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Constitutional Reform Initiative for the Electricity Sector

On September 30, 2021, Mexican President Andrés Manuel López Obrador sent to the Chamber of Deputies an "Initiative with a draft of decree amending articles 25, 27 and 28 of the Political Constitution of the United Mexican States in the field of energy" (hereinafter the "Initiative").1

Through the Initiative, the Mexican President intends to substantially modify the electricity sector in Mexico with respect to the current regime created by the energy reform of 2013 by amending Articles 25, 27 and 28 of the Political Constitution of the United Mexican States and establishing nine transitory articles. It should be noted that the Initiative not only implies changes in the electricity sector, but also in the mining sector (with respect to the regulation of lithium and other minerals considered strategic) and even in the hydrocarbons sector. Among the most relevant issues of the Initiative are the following:

 

Explanatory Memorandum

The Initiative’s explanatory memorandum (exposición de motivos), which contains the facts and reasons behind the same, explains that the constitutional energy reform of 2013 meant a regressive regulatory change, which had the main objective of pursuing: (i) the elimination of the State’s energy companies; (ii) the granting of unlimited benefits to the private sector; and (iii) the weakening of the National Electric System, energy security and national security in Mexico. The Initiative seeks to terminate with the energy reform of 2013 and return full control of the national electricity sector to the Mexican State.

 

Electricity Sector

  • Establishment of electricity as a strategic area: The Initiative proposes to create a single strategic area for electricity, which would consist of generating, conducting, transforming, distributing and supplying electricity. By considering electricity as a single strategic area, all the activities of the electricity industry listed above would be exclusively carried out by the State, through the Federal Electricity Commission (Comisión Federal de Electricidad "CFE").
  • Cancellation of permits and contracts. The Initiative proposes to cancel (i) all power generation permits that have been granted, (ii) power purchase agreements that have been executed with the private sector (such as contracts under the independent power production scheme), and (iii) all requests related to permits and contracts that are pending of resolution. Likewise, it should be noted that: (i) generation from self-supply permits that were granted in contravention of the provisions of the abrogated Public Utility Electricity Law (Ley del Servicio Público de Energía Eléctrica), will not be recognized or acquired by the CFE; and (ii) the surplus generation of Independent Power Producers, derived from permits superimposed on the original permit of the power plant concerned, will not be recognized in this new electric regime.
  • Limitation of private participation in the generation activity. It is foreseen that private sector power plants will only be able to dispatch up to 46 percent of the electric energy required by the country.
  • Entering into long-term bilateral financial hedging contracts with CFE. It is expected that the CFE will enter into long-term bilateral financial hedging contracts for the purchase of electric energy and the capacity of private sector power plants that will be able to continue generating electricity (these being power plants of independent power producers, without considering surpluses, plants associated with long-term auctions, power plants built as of the energy reform of 2013 and self-supply plants considered "authentic").
  • Changes in the nature of the CFE. The Initiative proposes that (i) the CFE be integrated as a State agency (organismo de Estado) with legal personality and its own assets (autonomous in the exercise of its functions and administration), responsible for the strategic area of electricity. Likewise, it is proposed that the CFE be integrated vertically and horizontally, eliminating the strict legal separation of its companies, subsidiaries and affiliates, maintaining only the CFE subsidiary CFE Telecomunicaciones e Internet para Todos and the affiliates CFEnergía, CFE International and CFE Capital.
  • Reincorporation of CENACE to CFE. The Initiative proposes that the National Center of Energy Control ("CENACE") be incorporated into the CFE with all its functions and attributions. This implies that the CFE will be in charge of procedures for dispatching power plants.
  • Elimination of the CRE and CNH. The Initiative proposes the elimination of the Energy Regulatory Commission ("CRE") and the National Hydrocarbons Commission, establishing that their structures and attributions would become part of the Ministry of Energy.
  • Energy Transition. The Initiative provides for the cancellation of clean energy certificates (certificados de energías limpias) and establishes that the CFE will be in charge of the execution of the Energy Transition in the area of electricity, as well as the activities necessary to carry it out.

 

Changes in the Mining Sector

  • Exploration and exploitation of lithium and other strategic minerals. The Initiative determines that no concessions will be granted with respect to lithium and other minerals considered to be strategic. However, it is established that mining concessions already granted by the Mexican State in which there is a history to date of lithium exploration duly endorsed by the Ministry of Economy, may continue to carry out such activity.

 

Legislative Procedure

Once the Initiative has been presented by the Mexican President, it will be discussed in the committees of the Chamber of Deputies and the Chamber of Senators in order to be submitted to a vote of their respective plenary sessions. Since it is a constitutional reform, the Initiative must (i) be approved by a two-thirds vote of Mexico’s Federal Congress (qualified majority), and (ii) be approved by the majority of the legislatures of the States and Mexico City.

 

Impact of the Initiative

The Initiative constitutes the most recent attempt to modify the legal and economic principles underlying the energy reform of 2013 and is, undoubtedly, the most relevant, since: (i) the Initiative intends to substantially modify the legal and economic principles of the energy reform of 2013; and (ii) given the constitutional nature of the Initiative, the means of defense that could be filed against it are limited. Therefore, it could impact all the activities of the value chain of the electricity industry, particularly the activities of generation in all its modalities, as well as the activity of commercialization of electricity, including the supply of electricity in its basic and qualified service modalities.

 

International Protections

With respect to the measures adopted by the State, investment protection treaties ("IPTs")2 grant a series of rights to investors deemed to protect their investment. Such rights consist of obligations for the State under public international law. Mexico has subscribed IPTs with more than 40 states,3 (between Bilateral Investment Treaties "BITs" and Free Trade Agreements "FTAs" with investment protection chapters). In addition, there are certain IPTs whose process of negotiation has finished, but the formalization by the States legislature is still pending (e.g., the Free Trade Agreement between Mexico and the European Union).

The IPTs signed by Mexico grant the investors, inter alia, the following key rights:

  • Fair and Equitable Treatment: is a warranty that encompasses a series of obligations for the State that have emerged out of the arbitral practice. Specifically, it forces the State to abstain from taking actions or measures that: (i) frustrate the investor's legitimate expectations at the moment the investment was made; (ii) constitute a lack of transparency; (iii) are arbitrary or unreasonable; or (iv) have negative disproportionate effects against the investment. Such treatment also encompasses an obligation to the State to maintain a stable and transparent legal framework.
  • Non-discrimination: relies in the fact that the States receiving the investment are obliged to give the investor the same treatment as the one it gives to its nationals with respect to such investment (what is known as "National Treatment"), and the same treatment it gives to other foreign investors, in like circumstances (what is known as "Most Favorable Nation treatment").
  • Fair Expropriation: relies on the fact that States that incur an expropriation or a governmental act with analogous effects with respect to the investment of a foreign investor protected by the applicable treaty must grant a prompt, adequate and effective compensation, and such act must be based on the State’s public interest.4

The content and definition of the rights mentioned above are intrinsically related to the text of the treaty at hand, and thus, their application will depend on the way the treaty was drafted. The violation of any of the right protected by IPTs will entail the international responsibility of the State and the obligation to repair the damage. 

The Initiative proposed by the executive power, if approved, could potentially impair certain rights protected by the IPTs, such as the legitimate expectations of investors that invested in Mexico, relying on the application of a determined business and legal framework. This because the Initiative constitutes a radical alteration of such framework that will substantially affect investments in the energy sector. Such impairment may result in potential claims before international tribunals under the scope of the IPTs in which the Mexican State is a party, and the radical alteration the Initiative proposes is precisely the type of regulatory change international tribunals have found to breach IPTs, entailing international responsibility to the offending States.

White & Case has notable experience in matters related to energy and investment arbitration. We remain at your disposal for the analysis of a specific case related to the Initiative and other measures implemented by the Mexican State in the energy sector.

 

Click here to download Constitutional Reform Initiative for the Electricity Sector (Spanish)

 

1 Available at: http://gaceta.diputados.gob.mx/PDF/65/2021/oct/20211001-I.pdf.
2 The IPTs are agreements in which two or more countries establish the applicable rules and conditions to foreign investment within the signatory countries, in which reciprocity guides the concession of warranties by each of the States involved.
3 Specifically, Mexico has signed BITs with the following countries: Germany, Argentina, Australia, Austria, Bahrain, Belarus, China, South Korea, Cuba, Denmark, United Arab Emirates, Slovakia, Spain, Finland, France, Greece, Holland, India, Iceland, Italy, Kuwait, Panama, Portugal, United Kingdom, Czech Republic, Singapore, Sweden, Switzerland, Trinidad and Tobago Turkey and Uruguay. Mexico has also FTAs that contain certain dispositions for investment protection, such as the Pacific Alliance Treaty between the United States, Mexico and Canada ("USMCA" late NAFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP"), and FTAs with Chile, Colombia, Costa Rica, Japan, Panama, Peru and Uruguay.
4 It should be noted that the public interest of a regulatory measure does not necessarily exonerate the State of its international responsibility in cases of expropriation.

 

Gustavo Neyra López (White & Case, Legal Intern, Mexico City) contributed to the development of this publication.

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