MEXICO ENERGY ALERT: Reform of Mexico’s Electric Power Industry

On February 1, 2021, Mexican President Andrés Manuel Lopez Obrador submitted an initiative to amend the Electric Power Industry Law to Congress. The initiative appeared to be part of the current administration’s plan to reverse the energy reform introduced by former president Enrique Peña Nieto in 2013 that liberalized the energy market.

Congress approved the initiative on March 2, 2021, and the amended Electric Power Industry Law (the “Law”) entered into force on March 9, 2021. However, several challenges ensued. For example, since March 6, 2021, several companies have initiated writs of amparo, arguing that the Law violated their free competition constitutional rights. As a result, the courts generally suspended the effects of the Law until the amparo writs are decided. Additionally, on April 8, 2021, several Senators initiated a court proceeding, seeking a declaration that the Law is unconstitutional.

In response to the constitutional challenges, on September 30, 2021, President Lopez Obrador submitted to Congress an initiative to amend the Constitution, which aimed to validate the constitutionality of the Law. The initiative was pre-approved by the joint Energy and Constitutional Matters Committees; however, on April 18, 2022, President Lopez Obrador’s attempt failed to reach the qualified majority required in the House of Representatives, allowing the investors’ constitutional challenges to the Law in the Courts to proceed.

On March 9, 2022, the Mexican Supreme Court of Justice (“SCJ”) dismissed the Senators’ action. However, as discussed below, the SCJ’s decision does not affect certain investors’ constitutional claims.

As set out in more detail below, the Law drastically alters Mexico’s legal framework for the electric power market, which could substantially interfere with private investment.

What Changes with the Law?

The Law’s main objective is to reconfigure the Mexican electric power sector by strengthening the role of the Federal Electricity Commission (“CFE” for its acronym in Spanish), thus limiting the participation of privately-owned companies.

To achieve that objective, the Law includes the following, among other measures:

• CFE’s Priority of Access: CFE’s hydroelectric plants and other CFE plants (g., nuclear, geothermal, combined cycle, and thermal) have priority of access to the electricity grid. Solar and wind farms and combined cycle plants operated by private entities would not be prioritized in the supply of electric power production to the grid.
• Granting CELs to Pre-existing Investments: The issuance of Clean Energy Certificates (“CEL” for its acronym in Spanish) by the Ministry of Energy does not depend on the commercial operation date of the power plants. Rather, the Law allows the approval of CELs to plants predating the Energy Reform (e., not new projects or re-powering of existing projects to increase clean energy production). This change has been criticized as it may affect the raison d'être of CELs: the development of new renewable power plants that would allow the reduction of polluting sources to meet the international obligations assumed by Mexico to address climate change.
• CRE’s Broaden Authority: The Energy Regulatory Commission (“CRE” for its acronym in Spanish) can grant, assign, modify, extend, or reject any permit request by considering the National Electric System’s planning criteria prepared by the Ministry of Energy. The Law also broadens CRE’s authority to revoke self-supply permits because it includes a new ground for revocation based on “fraud of the law.”
• End of CFE’s Public Bids: CFE is no longer obliged to purchase electricity through public bids organized by the National Center for Energy Control (“CENACE” for its acronym in Spanish). Before the Law, CENACE would manage bids to purchase electric power in the country in order to obtain the most cost-efficient electricity supply. Instead, the Law allows CFE to buy electricity from any supplier or generator at its sole discretion. This measure will likely affect end consumers since procurement of contracts would no longer need to prioritize cost-efficiency.
• CFE’s Revision of PPAs: Under the Law, CFE has the power to review the legality and profitability of the Power Purchase Agreements and Power Generation Capacity Commitments entered into by independent electric power producers and CFE. This entails reviewing, renegotiation and potential early termination of the existing contractual agreements. This power has been criticized because it allows CFE to disregard contractual obligations in light of circumstances that did not exist when the agreements were entered into.

The Effects of the SCJ’s Decision

While the SCJ’s decision dismissed the Senators’ unconstitutionality action, it did not confirm the constitutionality of the Law. This is because, under Mexican law, a decision to declare either the constitutionality or unconstitutionality of a law requires a qualified majority of eight out of the eleven Ministers’ votes. In this case, the votes did not reach the qualified majority needed to confirm or deny the constitutionality of the Law. This has consequences, as addressed below.

Four provisions of the Law were subject to constitutional control: (1) CFE’s Priority Access; (2) Granting CLEs to Pre-Existing Investments; (3) CRE’s Broaden Authority; and (4) CRE’s Revision of PPAs. Seven of the eleven Ministers held that provisions (1) and (2) are unconstitutional. However, this was not enough to reach the qualified majority required to declare such provisions unconstitutional. On the other hand, the SCJ did reach a qualified majority regarding the constitutionality of provisions (3) and (4).

As a result, investors can still bring amparo proceedings to allege that the provisions of the Law that the SCJ has not ruled to be constitutional are violating their constitutional rights. Furthermore, the votes to grant a writ of amparo require a simple majority.

If you have any questions or would like to know more about how we can help with this topic, please get in touch with Christian Leathley, Amal Bouchenaki, Florencia Villaggi, Daniela Páez, or your HSF contact.