Initiative to amend several provisions of the Electricity Industry Law

I. Introduction:

On February 1st, President Andrés Manuel López Obrador sent a preferential initiative of reform to the Chamber of Deputies to modify and add several provisions of the Electricity Industry Law (“LIE”).

II. Background:

During 2019 and 2020, the Federal Government carried out diverse actions to modify the rules of the power market established in the energy reform from 2013–2013, seeking to revert as much as possible said reform and to strengthen CFE over the other participants of the market.

One of the main actions in this regard happened on 15 May 2020, when the Ministry of Energy (SENER) published the Policy of Reliability, Security, Continuity and Quality of the National Electric System, a regulation which tacitly incorporated competition barriers for clean energy power plants in Mexico, affecting competition and open participation in the electricity industry for the private sector, and granting CFE numerous advantages in the electricity market.

Consequently, private sector participants submitted hundreds of amparo claims before the competent courts; Greenpeace too, along with other Mexican companies, filed an amparo against the reliability policy; and the Federal Economic Competition Commission (COFECE), as well as certain federal entities, filed a constitutional procedure before the Supreme Court of Justice to confirm the illegality of the policy. The Supreme Court had scheduled the discussion of such resolution to be held last Wednesday, but an extension of time was requested.

In addition to the Reliability Policy, on July 22, 2020, the President sent a memorandum to the regulatory bodies of the energy sector giving them instructions regarding the way in which the generators should be dispatched, giving priority to CFE’s power plants.

Other actions by the government included modifying the rules to grant Clean Energy Certificates (October 2019), stopping pre-operative tests of new power plants, suspending pre-operative tests of new power plants (April 2020), increasing transport fees applicable to grandfathered projects of self-supply (June 2020), and issuing an energy sector development programme which expressly sought to strengthen CFE over other participants (July 2020). All these actions have been challenged in local courts with high rates of success to this moment, and most of them have been suspended by the competent courts.

III. Content and observations about the proposed amendment:

The initiative pursues 5 main objectives:

1) To replace the rule known as “economic dispatch” (which provides that the power plants that produce cheaper energy must be “dispatched” first, in order to ensure that the best prices are offered to the final user), changing it for a rule to favor CFE, according to which hydroelectric plants must go first, followed by other CFE power plants (of any technology, including the most expensive and highly contaminating ones, such as thermoelectric), followed by combined cycle power generation plants of Independent Energy Generators, followed by wind and solar farms and, finally, by combined cycle plants of private companies.

Even when the explanatory statement of the initiative specifies that this modification intends to ensure the reliability of the system and reduce costs, it is self-contradictory as lowest prices are guaranteed by dispatching cheapest energy first, and the reform does not include elements that indicate that the dispatch based on security criteria is preferred, and it rather simply grants priority dispatch to CFE (regardless of the price or the security of the supply).

2) Condition the granting of new permits to SENER’s planning, in such a way that the CRE can consider, at its discretion, SENER’s planning objectives when deciding on whether to grant or not generation permits, as well as their modification, revocation, assignment, extension or termination.

This contradicts the market principle of “free access” and ignores the responsibility of CFE Distribución and CFE Transmisión (subsidiaries of CFE which still have the monopoly over transmission and distribution activities) of extending these networks, of SENER to plan this extension accordingly, and of the National Centre for the Control of Energy (CENACE), of ensuring the reliability of the system independently from the open access.

3) Modify the rules to grant Clean Energy Certificates (CELs), to grant them to power plants which entered into operation before the energy reform, this with the objective of allowing old CFE plants to receive them and thus appear to comply with energy transition objectives.

This goes against the original objective of the CELs, which is to encourage the installation of new clean power plants and affects the value of the certificates by flooding the market with new CELs. This was already tried in October 2019 by the Energy Ministry (SENER) through the emission of administrative regulation, but it was suspended by the courts.

4) Eliminate the obligation of CFE Basic Services Supplier (“CFE SSB”, the CFE subsidiary which sells energy to basic users) of buying energy through auctions. Current regulation establishes that this is only made through auctions to secure the best possible price and thus the users pay the cheapest prices. These auctions had been very successful in Mexico achieving some of the lowest prices for power in the world.

This change gives the power to CFE SSB to discretionally acquire the energy from other subsidiaries of CFE, independently from the conditions or prices they offer, which will imply an increase in price (or in subsidy to artificially sustain low prices) and will eliminate the incentives for CFE subsidiaries to offer more competitive prices.

5) Force the Energy Regulatory Commission (CRE) to revoke the self-supply permits which had been obtained through “law fraud”, and review the contracts with Independent Power Producers so, in case they are not profitable for the Federal Government, they are renegotiated or terminated.

This objective is expressly described in the explanatory statement of the initiative and seeks to be implemented through the third and fourth transitionary articles. If implemented it would be a harmful retroactive application of the law, which would be a violation of article 14 of the Constitution.

IV. Next Steps

The reffered initiative was filed by the President on a preferential basis. Therefore, the initiative must be discussed and voted by the Chamber of Deputies within a maximum period of thirty calendar days. If the initiative is not voted within such term, it must be the first matter to be discussed and voted on the next plenary session of the Chamber.

In case of being approved or modified by the Chamber of Deputies, the bill will immediately go to the Senate, which must discuss and vote on it within the same period of thirty calendar days. Considering the president’s party has a majority in both chambers of congress, there are high chances that this amendment will be approved (possibly with some changes, but mantaining its essence).

V. Defense Mechanisms

The Mexican Institute for Competitivity and the Business Coordination Board have already issued official statements opposing this initiative, and it is expected that soon the Federal Commission of Competence also does this (as it did previously against the Reliability Policy). Similar reactions are also expected from other members of civil society such as bar associations and environmental organizations, as well as from state governments.

Those who oppose this initiative argue that this amendment would imply an indirect expropriation of investments (since it would deprive them from its value through regulatory action), as well as a harmful and retroactive application of the law, which is unconstitutional. Likewise, it is considered that the amendment would violate constitutional provisions regarding free competition in commercialization and generation of electricity, and the right to a healthy environment, as well as investment protection treaties (such as TMEC), and international agreements on climate change (such as the Paris Agreement).

Considering the above, if the amendment is passed such may be challenged through diverse mechanisms including amparos by affected entities, investment arbitration claims by foreign investors covered by international treaties, and unconstitutionality actions which could be submitted by organisms like COFECE, state governments or by a determined minority percentage of the members of congress.

For additional information in this regard, please contact any of the members of our Infrastructure & Energy practice team.

M. Alejandro Ripoll González

aripoll@rrs.com.mx

Guadalupe Esparza Sánchez

lesparza@rrs.com.mx

Diego Álvarez Ampudia

dalvarez@rrs.com.mx

Important note: The information contained herein is of general nature and for informative purposes only. Please consider that it does not necessarily apply to individual circumstances. We strongly recommend not to perform any activity based on this information without the professional assistance of our lawyers.

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