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President Andrés Manuel López Obrador with Manuel Bartlett, the head of state electricity company CFE. (Photo: Mexican government)
Alexandro Padrés and Robert O’Leary, Shearman & Sterling. (Latinvex collage)
Thursday, October 7, 2021

Mexico Power Sector: AMLO Strikes Back

If the Presidential Bill becomes law, it would be disastrous for private investment in the energy sector in Mexico.


The proposed Constitutional amendment (the “Presidential Bill”) presented to Congress on September 30, 2021 by the Mexican president Andrés Manuel López Obrador (hereinafter, “AMLO” and his administration, the “AMLO Administration) … would result in the unwinding of Mexico’s 2013 Energy Reform, which had significantly increased private investment in the Mexican power sector.

Most of the executive actions taken to date by the AMLO Administration to tip the regulatory scales in favor of the Federal Electricity Commission (Comisión Federal de Electricidad—CFE), have been vacated or suspended by the Mexican judiciary in response to claims brought by industry players and other non-governmental organizations, such as Greenpeace. As a result—and shortly after the CENACE Resolution was judicially suspended—AMLO announced that his administration would pursue any legislative and legal actions necessary to bring the entire power generation value chain (i.e., power generation, transmission, distribution, supply, etc.) under the umbrella of monopolized strategic, state-owned activities.

As a result, on September 30, 2021, AMLO submitted to the Mexican congress the Presidential Bill (i) to cause CFE to become a fully vertically- and horizontally-integrated governmental entity and primary actor in the Mexican power sector and (ii) to limit the participation of both present and future private power generators. The key aspects of the Presidential Bill are as follows:

I. Reorganization of the Power Industry

The Presidential Bill recategorizes all activities of the Mexican power industry as “strategic” and declares that only the State should be allowed to perform them. To implement this, the Presidential Bill creates a monopoly in favor of CFE as a single vertically- and horizontally-integrated governmental entity, including the reincorporation of the National Center for Energy Control of Mexico (Centro Nacional de Control de Energía—CENACE) as a business unit under CFE’s full control and the elimination of the category of “productive state enterprise” and the affiliates thereof, introduced by the 2013 Energy Reform.

To further cement CFE as the sole industry player, the Presidential Bill dissolves the Energy Regulatory Commission (Comisión Reguladora de Energía—CRE) and transfers its activities and authority to SENER.

Notably, a vertically-integrated CFE is not new to the power sector in Mexico, as fully open market principles were adopted only as a result of the 2013 Energy Reform. Prior to that, limited private investment was permitted in the sector. However, eliminating the regulatory oversight of the CRE—which was established in 1992—may cause CFE to be beholden only to the federal executive administration, without proper checks and balances from a governance perspective.

II. Private Power Generation

As a consequence of the power sector being deemed a strategic State activity, all power generation permits in effect on the day on which the Presidential Bill is approved will be immediately terminated along with any power purchase agreements associated with such permits. However, the Presidential Bill leaves open the possibility for some kind of undefined private participation in power generation, as it describes that the private sector may participate in up to 46 percent of the existing power generation capacity in Mexico. The rules applicable to such private participation are unclear as the Presidential Bill provides few details about how this new scheme will work or be implemented, leaving much of the specifics to secondary legislation to come. What seems to be somewhat clear is that all existing generation permits will be canceled (i.e., those issued as a result of the Energy Reform), while legacy permits (issued pre-2013 Energy Reform) may remain unaffected (although this remains to be confirmed, given the vagueness of the text), except for (i) self-supply (autoabstecimiento) permits where final users are not “true affiliates” of the power generator and (ii) permits for excess capacity and associated power generated by independent power producers.

What the AMLO Administration deems to be “true affiliates” appears to be entities that, prior to becoming a shareholder of the self-supply generator, were affiliated with the sponsors (or strategic shareholders) of such self-supply generator—not a requirement per the terms of the Electricity Public Service Law (Ley del Servicio Público de Energía Eléctrica) at the time. With respect to excess capacity, the AMLO Administration views all arrangements in connection with such excess capacity and associated power to be fraudulent, since they were not part of the original tender awarding the independent power producer power purchase agreement.

Nevertheless, the Presidential Bill requires that all power generated by private entities must be sold to CFE as the only permitted offtaker. The rules for CFE to execute power purchase agreements with private parties (including applicable pricing) are not clear or delineated in the Presidential Bill, and will need to be further detailed under any secondary laws to be issued as a result of the enactment of the Presidential Bill, if approved.

Further, dispatch priority under the Presidential Bill is wholly preferential for CFE, which will be dispatched first in all cases, while dispatch for private parties will be determined using cost efficiency principles (although the variables for determining such costs are also unclear).

III. Clean Energy Goals

Although the Presidential Bill endorses the establishment of clean energy goals in Mexico, it also provides that such goals will be unilaterally determined by CFE without any objective parameters or principles to adhere to. Furthermore, the Presidential Bill also eliminates clean energy certificates, meaning that energy consumers are not required to obtain any percentage of energy from clean sources. While it is unclear if detailed rules for clean energy goals will be further defined in a secondary law, the Clean Energy Transition Law currently in force would need to be replaced, in any event, as it is not consistent with the new principles outlined in the Presidential Bill.

Considering that the Presidential Bill amends the Mexican Constitution—unlike previous bills sent by AMLO to congress, which amended federal laws—the Presidential Bill faces significant challenges before becoming law. Amending the Mexican Constitution requires a supermajority vote of 2/3 from both chambers of federal Congress (i.e., 66 percent for each chamber) and approval by at least 50 percent of local congresses. In other words, for the Presidential Bill to be approved, it would be necessary to have 335 or more votes from the Chamber of Representatives (Cámara de Diputados) and 85 or more votes from the Chamber of Senators (Cámara de Senadores), along with the approval from 17 local congresses. 

Notably, the composition of the Mexican Congress has changed since the approval of the prior energy bills sent by AMLO to Congress earlier this year, as AMLO’s Morena party lost a few seats in the recent midterm elections held in July 2021. Currently, Morena holds only 202 seats of the 335 required to obtain a supermajority at the chamber of representatives and 60 of the 85 required at the chamber of senators. This alone should not serve to discount the possibility of the passage of the Presidential Bill. Given the diverse composition of both chambers, it is possible for Morena to seek alliances with smaller political parties, who have historically aligned with either left or right-handed initiatives, on a case by case basis.

In this regard, although an alliance with Partido Acción Nacional (PAN)—which ranks second in both chambers—seems unlikely, the Partido Revolucionario Institucional (PRI) has publicly stated that they will further evaluate the Presidential Bill before making public its position on it. This approach by PRI has taken the market by surprise, as it was expected that PRI would have a stronger position against unwinding the 2013 Energy Reform, as it was one of the main achievements of the PRI-backed Peña Nieto administration.

If the Presidential Bill becomes law, it would be, in a word, disastrous for private investment in the energy sector in Mexico. The Presidential Bill would create grave uncertainty for existing energy projects—most of them under long term financial debt—including with respect to the terms under which they would operate and be dispatched, whether they would be able to meet any of their payment obligations or their ability to make any return on their investment. It is also unclear how quickly new permits for existing facilities would be issued (for those cases where obtaining a new permit is an option) and what the pricing conditions offered by CFE would be under the new power purchase agreements it is permitted to enter into pursuant to Transitional Article Second, paragraph (f), clause (i) and clause (ii), which is particularly relevant as CFE will become the only offtaker in the Mexican market.

Furthermore, the conditions under which self-supply legacy permits will operate are even more uncertain, given that (i) many of the existing self-supply permits operate with structures where offtakers are not necessarily “true affiliates” of the power generator, as noted above and (ii) these permits may be subject to cancellation altogether, per Transitional Article Second, paragraph (a). Although such third-party offtaker structures were previously disclosed and approved by CRE on a case by case basis, the text of the Presidential Bill seems to be punitive in nature by providing that no energy may be purchased from those self-supply power generators supplying energy to third parties. As a result, it is unclear if self-supply legacy permit holders would even be able to apply for a new permit, or if the rationale behind the Presidential Bill was to decommission—or even seize—those facilities.

If enacted, the Presidential Bill would result in the termination of otherwise valid power generation permits, which would run up against many of the international commitments assumed by Mexico, including those under international bilateral investment treaties executed with various countries and regions. The substantial investments made by private foreign sponsors following the 2013 Energy Reform were made under a legal regime where permits were validly issued for a fixed term and could not be arbitrarily terminated by the Mexican government. Furthermore, on its face, the Presidential Bill provides for what seems to be a textbook regulatory taking where legislative actions may amount to a de facto expropriation in favor of CFE, considering the loss of value on the relevant assets.

If the Presidential Bill is enacted as currently drafted, a wave of international arbitration claims against the Mexican Government will be likely to follow. Stay tuned for our upcoming publication on the international arbitration aspects of the Presidential Bill.

Alexandro Padrés is the Head of Shearman & Sterling’s Latin America Practice Group and a partner in the firm’s Project Development & Finance practice. Robert O’Leary is a senior associate in the Project Development & Finance practice of Shearman & Sterling.

The authors wish to extend a special thanks to visiting attorney Pedro Lladó for his valuable contribution to this publication.

This article is based on a note by Shearman & Sterling. Republished with permission.





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