USMCA Energy Dispute: The Key Facts

The United States alleges that Mexico's Electric Power Industry Law violates provisions of the USMCA. The law requires Mexico’s grid operator to prioritize CFE-generated electricity over electricity generated by private competitors. Here two CFE workers. (Photo: CFE)

Paul T. Luther, Matthew T. West and Alexander Reinert, Baker Botts. (Latinvex collage)


The United States challenges Mexico's energy policies under the USMCA.

BY PAUL T. LUTHER, MATTHEW T. WEST AND ALEXANDER REINERT

On July 20, 2022, the United States requested consultations with Mexico under the Dispute Settlement chapter of the United States-Mexico-Canada Agreement (USMCA), arguing that Mexico’s government favors its state-owned utility and oil companies at the expense of American businesses. The challenge is the first step in what could lead to tariffs on various Mexican products if the parties do not reach a resolution.

A. U.S. Allegations Against Mexican Government Energy Policies

The United States’ request targets four Mexican energy policies that the United States alleges violate Mexico’s commitments under the USMCA trade agreement. The action by the United States comes in response to the Mexican government’s efforts in recent years to reinstate the primacy of its state-owned electrical utility, CFE, and oil and gas company, Pemex.

1. Prioritizing Electricity Generated by the State-Owned Utility

The first Mexican energy policy targeted by the United States is the Electric Power Industry Law, which was amended in March 2021 to require Mexico’s grid operator to prioritize CFE-generated electricity over electricity generated by private competitors, regardless of cost or environmental impact. The United States alleges that this law violates provisions of the USMCA’s Market Access chapter, which requires that U.S. goods are accorded national treatment in Mexico. The United States also alleges that this law is inconsistent with the USMCA’s Investment chapter, which requires that U.S. investors are treated no less favorably than Mexican investors.

2. Obstructing Private Companies from Operating in the Energy Sector

Second, the United States argues that Mexico “hinders the ability of private companies to operate in Mexico’s energy sector,” including by “delaying, denying or failing to act on applications for new permits or permit modifications; suspending or revoking existing permits; or otherwise blocking private companies’ ability to” effectively operate in the energy sector, including in renewable energy projects, oil storage and retail fuel stations. The United States claims that these measures appear to violate the following provisions of the USMCA chapters on Market Access, Investment, State-Owned Enterprises, and Publication and Administration:

Article 2.3, because the measures provide treatment less favorable than that accorded to like products of national origin;

Article 14.4, because they favor Mexican investors and their investments over U.S. investors and their investments;

Article 2.11, because they prohibit or restrict imports or exports of a good;

Article 22.5.2, because the relevant administrative body “is not exercising its regulatory discretion in an impartial manner with respect to enterprises that it regulates, including enterprises that are not state-owned enterprises”; and

Article 29.3, because Mexico “is not administering its laws in a consistent, impartial, and reasonable manner.”

3. Favoring Pemex in Extending Time for Regulatory Compliance

Third, the U.S. request challenges a regulation issued in 2019 by Mexico’s Energy Regulatory Commission granting only Pemex a five-year extension to comply with maximum sulfur content requirements under its applicable automotive diesel fuel standard. The United States argues that Mexico has failed to accord national treatment to U.S. goods with this regulation in violation of the USMCA’s Market Access chapter. The United States also alleges that the measure is inconsistent with the State-Owned Enterprises chapter because Mexico has not exercised its regulatory discretion in an impartial manner by granting only Pemex an extension.

4. Incentivizing the Sourcing of Natural Gas in Mexico from State-Owned Entities

Fourth, the United States contests an “official letter” sent by Mexico’s Secretary of Energy to its Energy Regulatory Commission and National Natural Gas Control Center that announced a national energy policy and “supply guarantee strategy” that “would incentivize or require current or future users of Mexico's natural gas transportation service to source natural gas from CFE or Pemex and would impose restrictions on the importation of U.S. natural gas.” The letter urges these agencies to take all necessary actions to implement the energy policy criteria established in the letter. The U.S. request challenges the letter, claiming that it violates the USMCA’s Market Access chapter because it provides treatment to imported products that is less favorable than that accorded to like products of national origin and restricts the importation of a good of the United States destined for Mexico.

B. Process for Dispute Settlement Under the USMCA

With its submission of the consultation request, the United States began what could be a lengthy process of consultations and dispute settlement proceedings under the USMCA. Under Chapter 31 of the USMCA, the United States and Mexico must begin consultations within 30 days of the U.S. request. If the consultations do not lead to a resolution, the United States could request that a panel of experts be established to issue a ruling on the matter. If the panel finds that Mexico’s measures are inconsistent with the USMCA, the parties will have 45 days to negotiate a resolution. If a resolution is still not reached after this negotiating period, the United States could impose import tariffs on Mexican products to offset the damage suffered by U.S. companies.

Following the lead of the United States, Canada has also requested its own consultations with Mexico under the USMCA regarding Mexico’s energy policies. Whether these disputes are resolved through consultations or a formal panel procedure, they will likely have significant implications for the North American energy sector.

Partner Paul Luther is Firmwide Section Chair, International Trade Group at Baker Botts; Partner Matthew West is Firmwide Section Chair, International Trade Group and Alexander Reinert is an Associate in the International Trade Group at Baker Botts. 

Cullen Richardson, Associate, Global Projects Department, Houston, also contributed to this article.

Republished with permission from a client alert by Baker Botts.

 

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