On February 1, 2021, Mexican President Andrés Manuel López Obrador sent to the Chamber of Deputies the "Preferential treatment initiative to modify the Electricity Industry Law," (the "Initiative").1
The Initiative would modify substantial aspects of the power sector in Mexico by amending nine articles of the Electricity Industry Law (Ley de la Industria Eléctrica, "LIE") and establishing four transitory articles. Among the relevant aspects contained in the Initiative (including its statement of reasons and transitory articles), the following aspects are emphasized:
- The agreements executed between the Federal Electricity Commission ("CFE") and the Independent Power Producers2 have to be reviewed. The purpose of such review would be to verify if the agreements comply with the "profitability requirement" established in the Constitution of the United Mexican States, the Budget and Treasury Responsibility Law and the Public Debt General Law. In the event that such profitability requirement is not fulfilled, the referred agreements could be renegotiated or terminated early.
- The self-supply generation permits (autoabastecimiento)3 could be revoked by CRE in the event that, as established in the statement of reasons of the Initiative, "the permits were obtained through Fraud on the Law (Fraude a la Ley)"; for instance, creating corporate and contractual schemes that are required by law to carry out the self-supply scheme.
- Technical feasibility would be required for open and non-unduly discriminatory access to the National Transmission Network and the General Distribution Networks.
- The "Electricity Hedging Agreements with Physical Delivery Commitment" (Contratos de Cobertura Eléctrica con Compromiso de Entrega Física) are created for Basic Service Suppliers ("CFE"). These agreements include the physical obligation to deliver power, capacity or other related products, unlike the current Electricity Hedging Agreements. The power plants included in this type of agreement will have preference in the dispatch, as they will be able to offer their products as "fixed program offers" (ofertas de programa fijo).
- The CFE's Legacy Power Plants and Legacy External Power Plants shall have priority use of the National Transmission Network and the General Distribution Networks.
- The permits under the LIE will only be granted if they comply with the "planning criteria" (criterios de planeación) that would be established by the Ministry of Energy.
- The obligation of the Basic Service Supplier (CFE) to execute Electricity Hedging Agreements exclusively through Medium and Long-Term Auctions organized by the National Center of Energy Control is eliminated.
- All clean power plants could receive Clean Energy Certificates regardless of the owner or the date on which the power plant started commercial operations.
It is worth mentioning that the Federal Executive submitted the Initiative to the Chamber of Deputies under the "preferential treatment" modality. For this reason, it must be discussed (and approved, as the case may be) within 30 calendar days following its submission. If approved by the Chamber of Deputies, the Senate will have a similar term to discuss it (and approve it, as the case may be). If Congress approves the Initiative, the Federal Executive would enact it and publish it in the Federal Official Gazette.
The Initiative establishes that, if approved, the Ministry of Energy, the Energy Regulatory Commission and the National Center of Energy Control would have a six-month period to amend the regulation in order to make it consistent with the content of the Initiative (including the Wholesale Electricity Market Rules).
Individuals or entities whose rights would be affected by the Initiative could obtain legal advice for taking appropriate legal actions.
Towards the measures adopted by the State, investment protection treaties ("IPTs")4 grant a series of rights to investors deemed to protect its investment. Such rights consist in obligations for the State under public international law. Mexico has subscribed IPTs with more than 40 states,5 and besides those, there are certain ITP's whose process of negotiation has finished, but the formalization by the states legislatures is still pending (v e.g. Free Trade Agreement between Mexico and the European Union).
The ITPs signed by Mexico, grant the investors, inter alia, the following key rights:
- Fair and Equitable Treatment: is a warranty that englobes a series of obligations for the state, which have emerged out of the arbitral practice. Specifically, it forces the state to abstain in taking actions or measures that: (i) frustrate the investor's legitimate expectations at the moment the investment was made; (ii) lack of transparency; (iii) are arbitrary or unreasonable; or (iv) have negative disproportionate effects against the investment. In addition, the state has the duty 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 than 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 similar circumstances (what is known as "Most Favorable Nation treatment").
- Fair Expropriation: relies in the fact that states that incur in 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.6
The content and definition of the rights mentioned above is intrinsically related with the text of the treaty at hand, and thus, its application will depend on the way the treaty was drafted. The violation of any of the right protected by ITPs, will imply 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 BIT protected rights, as the legitimate expectations of investors that invested in Mexico, relying on the application of a determined business and legal framework. Such impairment may result in potential claims before international tribunals under the scope of the BITs that the Mexican State is a party.
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 latest measures implemented by the Mexican state in the electric sector.
1 Available at: http://gaceta.diputados.gob.mx/PDF/64/2021/feb/20210201-I.pdf.
2 Which operate under the now repealed Public Utility Electricity Law (Ley del Servicio Público de Energía Eléctrica).
3 Granted under the now-repealed Public Utility Electricity Law (Ley del Servicio Público de Energía Eléctrica).
4 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.
5 Specifically, Mexico has signed Investment Promotion and Protection Agreements ("IPPAs") 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. México has also signed free trade agreements (FTA”) that contain certain dispositions for investment protection, such as, Pacific Alliance, Treaty between the United States, Mexico and Canada ("USMCA" late NAFTA) Comprehensive and Progressive Agreement for Trans-Pacific Partnership, FTA with Chile, FTA with Colombia, FTA with Costa Rica, FTA with Japan, FTA with Panama, FTA with Peru y FTA with Uruguay.
6 It should be noted that the public interest of a regulatory measure does not necessarily exonerates the State of its international responsibility in cases of expropriation.
Gustavo Neyra Lopez (White & Case, Legal Intern, Mexico City) contributed to the development of this publication.
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