Mexico Power Bill Raises Investment Stakes

Should the bill pass, it will surely increase stakes and tensions between the Mexican and the U.S. governments regarding USMCA commitments. Here a CFE plant. (Photo: CFE)


The proposed bill seems to violate Mexican trade obligations, including the USMCA.

 

BY CARLOS OCHOA, ALBERTO ESENARO AND ALDO GONZALEZ

 

The Mexican government has introduced a bill that seeks to reform the electricity market in Mexico in order to favor the Federal Electricity Commission (Comisión Federal de Electricidad o CFE), the state-owned utility company.

 

On Feb. 1, 2021, the Office of the President sent a fast-track (preferencial) bill to Congress to reform and amend the Electric Industry Law (Ley de la Industria Eléctrica o LIE). Congress is set to vote on the bill within 30 days under the fast-track rules.

 

The proposed amendments would broadly change the dispatch rules of the national grid in order to benefit CFE and the power generation plants owned by its subsidiaries, displacing clean and renewable energy plants and other fossil-fuel based privately-owned power plants.

 

The following are the highlights of the proposed bill:

• subjects dispatch and operational rules for the national grid as part of the government's energy policy, which is openly designed to benefit CFE's power plants and subsidiaries and displace privately owned plants

• intends to limit free competition and open access principles under the LIE

• eliminates the obligation of CFE and the National Center for Energy Control (Centro Nacional de Control de Energía o CENACE) to hold long-term power auctions (subastas de largo plazo) for basic supply, a policy that had been enforced de facto by the administration

• introduces a new type of power purchase agreement with commitments for the physical delivery of electricity, giving them priority on dispatch

• orders that the power purchase and capacity agreements executed between CFE and independent producers be reviewed according to the new energy policy

• suggests that existing self-supply generation permits (permisos de autoabastecimiento) under the grandfathered regime (legados) may be reviewed and revoked should they be inconsistent with the amended LIE and the current energy policy

• gives regulators and sector authorities a six-month period to amend, restate or issue all existing rules, regulations and administrative orders in compliance with the amended LIE provisions.

The bill is unclear with regard to whether there is an actual obligation to migrate grandfathered self-supply permits into LIE generation permits and whether it seeks to maintain a market share for private producers for the qualified power supply of the electricity sector.

Previous executive orders and regulatory actions pursued by the federal government have been successfully stayed in constitutional courts. In the next few weeks, the Mexican Supreme Court will rule on the constitutionality of the government's energy policy in an action filed by the antitrust regulator, the Federal Economic Competition Commission (Comisión Federal de Competencia Económica o COFECE).

The bill is problematic on different levels but raises the same constitutional, trade and competition concerns that are being analyzed by investors and reviewed by federal courts. It could also bring additional regulatory burden to energy generation projects.

Generally speaking, the proposed bill seems to violate Mexican trade obligations (e.g., national treatment, nondiscrimination, etc.) under several investment and other trade agreements, including the United States-Mexico-Canada Agreement (USMCA). Should the bill pass, it will surely increase stakes and tensions between the Mexican and the U.S. governments regarding USMCA commitments, as the Biden Administration will have to provide follow up to the letter sent by the U.S. trade and state authorities to the Mexican government urging it to review its energy policies.

In addition, some of the bill's provisions appear to clearly contravene constitutional retroactivity and free competition standards.

Foreign investors and other private stakeholders with renewable energy projects in Mexico will have to closely follow up the legislative process of the proposed bill and prepare legal strategies amid the upcoming reform.

The impact and legal remedies should be carefully assessed and will vary depending on the type of investment, financing features, stage and exposure on a case-by-case basis.

Carlos Ochoa is a partner in Holland & Knight's Mexico City office and focuses his practice on the energy and infrastructure sector. Alberto Esenaro and Aldo Gonzalez are associates in the Mexico City office.

This article is based on a client alert from Holland & Knight.

 

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