•  On September 30, 2021, President Andrés Manuel López Obrador presented to Congress a constitutional reform of the electricity sector which modifies three articles of the Mexican Constitution (25, 27 and 28), reversing key parts of the 2014 energy reform that opened the sector to private investment. The congressional debate and vote on the reform are scheduled to take place as early as mid-November.
  • If it passes in its current form, the reform would have serious implications for companies with investments in Mexico’s electricity sector. Foreign investors in this sector should assess options they may have under Mexico’s trade and investment treaties to seek potential remedies for adverse impacts.
  • Recent preliminary analysis by the U.S. Department of Energy concludes that implementation of the reform in its current form would increase Mexico’s greenhouse gas emissions and result in higher generation costs, making Mexico a less competitive jurisdiction for investment.[1]
  • Politically, the President’s move could also have implications beyond the energy sector by dividing the opposition coalition in the run-up to the 2024 elections.

Since the beginning of his administration, President López Obrador has sought to strengthen the role of the sate-owned Comisión Federal de Electricidad (CFE) in providing electricity and regulating the market.  Earlier in 2021, the Mexican Congress approved reforms to the Electricity Industry Law, but implementation was blocked by the courts.  The constitutional reform is designed to skirt similar judicial intervention and would imply a major change in the medium and long term outlook for the sector.

The proposed constitutional reform is intended to: maintain CFE’s participation in the market at 54%  by limiting private generators to 46%; change the current dispatch regime in favor of CFE instead of the lowest-cost power generators (often private actors); cancel electric generation permits, power purchase agreements, self-supply contracts and Clean Energy Certificates for private and public electricity generators; eliminate the country’s independent energy regulatory agencies (the Comisión Nacional de Hidrocarburos or CNH and Comisión Reguladora de Energía or CRE); and have the National Center for Energy Control (CENACE) be absorbed by the CFE.

The Constitutional reform would also impact the production of lithium from Mexican deposits, requiring the minerals’ future production and exploitation be reserved for the State.

WHAT TO WATCH:

  • Passing the constitutional reform will be an uphill, but not impossible, battle for the President. His legislative coalition falls short of the two-thirds majority needed in the Mexican House and Senate to pass constitutional amendments.
  • In the House, Morena and its allies need 334[2] votes for the qualified majority necessary to pass the reform, assuming all legislators are present. The Green Party (PVEM), one of Morena’s key allies in the house, to date has not shown a clear position toward the electricity reform.
  • In the opposition bloc, the center-right PAN, the center-left PRD, and Movimiento Ciudadano have adamantly opposed the reform. The PRI however may be partly in play, even though the PRI introduced and passed the 2014 energy reform that opened the sector to private investment.  PRI leadership has not publicly rejected Morena’s effort and instead is proposing to convene experts to analyze the details of the proposed reform.  Those opposed to the reform fear that the PRI could separate themselves from the opposition bloc, increasing the chances that some form of the bill could pass.
  • In Mexico’s Senate, where the President’s party also lacks a qualified majority, the path looks more difficult. The PRI holds 13 votes out of 128 total in the Senate, of which 85[3] are needed to enact the reform, assuming all senators are present at the time of the vote.  A few PRI senators have publicly rejected the reform in its current form.  However, on September 27, five Senators (three from the President’s coalition) banded together to create a new group, and they could make the difference if they align on this reform.
  • The congressional debate and vote for the reform are scheduled to take place as early as mid-November, after the discussion and vote for the 2022 federal budget takes place.
  • The Constitutional reform would also need to be approved by a majority (50%+1) of state legislatures (e., 17 states). President López Obrador’s coalition controls 20 of the country’s 32 State legislatures and holds the governor’s office in 16 states.

WHAT IS AT STAKE:

Political Implications in Mexico

  • The outcome of the political debate on this constitutional reform will set an important precedent for other reforms planned by President López Obrador and his party. These other reforms may encompass fundamental changes to the electoral system, including opening debate on the autonomy of the country’s widely respected electoral institution and changes to Mexico’s security institutions, including further strengthening the role of the uniformed military over Mexico’s security structure.
  • The future of the opposition bloc going into the 2024 presidential election likely depends on their united position toward the electricity bill. Divisions over the bill could fracture the opposition alliance heading into those elections and key state races that will be decided concurrently.

Internationally

  • Should the reform be implemented, Mexico could face challenges from foreign investors under its international trade and investment treaties that allow investors to initiate arbitration directly against the government. For example, recourse to arbitration is available to investors of ten countries that are party to the Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”).
  • Similarly, U.S. investors could potentially file arbitration claims under the S.-Mexico-Canada Agreement (“USMCA”), which provides enhanced protections for certain investors in the “power generation” sector. Potential claims could also be made by U.S. and Canadian investors under the North American Free Trade Agreement (“NAFTA”), which—although superseded by the USMCA—retains the option for investors to initiate arbitration proceedings for qualifying “legacy” investments until July 1, 2023. NAFTA contains exceptions specific to the energy sector that are not contained in the USMCA that may affect such claims.
  • Foreign investors in the Mexican electricity sector should assess whether they may pursue arbitral remedies under Mexico’s investment treaties and how potential domestic litigation in Mexico may affect access to those remedies.
  • In addition to investment arbitration, Mexico could also be subject to treaty challenges by other countries, which could claim that the reform violates other obligations, including—for example—provisions in the USMCA or CPTPP regarding state-owned enterprises.
  • By eliminating Clean Energy Certificates, the reform would eliminate Mexico’s most important mechanism for the reduction of greenhouse gas emission at the domestic level; this mechanism was included within the nationally determined contribution under the Paris Agreement. According to recent preliminary analysis by the U.S. Department of Energy, Mexico’s greenhouse emissions could increase by as much as 65 percent as well as raising costs for the generation of electricity. Both impacts would make Mexico a less competitive jurisdiction for foreign investment.

[1] https://www.bnnbloomberg.ca/u-s-energy-department-s-nrel-sees-amlo-bill-pushing-up-emissions-and-costs-1.1673102

[2] Considering that there are 500 legislators in the House, 334 votes are required to reach a qualified majority – or a smaller number, depending on the total number of attendees at the session.

[3] Or a smaller number depending on the senators present in the plenary session.

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Photo of Kimberly Breier Kimberly Breier

Kimberly Breier has more than 20 years of experience in foreign policy, primarily focused on Western Hemisphere affairs. Prior to joining the firm, Ms. Breier, a non-lawyer, was Assistant Secretary in the Bureau of Western Hemisphere Affairs at the U.S. Department of State.

Kimberly Breier has more than 20 years of experience in foreign policy, primarily focused on Western Hemisphere affairs. Prior to joining the firm, Ms. Breier, a non-lawyer, was Assistant Secretary in the Bureau of Western Hemisphere Affairs at the U.S. Department of State. She also served as the Western Hemisphere Member of the Policy Planning Staff.

Ms. Breier was previously the founder and Director of the U.S.-Mexico Futures Initiative, and the Deputy Director of the Americas Program at the Center for Strategic and International Studies (CSIS). She also was Vice President of a consulting firm, leading country risk assessment teams for private clients in Mexico, Argentina, and Chile.

In addition to her private sector and think tank experience, Ms. Breier served for more than a decade in the U.S. intelligence community as a political analyst and manager, primarily focused on Latin America.

From January 2005 to June 2006, Ms. Breier served at the White House in the National Security Council’s Office of Western Hemisphere Affairs, first as Director for Brazil and the Southern Cone, then as Director for Mexico and Canada, and also as an interim Director for the Andean region.

Prior to her government service, Ms. Breier was a senior fellow and director of the National Policy Association’s North American Committee—a trilateral business and labor committee with members from the United States, Canada, and Mexico.

Photo of Gerónimo Gutiérrez Fernández Gerónimo Gutiérrez Fernández

Gerónimo Gutiérrez Fernández, is a senior advisor at the firm. He provides strategic advice to businesses and governments on political risk, public affairs, communications, and business development. Gerónimo, a non-lawyer, has over 20 years of experience in senior government positions under five Mexican…

Gerónimo Gutiérrez Fernández, is a senior advisor at the firm. He provides strategic advice to businesses and governments on political risk, public affairs, communications, and business development. Gerónimo, a non-lawyer, has over 20 years of experience in senior government positions under five Mexican presidents in the areas of finance, trade, national security and diplomacy. Most recently, he served as Mexico’s Ambassador to the United States. In that position, he played a prominent role in the negotiation of the United States, Mexico and Canada Agreement (USMCA).

He previously served as Managing Director of the North American Development Bank (NADB), Deputy Secretary for Governance and Homeland Security, member of the National Security Council’s Executive Committee and, in the Foreign Ministry, as Under Secretary for Latin America and the Caribbean and Under Secretary for North America. In the latter capacity, he coordinated day-to-day trilateral and bilateral affairs with the United States and Canada. He also led negotiations for the creation of the Security and Prosperity Partnership for North America (SPP) – prelude to the present day North American Leaders Summit.

Gerónimo has also held other Mexican federal government positions in the Ministries of Economy and Treasury, the Office of the President, and Banobras.

Photo of José Arvelo José Arvelo

José Arvelo helps clients navigate and tackle their most complex disputes as counsel in high-value international arbitrations as well as transnational and multi-district litigation.

He has helped secure sizeable awards in arbitral proceedings conducted in English and Spanish, and defended clients against multi-million-dollar…

José Arvelo helps clients navigate and tackle their most complex disputes as counsel in high-value international arbitrations as well as transnational and multi-district litigation.

He has helped secure sizeable awards in arbitral proceedings conducted in English and Spanish, and defended clients against multi-million-dollar claims brought before international tribunals and U.S. courts. A native Spanish speaker, José also helps clients investigate and address allegations of bribery or other misconduct in Latin America.

José’s international arbitration work centers on representing multinational companies from diverse industries—e.g., energy, mining, consumer brands, and technology—in connection with investor-state and commercial disputes spanning the globe, with a focus on Latin America. His U.S. litigation practice focuses on complex multi-district and transnational litigation involving mass-tort claims and issues of international law. As part of his white-collar and investigations practice, José has advised corporate and individual clients facing allegations of wrongdoing and corruption in multiple Latin American countries.

Photo of Kate McNulty Kate McNulty

Kate McNulty is an associate in the Washington office who helps clients navigate complex international arbitrations and international trade matters. She has represented corporate clients in both commercial and investment treaty arbitrations, including under ICSID, ICC, UNCITRAL, and ICDR rules. She also provides…

Kate McNulty is an associate in the Washington office who helps clients navigate complex international arbitrations and international trade matters. She has represented corporate clients in both commercial and investment treaty arbitrations, including under ICSID, ICC, UNCITRAL, and ICDR rules. She also provides legal and strategic advice to clients on global policy and international trade issues relating to the negotiation, implementation and enforcement of bilateral and multilateral trade agreements, including in the areas of intellectual property, market access, regulatory trade barriers, government procurement, and investment.

Kate joined the firm after serving as a Foreign Affairs Officer in the Office of Multilateral Trade Affairs at the U.S. Department of State, where she managed trade enforcement and trade policy issues, and participated in the negotiation of international trade agreements on behalf of the U.S. Government.

Lorena Montes de Oca

Lorena Montes de Oca is a policy advisor in Covington’s Public Policy Practice-Latin America through which she provides strategic advisory and regulatory advice to clients doing business across Latin America.

Lorena, a non-lawyer, has over a decade of experience in public policy and…

Lorena Montes de Oca is a policy advisor in Covington’s Public Policy Practice-Latin America through which she provides strategic advisory and regulatory advice to clients doing business across Latin America.

Lorena, a non-lawyer, has over a decade of experience in public policy and international trade. During this time, she has supported private sector companies and policymakers on a broad range of sectors such as energy, trade and investment, technology, policymaking and economic development.

In addition, Lorena has particular experience in supporting companies with complex cross border projects between the U.S. and Mexico.