•  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.