Mexico’s New Bill To Reshape the Energy Sector Could Impact Private Investments
On Sept. 30, the Mexican Government introduced a bill to amend the country’s Constitution, which would impose substantial limitations to the energy sector to the detriment of private power generators. The bill seeks to give back complete control of the electricity sector to Mexico’s state utility company, the Federal Electricity Commission (CFE).
If passed, the power generation sector will transition from a free and competitive market in which CFE and various power generators compete against each other to an unfair market in which CFE is granted both Constitutionally-protected market dominance as well as a leading role in regulating the very market in which it has market dominance. The CFE would have the exclusive right to supply energy to a substantial part of the market at any cost and control the power generators’ participation to provide energy to the remaining portion of the market. As a result, this new regime would affect private power generators that have made or are making investments in Mexico, particularly renewable energy companies (e.g., wind and solar). The bill also includes modifications that would impact the mining and oil & gas sectors, as explained below.
This is not the first attempt by the Mexican Government to reshape the energy sector and grant CFE an advantage over private power generators. In March 2021, Mexico’s Congress passed a bill amending the Electric Industry Law which was immediately challenged through multiple lawsuits. However, the courts dismissed those challenges on procedural grounds.
In 2013 (and later in 2014), Mexico underwent a major constitutional reform to, among other things, allow private investment in the power generation and commercial supply of power sectors, which before the reform was under the control of CFE. However, it maintained control over the transmission and distribution of power, as these sectors remained under the exclusive control of the Mexican State.
Furthermore, to ensure fair and open conditions between power generators and CFE, the 2013 reform also created an independent agency, the National Center for Energy Control (CENACE), which controls the national electricity market and guarantees non-discriminatory access to the grid.
Mexico consolidated the 2013 reform in the most recent international trade negotiations: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the United States-Mexico-Canada Agreement (USMCA). Likewise, Mexico is a party to several investment treaties to protect foreign investments. Therefore, if passed, the proposed amendments to Mexico’s Constitution would impact investments made in Mexico by investors from countries party to those treaties, including U.S. investors.
Relevant Aspects of the Bill
Revocation of power generation permits
All permits granted to private companies for power generation (e.g., wind and solar) would be revoked, and pending requests would be canceled.
Additionally, if approved, the bill would grant CFE exclusive right to supply at least 54% of the power required nationwide (regardless of its costs). In comparison, private generators would be limited to provide up to 46% based on the lowest-production-costs criteria. Furthermore, to be able to participate, private companies would have to enter into contracts with CFE. Finally, to consolidate CFE’s position as Mexico’s regulator in the power generation sector, CENACE would be incorporated within the CFE.
In sum, as a result of these changes, CFE would no longer compete with private power generators, and it would enjoy an exclusive and substantive portion of the market (i.e., at least 54%). Furthermore, the participation of private companies in the market would be limited to 46% of the market, which CFE would supervise and subject to conditions.
Extinction of specialized energy regulators
The 2013 reform created two autonomous and specialized agencies to oversee the energy sector: the National Hydrocarbons Commission (NHC) and the Energy Regulatory Commission (ERC), both of which would be extinguished by the proposed bill.
The NHC oversees the regulation applicable to the exploration and extraction of hydrocarbons, with authority to enter into contracts with companies to explore and produce hydrocarbons. The ERC has the authority to regulate and grant permits for activities like transportation, distribution, and storage of hydrocarbons and regulate and grant permits for power generation. If approved, the Ministry of Energy would take over the functions of both agencies.
Limitations on the extraction of lithium
The bill also includes a prohibition to grant mining concessions to produce lithium. Furthermore, lithium concessions already granted would remain valid provided that the concessionaires demonstrate to the Ministry of Economy that they are carrying out exploration activities.
Next Steps in The Legislative Process
In Mexico, the legislative process to amend the Constitution requires that its Congress approve the bill by two-thirds of each of its two chambers. Subsequently, it must be approved by a majority (i.e., 50% plus one) of the state legislatures. It is possible that the bill could be discussed and voted in Congress before the end of the year.
In the meantime, companies are advised to assess the impact of the constitutional amendments on their businesses in the context of the USMCA, the CPTPP, and other applicable international agreements.
If you would like a translated copy of the bill in English or if you have any questions regarding the content of this alert, please contact Mark Ludwikowski (email@example.com; 202-640-6680), Aristeo Lopez (firstname.lastname@example.org; 202-552-2366), Joe Donovan (email@example.com; 202-572-8672), or another member of Clark Hill’s International Trade & International Arbitration or Energy & Renewables teams.
The views and opinions expressed in the article represent the view of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.
Clark Hill Simply Smarter Employment Law SeminarExplore more
The Learned Concierge - December 2023, Vol. 3
Monthly legal insights on the trends impacting the retail, hospitality, and the food & beverage industries.
WEBINAR-Our Working Theory: Creating a Respectful Workplace is the Antidote to Sexual Harassment in the Workplace
Sexual Harassment remains a persistent problem in the workplace despite regulation, mandatory training, and national attention, such as the #MeToo Movement.