February 22, 2019

Electricity Reform and Political Shift in Mexico

By José María Lujambio

Despite the recent political storm in the Mexican electricity sector, it appears that the electricity reform of 2013 and 2014 is protected in various ways from political and ideological shifts in the federal administration.

The strongest evidence of such protection lies in the fact that the main contents of the reform were established at a constitutional level, specifically in both the substantive and the transitory articles of the decree of constitutional reforms published in the Official Journal of the Federation on December of 2013. A constitutional amendment requires the vote of a two-thirds majority in both chambers of Federal Congress, a majority of state legislatures, and the Mexico City legislature. No political party or coalition has, on its own, gained such support in the 2018 elections. The following are examples of legal functions that would, in principle, be protected by these constitutional strictures:

 

  • The activities of planning and control of the national electric system, as well as transmission and distribution, are exclusively reserved to the federal government. However, the government may contract with private parties as provided by applicable law.
  • The Department of Energy (known by its Spanish acronym as “SENER”) shall set forth and supervise the terms for strict legal unbundling needed to promote open access and the efficient operation of Mexico’s electricity sector.
  • The Energy Regulatory Commission (known by its Spanish acronym as “CRE”) regulates and issues permits for the generation of electricity. It also determines transmission and distribution rates. The CRE is an agency of the Executive Branch but it has its own legal status, assets and resources, as well as technical, managerial and budgetary autonomy. The CRE has seven commissioners, who are all appointed by a two-thirds vote of the Senate and selected from among three candidates nominated by the President for each position.
  • The National Center for Energy Control (known by its Spanish acronym as “CENACE”) is a public sector agency, independent from the state-owned utility Federal Electricity Commission (known by its Spanish acronym as “CFE”). CENACE oversees the operation of the national electric system and the wholesale electricity market, as well as ensures open and non-discriminatory access to Mexico’s grids.
  • The CFE is a State-owned productive enterprise, with a special regime governing its budgeting, procurement, salaries and accountability processes, among other areas.
  • Mexican law should set forth clean energy obligations for participants in the electric industry.

 

The Electric Industry Law (known by its Spanish acronym as “LIE”) is the vehicle through which Congress specifies the above-mentioned constitutional contents. Any amendment to the LIE would require the vote of an absolute majority in both chambers of Congress. If any political party or coalition were to gain the majority necessary in either chamber of Congress, any amendment would still need to comply with applicable constitutional mandates including, from our point of view, those set forth in the transitory articles.

The next tier of rules includes the LIE Regulations, which Mexico’s President may amend on his own, as long as such does not violate the LIE or the Federal Constitution. Fortunately, to ensure that the actions of the Executive Branch are not unconstitutional, Mexico has an independent Federal Supreme Court of Justice, which, in recent years, has demonstrated institutional autonomy and strength.  

All the market rules, including the wholesale electricity market bases, manuals, and general administrative provisions regulating the same, are now under the authority of the CRE and no longer under the purview of the SENER. Therefore, they constitute a regulatory framework that is not subject to the President’s direct rule. It is both healthy and expected that certain CRE commissioners would be willing to defend the agency’s relative autonomy in order to safeguard the energy regulatory framework that was crafted by Mexico’s former administration.

Given all of the above, most analysts agree that it is unlikely that the new administration will attempt to modify the fundamental structure of the electricity reform or to dismantle the wholesale electricity market. However, we should expect new administration to provide renewed political support to a strengthened CFE.