On March 9, 2021, a Decree amending and adding various provisions to the Electricity Industry Law (the “Amendments”) was published in the evening edition of the Official Journal of the Federation (“DOF”). The Amendments became effective the day after publication. The government agencies responsible for implementing the Amendments have 180 calendar days to do so.
These Amendments are the first legislative measure taken by the Mexican federal government to advance its energy agenda following the suspension or invalidation of several regulatory attempts by Mexico’s Federal Judiciary. Following the trend of recent regulatory changes, which have been mostly ineffective, the Amendments tend to unjustifiably favor the Federal Electricity Commission (“CFE”, for its acronym is Spanish) as a State-owned company and hinder the private generation of electricity.
The key aspects of the Amendments include the following:
1. Distortion to the economic dispatch rule. The Amendments distort the principle of economic dispatch to give priority to CFE power plants in all cases. Although the specific text of the amended articles does not make it explicit, the explanatory memorandum of the initiative explains that the intended dispatch priority is as follows:
- Hydroelectric power plants owned by CFE;
- Nuclear, geothermal, combined cycle (natural gas), and thermoelectric (fuel oil) power plants owned by CFE;
- Solar and wind power plants owned by private entities, and
- Combined cycle power plants owned by private entities.
The new dispatch rule provides an unjustified benefit to a specific agent in a competitive market because it guarantees the dispatch of certain power plants regardless of their cost merit, which tends to discourage investment in new, cleaner, and more efficient plants. It is particularly detrimental to the Wholesale Electricity Market (“MEM”, for its acronym in Spanish) because disrupts both its efficiency and the level playing field among the various generators. Industry analysts have suggested that more expensive energy will be offered in the market from “dirty” CFE power plants which use fuel oil purchased mainly from Petróleos Mexicanos. Such analysts aver this will lead to price increases that will affect marketers, suppliers and end users, as well as cause irreversible damage to people’s health and the environment.
2. Discrimination in access to the grid. The Amendments feature a provision instructing the National Energy Control Center (“CENACE”, for its acronym in Spanish) to give priority to CFE’s plants in the operation of the National Transmission Grid and the General Distribution Grids. This restriction openly opposes the principle of open and not unduly discriminatory access to the National Electric System.
3. Political criteria in permits granted by the CRE. The Amendments require the Energy Regulatory Commission (“CRE”, for its acronym in Spanish) to consider the planning criteria established by the Department of Energy (“SENER”, for its acronym in Spanish) to grant, modify, revoke, assign, extend, or terminate electricity permits. While it is not clear what specific planning criteria will be issued by SENER, the purpose of this change is to subordinate regulation to public policy.
4. Non-mandatory auctions for basic service suppliers. Currently basic service suppliers (in practice only CFE SSB) must purchase their electricity, capacity, and clean energy certificates (“CELs”) through auctions. The Amendments make auctions optional, which means that CFE has the discretion to purchase more expensive products from CFE’s own power plants or from third parties.
5. Flooding of the CELs’ market. The rules are modified to grant CELs to all clean power plants regardless of their age, mainly for the benefit of CFE’s hydroelectric plants. This is contrary to the original purpose of CELs, which was to encourage the installation of new clean power plants.
6. Impact on the legacy regime. On one hand, the reform grants broad discretion to CRE to revoke self-supply permits granted under the 1992 Public Electricity Service Law such were obtained through “fraud against the law”. On the other hand, it requires contracts with independent power producers under such law to be reviewed and, if applicable, renegotiated or terminated based on their profitability for the government.
It is expected that in the following days and weeks numerous challenges to the Amendments will be filed, many of which have a good probability of success. Interested parties have 30 business days following publication to file indirect amparo lawsuits opposing the Amendments. It is also expected that many participants in the electricity industry will do so. In the first cases filed by companies to protest the Amendments, at least one Mexican federal judge has already granted provisional injunctions in favor of such parties.
Our firm considers that the Amendments violate several rights contained in the Mexican Constitution. In particular, the rights to freedom of competition and trade, equality and non-discrimination, a healthy environment and health, and the principles of legality and legal certainty, in particular the non-retroactive application of the law.
The Reform establishes absolute barriers to competition for two activities which do not constitute strategic areas that should be carried out exclusively by the State, namely the generation and commercialization of electricity, not only to the detriment of MEM participants, but ultimately to the detriment of end users. The changes are a step backward with respect to the constitutional basis of sustainability for the electricity industry, which includes a gradual transition towards clean energy. The Amendments also violate several international obligations of the Mexican State in terms of emissions’ reduction.
Although the Amendments will apply generally to the MEM, their primary effects will be on private generators, including developers that have projects with a certain degree of progress and those that already operate in the MEM, and traders that purchase products in said market, whether from suppliers or non-suppliers. At this stage, it is difficult to determine the specific effects the Reform will have on each participant. However, in principle, the aforementioned actors would have standing to challenge the Amendments as soon as such were published, since they are self-applicable, which means they take effect immediately and without the need for specific acts of implementation or application. In any case, it is essential for all companies to analyze their individual case and circumstances.
CCN offers the significant experience and specialized expertise of our energy and litigation practices, which have successfully coordinated several energy defense strategies. In particular, in recent months CCN has obtained favorable rulings and suspensions against SENER’s Reliability Policy.
José María Lujambio – jmlujambio@ccn-law.com
Jorge Sánchez Cubillo – jcubillo@ccn-law.com.mx
