile the results
A: The regulatory framework forces large users to provide
of the gathered information in annual reports. The challenge
information about their energy consumption. We help
for us is to make this information useful. We have been
such users by assessing their plans to implement energy
working with the Economic Commission for Latin America
management systems with the help of foreign institutions
and the Caribbean (ECLAC) to produce indicators of energy
and governments. These systems strengthen the capacity
intensity in the industrial sector.
of energy end users to take advantage of the Mexican power market. The market now has qualified users that can
Q: How important are strategic alliances for CONUEE?
buy electric power and clean energy certificates. Energy
A: We basically operate with alliances on numerous issues.
management systems help them find the best opportunities
We have a large program for mandatory energy efficiency
in the new market. We are also involved in the promotion
standards in which we have to negotiate with the industry
of cogeneration, which for large-scale companies means
to gain their compliance. For this, the National Chamber of
they can compete in the supply side of the power market.
Electrical Manufacturers (CANAME) is an important ally. We
CONUEE also is in close collaboration with COGENERA, an
collaborated with them on projects such as street lighting.
association offering cogeneration-related technology and
With energy management systems we are collaborating with
consulting, to promote this energy-efficiency alternative.
the German government, through Germany Industry and Commerce (GIC) and the Institute of Metrology of Germany
Q: Where do you see the most opportunities regarding
(PTB), and with the Danish government, the Commission
for Environmental Cooperation of North America, the US
A: Everywhere. On one side, there are cogeneration
Department of Energy and engineering associations. In the
opportunities where companies that waste heat can put
process of creating standards, it is important to involve as
it to better use. The bigger challenge has to do with the
many participants as possible.
The National Commission for the Efficient Usage of Energy (CONUEE)
Q: What are CONUEE’s plans for green buildings?
is a public entity created in 2008 to promote energy efficiency and as a
A: Buildings are a very important area for us. In Mexico,
technical body for the sustainable use of energy.
energy use in commercial buildings has been reported
to the Energy Ministry by CFE as medium industries so the electricity balance in Mexico indicates that industrial users are the largest consumers of electricity, which does not reflect reality as buildings, both residential and commercial, consume more electricity than the industry and their consumption is growing faster. The yearly peak load of Mexicoâ€™s power system is driven by air conditioning in commercial and residential buildings. To reduce this growth, we have two standards in place, NOM-008 and NOM-020, but we depend on local governments to make
Mexico wants to reduce 1.9 percent of its energy intensity by 2030 and 3.7 percent by 2050 in comparison with 2016 levels
ENERGY COMPSUPTION PER SECTOR ANNUAL ENERGY INTENSITY 2009-2015 (KJ/MX$ produced) Q: What are the main challenges for industrial users implementing energy-efficiency strategies?
A: Our National Energy Management Systems Program (PRONASGEn) promotes energy management systems 712
in 50 installations under ISO-50001 standards. Our goal is to have as many installations with energy management
systems in place as possible. Companies like Bimbo and
Alpura are involved in this program with support from
the Danish Energy Agency. This has helped them identify opportunities they had not considered before. Bimbo found that it could use heat they presently waste to operate
a cogeneration system applied to cooling systems in the
companyâ€™s plants. Alpura previously had fluids circulating at high temperatures through valves that had no thermal
Energy efficiency is one of the pillars of the Energy Transition Law
insulation. They invested in insulation and recovered the investment in three months. The reduction of heat loss was so impressive their gas supplier called them to verify whether they had stopped operations. Q: How are new technological trends impacting energy
Energy Consumption per Sector
efficiency? A: The drop in electricity prices that took place before the Energy Reform might be good for the economy but it made energy-efficiency investment less cost-effective. But technology is also evolving rapidly and boosting energy-
Source Electricity Natural Gas
34, 211.9 mcf
efficiency solutions. For instance, in street lighting we have contributed to the development of 28 systems that are
TOP 5 INDUSTRIAL ENERGY CONSUMERS
now operating and saving around 38 percent electricity consumption on average. Internet of Things (IoT) solutions can reach up to 80 percent power savings because they not only make a lamp more effective but allow for remotecontrolled usage patterns. The savings come not only from energy but from operational efficiency.
Steel 222.34 PJ
Chemicals 96.75 PJ
Cement 176.77 PJ
Q: How do you see energy efficiency in Mexico evolving? A: We are dealing with accelerated technological change which will require new standards and more flexible systems to design them and ensure compliance. The growth of the IoT will play an important role. Also, financing of projects and programs is important. We need to find mechanisms that deal with the fact that most energy efficiency actions are not big investments and that savings can only be estimated.
PEMEX Petrochemicals 74.41 PJ
Mining 62.81 PJ
Source: Energy Information System and Ministry of Energy
$199.00 ISBN 978-0-9968026-9-7
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