Reform to the Electric Industry Law: a new risk for energy projects in Mexico

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This alert has been updated to reflect the developments of March 9 and 10, 2021.

On March 9, 2021, the Decree that Reforms and Adds Diverse Provisions to the Electric Industry Law (Decreto por el que se reforman y adicionan diversas disposiciones de la Ley de la Industria Eléctrica, or Reform) was published in the Federal Official Gazette (Diario Oficial de la Federación).  It enters into force the day following its publication.

The bill that originated the Reform was initially filed by the Mexican President, Andrés Manuel López Obrador, on January 29, 2020 and was sent to the Mexican Chamber of Deputies for preferential consideration.[1]  The Mexican Chamber of Deputies approved the corresponding bill on February 23, 2021 and the Mexican Senate approved it on March 2, 2021.

The Reform essentially favors the dispatch of electricity generated by the state-owned Federal Electricity Commission (Comisión Federal de Electricidad, or CFE). Prior to the Reform, the Electric Industry Law (Ley de la Industria Eléctrica, or LIE) had clear rules on access to the grid based on power generation costs, giving priority to the least expensive generated electricity.

In this article, we analyze the contents of the Reform and provide an overview of key commentary on the Reform and the Mexican state’s energy policy in general.

The Reform

The Reform provides new rules for generators to access the grid, prioritizing the energy produced by the CFE power plants, regardless of the generation costs, in the following order:

  • First, "Energy Produced by Hydroelectric facilities"
  • Second, "Energy Generated by other (sic) CFE generation facilities […] such as nuclear, geothermal, combined-cycle and thermoelectric"
  • Third, "privately-owned wind and solar energy" and
  • Finally, "privately-owned Combined-Cycles […] and the rest of the other energy generation technologies."

It is worth mentioning that the CFE is the main owner and operator of hydroelectric centrals in the country, while the other sources of electricity generated by CFE are mostly fuel-based. Almost all existing and projected wind and solar/photovoltaic generation facilities in Mexico are privately owned. According to the statement of purpose of the Reform, wind and solar/photovoltaic generation is unsafe and unreliable to the system, as well as long-term renewable power purchase agreements, since they "cause risk and financial vulnerability to the entities that enter into them." Accordingly, the Reform creates "a new Physical Power Delivery and Network Capacity Contract" that would limit the participation of renewable generation in the sector.

The Reform is intended to strengthen CFE’s finances by increasing its market participation. On February 9, 2021, the Budget and Public Account Commission of the Mexican Chamber of Deputies issued an opinion on the budgetary impact of the Reform and stated that it would have "a positive effect on CFE’s finances."

Additionally, the Reform proposes the following:

  • The obligation that the permits granted under the LIE "be subject to the National Energy System planning criteria issued by the Mexican Ministry of Energy"
  • That "the issuance of Clean Energy Certificates […] not depend on the ownership or the commencement date of commercial operations of power generation facilities"
  • To eliminate the obligation to "purchase [power] by means of auctions by the Basic Services Supplier" (a subsidiary of the CFE), which, pursuant to the statement of purpose of the Reform, only sought to "guarantee the profitability of private investments in detriment of the CFE"
  • To oblige the Mexican Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) to revoke privately held self-supply permits "in the event they were obtained […] under the façade of self-generation entities (sic)" and
  • A revision of "the legality and profitability for the Mexican Federal Government of the Generation Capacity Commitments and Power Purchase Agreements entered into with independent power producers in detriment of the CFE under the [LIE]."

It is also worth mentioning that the statement of purpose of the Reform expressly refers to a June 22, 2020 memorandum, issued by President Obrador, urging the Mexican energy regulatory agencies to assume public control of the oil and power industry, and to apply a "new rescue policy" to Petróleos Mexicanos (Pemex) and the CFE, which are each 100 percent state-owned enterprises. In addition, on September 22, 2020, the President met with the main officials of the energy regulatory agencies and agreed that they will favor Pemex and CFE over any private investment.

The bill that originated the Reform was filed days before the Mexican Supreme Court declared unconstitutional almost the totality of the Policy of Reliability Security Continuity and Quality of the National Electric System – this policy was an attempt by Obrador’s administration to amend the current electricity market scheme, favoring CFE’s power generation over any other type of investment projects in the sector (which, together, represent a total investment of more than US$9.5 billion).

The Commentary

President López Obrador’s energy policy and, recently, the Reform have unleashed criticism from different stakeholders, both of a national and international scale, because of the impairment it could cause the sector.

On January 11, 2020 (shortly before the bill that originated the Reform was filed), the US government expressed its concerns about the uncertainty in the Mexican energy sector in a letter to the Mexican government signed by then Secretary of State Michael R. Pompeo, then US Secretary of Energy Dan Brouillette and then US Secretary of Commerce Wilbur L. Ross (each of them members of the former US Presidential Administration). In their letter, these officials pointed out that the Mexican state’s policies have threatened hundreds of millions of dollars in US investments in the sector and represent potential violations of the United States-Mexico-Canada Agreement (USMCA).

As soon as the bill that originated the Reform was filed, it was met with criticism from an array of organizations and experts. For example, Neil Herrington, Senior Vice President of the Americas of the US Chamber of Commerce, held that the Reform "would open the door for the reinstatement of a monopoly in the electricity sector and […] would directly contravene Mexico's commitments under the [USMCA]." Kenneth Smith Ramos, Mexico’s former chief of USMCA technical negotiations, stated that in the event the Reform was enacted, it would violate the USMCA and other treaties, like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

In this context, Mary Ng, Canada’s Minister of Small Business, Export Promotion and International Trade, mentioned in an email statement to Tatiana Clouthier, Mexican Minister of Economy, that "Mexico must maintain a stable and predictable business environment for Canadian firms."

Furthermore, Julie J. Chung, Acting Assistant Secretary of the US State Department’s Bureau of Western Hemisphere Affairs, in a telephone interview encouraged "Mexico to listen to the stakeholders, to listen to the private sector companies and really provide that culture, the atmosphere of free investment and transparency so that companies will continue to invest in Mexico."

In addition, various Mexican agencies and institutions have expressed their concerns about the Reform. Among these are (i) Mexico’s Federal Commission for Economic Competition (Comisión Federal de Competencia Económica, or COFECE) which sent an opinion to the Mexican Congress to formally recommend the Reform be struck down "given that it could severely hinder the free competition process in the electric power generation and trading sectors"; (ii) the Mexican Institute for Competitiveness (Instituto Mexicano para la Competitividad, or IMCO) which stated that the Reform would "set a dangerous precedent that would harm the investment climate and the Mexican economy by threatening legal certainty and the rule of law in the energy sector"; (iii) the Mexican Bar Association (Barra Mexicana de Abogados, or BMA), which expressed its "concern for the likely unconstitutionality and the violation of treaties" by the Reform; and (iv) the Mexican Institute of Finance Executives (Instituto Mexicano de Ejecutivos de Finanzas, or IMEF), which held that, among other things, the Reform represents "a setback in the development of a competitive electricity market."

As a result of the measures adopted throughout last year and those set forth in the Reform, foreign investors involved in energy projects in Mexico may wish to consider their rights and potential remedies under applicable investment treaties and other investment instruments.

In this regard, please see our series of articles on the potential for investment claims arising out of measures taken by states in response to the COVID-19 pandemic:

If you have any questions regarding these new requirements and their implications, please contact the authors, any member of our Energy team or your DLA Piper relationship attorney.

Read this article in Spanish.

 


[1]The preferential consideration of the Reform implies that it was analyzed, discussed and voted on by the Chamber of Deputies within a maximum period of 30 calendar days, to be sent to the Chamber of Senators, which had to resolve it within a period of the same extension.