Reforms in the energy legal framework in Mexico and challenge mechanisms

Oil and gas pipes pipeline

Energy Alert

Latin America Alert

By:

Throughout 2020 and 2021, the Mexican government has promulgated a number of legal reforms that favor the Federal Electricity Commission (Comisión Federal de Electricidad or CFE) and Petróleos Mexicanos (Pemex), both companies owned by the Mexican state, and give them competitive advantages in the hydrocarbon and electricity markets to the detriment of private investors in these sectors.

Said measures seek to reverse the legal framework derived from the 2013 constitutional energy reform, which opened the sector to private investments. These measures have been called the Energy Counter-Reform and include variations in the regulation with the purpose of restoring the monopoly power that CFE and Pemex exerted before the 2013 reform.

Among the measures of the Energy Counter-Reform, it is worth highlighting (i) the reform to the Electric Industry Law (Ley de la Industria Eléctrica or LIE), which seeks to favor the CFE, and (ii) the recent reforms to the Hydrocarbons Law (Ley de Hidrocarburos or LH), which seek to favor Pemex.

In this article, we briefly describe the content of the reforms to the LIE and the LH, as well as the numerous challenges and legal disputes that have been filed against them.

The reforms and the measures derived therefrom

(a) The LIE reform

The LIE reform, published in the Federal Official Gazette (Diario Oficial de la Federación or “DOF”) on March 9, 2021, which we analyzed in more detail in a previous article, in sum, seeks to strengthen the economic position of the CFE by increasing its participation in the power generation and supply market, thereby, displacing private generators and suppliers.

Among other things, this reform sets forth new rules for the access of generators to the grid, prioritizing the energy generated by the CFE, regardless of generation costs (which, in the case of private renewable energy generation plants, are lower).

Likewise, the LIE reform has a number of detrimental effects. The reform subjects market participants to planning criteria issued by the Mexican Ministry of Energy (Secretaría de Energía), relaxes the requirements for the granting of clean energy certificates in favor of the CFE, eliminates the obligation of the CFE to buy cheaper energy for supply through auctions and imposes serious restrictions on the renewable energy generation scheme through self-supply, a scheme widely used by private companies.

(b) The LH reforms

As stated by the Mexican Federal Economic Competition Commission (Comisión Federal de Competencia Económica or COFECE) in an opinion it issued in use of its powers in antitrust matters, the LH reforms, published in the DOF on May 4, 2021, and May 19, 2021, respectively, seek to modify the principles of free competition in the fossil fuel market, to grant Pemex the monopoly control that it exerted on said market before the 2013 energy reform;

In light of the bill that proposed the reform, which we described in our previous article, the reform published on May 4, 2021 detailed (i) the procedure for suspending permits in case of "imminent danger to national security," (ii) the revocation of permits that do not meet the minimum fuel storage requirements and (iii) instructed the Mexican Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) to carry out such suspension and revocation actions.

In this context, on May 14, 2021, the CRE published two resolutions[1] in the DOF that resulted in 139 permits for the commercialization of petroleum products, oil, and other products owned by private investors being declared as expired. As a result of the resolutions, the CRE has canceled more than 200 permits so far this year.

The May 19, 2021 reform, as a result of (supposedly) greater competition in the fuel market, [2] abolishes the CRE's power to subject first-hand sales of fuel, as well as the commercialization of fuels carried out by Pemex or its subsidiary organizations, to asymmetric regulation principles. The purpose of said asymmetric regulation was to contain the market power that Pemex held at the time the 2013 reform entered into force.

In this context, the CRE published in the DOF Resolution No. A/015/2021, whereby it revoked the almost 50 administrative resolutions related to the imposition of asymmetric regulatory principles on Pemex and its subsidiary entities. These instruments, established, among other things, price regulations, contract models and other conditions to which Pemex transactions were subject.

The legal challenges against the measures

The implementation of both reforms will have serious implications on the Mexican power and fuel sectors, by changing the rules that had promoted private investment. Accordingly, the Mexican National Organization of Oil Dealers (Organización Nacional de Expendedores de Petróleo or Onexpo) pointed out that the stoppage of permits by the CRE and the deregulation of Pemex's wholesale transactions means a blow of around US$1 billion to private investments. Therefore, multiple private and public actors have challenged the reforms through various mechanisms.

On the one hand, on May 6, 2021, COFECE published a notice of initiation of an investigation in the DOF for the possible commission of relative monopolistic practices in the power generation, wholesale marketing and supply of electricity and associated products markets; a clear sign against the monopoly power sought by the CFE. [3]

On the other hand, on April 8, 2021, legislators opposed to the LIE reform asserted an unconstitutionality action (acción de inconstitucionalidad) against it, since, among other things, the reform violates the constitutional principles of legality, legal security and non-retroactivity, and violates principles set forth in international treaties, such as the United States-Mexico-Canada Agreement (“USMCA”).

Likewise, on April 22, 2021, COFECE filed a constitutional controversy (controversia constitucional) against the LIE reform, since it prevents the agency from safeguarding competition and free concurrence in the sector. The constitutional controversy was admitted by the Mexican Supreme Court of Justice (Suprema Corte de Justicia de la Nación or SCJN) on May 11, 2021, although, without granting the suspension of the application of said reform requested by COFECE.

In both cases, the Full Court of the SCJN will determine if said reform is unconstitutional, for which a majority vote of eight of the 11 ministers will be necessary.

Notwithstanding the foregoing, as of the date of this publication, the LIE reform has been indefinitely suspended due to the multiple amparo constitutional review actions filed against it by various companies. Likewise, some of the most controversial provisions derived from the LH reform published on May 4, 2021[4] were suspended indefinitely by Mexican federal judges as a consequence of the amparos filed against them. This was recognized in a Notice published in the DOF on May 26, 2021. Furthermore, on May 31, 2021, two federal judges suspended the LH reform published on May 19, 2021.

In other words, as appropriate, the rules prior to the reforms must be applied while said lawsuits are substantiated. However, it is highly likely that the merits of said amparos will be finally resolved by the SCJN.

Even though certain judges have contained the policies promoted by the current administration (and, as a result, have been criticized by the president of Mexico himself), the SCJN is not free from political pressure. Likewise, President López Obrador has threatened to reform the Mexican Constitution if the legal reforms are successfully combatted before the judiciary.

In this context, it is relevant that Michael J. Sommers, President and CEO of the American Petroleum Institute (API), stated in a letter sent to senior officials of the US government, that the various measures adopted by the Mexican government violate the USMCA.

As evidenced by a recent investment arbitration filed by investors in the Mexican upstream hydrocarbon sector against the Mexican government under the legacy regime of the USMCA, investment arbitration under treaties can offer an effective mechanism in case foreign investors in Mexico are deprived of parts of the value of their investment[5] or of the use or reasonably-to-be expected economic benefit thereof.[6]

As a result of the measures adopted since 2020, it is recommended that investors who have participated in projects in this sector in Mexico consider the rights and potential claims they are entitled to, both at the local jurisdictional level, as well as under the applicable investment treaties or other international instruments.

In this regard, please see our series of articles on the potential for investment treaty 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] Resolutions No. A/010/2021 and No. A/011/2021, respectively.

[2] According to data from COFECE, Pemex is still the main wholesaler, with 86% of the gasoline and 72% of diesel markets.

[3] COFECE points out that, "[i]n the event that the commission of a relative monopolistic practice is proven, the responsible economic agent(s) could be sanctioned with fines of up to 8% of their income and the order to suppress the conduct.

[4] Such as the revocation of permits due to non-compliance with certain requirements and the possibility that Pemex and/or CFE occupy the facilities whose permits are suspended.

[5] Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award, 12 April 2002, paragraph 107.

[6] Metalclad Corp. v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000, paragraph 103.