Legal News: Constitutional Reform in Energy Matters

printable version | October 2021

On September 30, 2021, the President of the Republic presented to the Chamber of Deputies the “Draft decree amending Articles 25, 27 and 28 of the Political Constitution of the United Mexican States"(From"Initiative

The Initiative aims to modify the current constitutional text, resulting from the energy reform of December 20, 2013 (the "Energy Reform of 2013”). According to the explanatory statement of the Initiative itself, the Energy Reform of 2013 implied an impairment to the Federal Electricity Commission (“CFE”) as a result of the opening of the electricity market to private industry.

The Initiative proposes a profound restructuring of the sector in order to strengthen CFE, recovering it as a strategic area of ​​the State.

Content of the Initiative

The Initiative proposes the following reforms:

1.- In terms of electrical energy:

• The recovery of the National Electric System is proposed (“SEN”) by the State through CFE, who, from the entry into force of the Initiative, will be responsible for the planning and control of the SEN;

• Because the main objective of the National Energy Control Center (“DINNER”) is the planning and control of the SEN, its reincorporation into CFE is proposed;

• CFE will cease to be a productive state enterprise, becoming a state body with legal personality, its own assets and autonomy in the exercise of functions and administration;

• Electric power will once again be considered a strategic area under the responsibility of the State, incorporating the generation, conduction, transformation, distribution and supply of electric power as a single and indivisible process;

• CFE is integrated as a single State agency, vertically and horizontally, eliminating subsidiaries and affiliates, keeping only “CFE Telecomunicaciones e Internet para Todos” and the subsidiaries “CFEnergía”, “CFE Internacional” and “CFE Capital”;

• CFE will be the entity in charge of providing the supply of electric energy exclusively, so 54% of the national electric energy consumption must be generated by CFE on a permanent basis with the argument of guaranteeing supply;

• The private industry will be able to participate in 46% of the energy generation market, as long as the above is subject to the planning and control of the SEN through CFE, which will be incorporated through CENACE in compliance with the order of production costs and the requirements to guarantee the safety and reliability of the SEN;

• Electric power generation permits, electricity purchase and sale contracts signed with CFE, private generation and applications pending resolution will be cancelled;

• Electricity from modifications to the self-supply permits granted in contravention In accordance with the provisions of the Public Electricity Service Law, the electricity will not be acquired by CFE. Likewise, surplus generation produced by independent energy producers will not be recognized, and

• The rates for transmission and distribution networks, as well as rates for end users, will be determined by CFE.

2.- On energy transition:

• CFE will be the authority responsible for the execution of the nueva energy transition proposed in the Initiative, until the new secondary legislation necessary to regulate the matter is issued by the Congress of the Union;

• Article 27 of the Constitution is amended to grant exclusive powers to the State to establish lithium reserves as assets of the Nation;

• A priority area will be developed for the development of the industries required for the energy transition, for which public, social and private companies will be promoted. of national capital, science and intellectual property of the State of critical technologies and equipment; national technological development, manufacturing of capital goods, inputs and equipment for final energy uses destined for electro-mobility; water-energy systems for food self-sufficiency, lighting, transformation of strategic minerals, industry, commerce, services, distributed generation and energy storage, among others, and

• Clean energy certificates (CELs) are cancelled.

3.- Regarding the Federal Public Administration:

• The Energy Regulatory Commission (“CRE”) and the National Hydrocarbons Commission (“CNH”) will disappear, taking their powers and attributions the Ministry of Energy;

• All provisions issued by the authorities of the Federal Public Administration that oppose the provisions of the Initiative are hereby repealed, and

• Within 180 (one hundred and eighty) calendar days following the entry into force of the Initiative, the Congress of the Union must make the necessary adjustments to the legal framework, in order to make the provisions contained therein effective.

Controversial aspects of the Initiative

Restructuring of the electricity sector

First of all, it is important to highlight that the Initiative is not limited to the electricity sector, as it includes the disappearance of the CNH, thereby removing legal certainty from the hydrocarbon market as well. It also includes aspects related to the energy transition and the phenomenon of climate change, again generating more doubt than certainty on a fundamental issue in which there are specific performance commitments by the Mexican State in the international arena.

Considering the electricity sector as a strategic area under the exclusive control of the State has wide-ranging repercussions. The industry would be integrated into CFE vertically and horizontally with clear situations of conflict of interest that had been clearly resolved with the Energy Reform of 2013.

The integration of CENACE as an administrative unit of CFE also presents a serious situation of conflict of interest by converting CFE into judge and party dispensing with an independent system operator in terms of planning and control.

It is established that CFE will be in charge of determining rates for distribution, transmission and end users. This again creates a situation of uncertainty and potential conflicts of interest.

The elimination of the regulatory bodies in energy matters (CRE and CNH) destroys formally which in fact It was already being squandered, by dispensing with organizations whose origin and reason for being consisted precisely in having institutional control mechanisms in charge of entities specialized in the matter and independent of the political agenda in power.

Private generation

The Energy Reform of 2013 laid the foundations for an orderly market with clear rules for participation in the sector. This sparked the interest of investors and operators, both national and foreign, who have been operating based on rights acquired under the regulatory framework that resulted from said reform.

The participation of the private sector in the generation of electric energy faces a scenario of unprecedented legal uncertainty. Not only is its participation limited by decree; it is also subject to authorization and the signing of contracts with CFE. In our opinion, this clearly anticipates a very serious situation of conflicts of interest and the violation of legitimately acquired rights.

The cancellation of permits and contracts by decree may constitute an indirect expropriation of the sector, in addition to violating constitutional principles and international commitments of the Mexican State, as indicated below.

The contractual relationships that originated from the permits that are now being cancelled will be seriously affected by the violation of the capacity of generators to fulfil their obligations. The impact is imminent not only for the generators, but also affects the entire value chain and the interest groups associated with the projects, including employees and workers, investors, creditors, clients, users and consumers.

Regardless of whether the Initiative succeeds in moving forward in the terms proposed by the Federal Executive, as of this date the recommendation to companies is to suspend the negotiation of contracts in process and revisit existing contractual relationships in matters of force majeure, changes in law and adverse material effects generated by the new regulation that is intended to be implemented.

Energy transition and climate change

The Initiative contemplates that the objectives in terms of energy transition will be established unilaterally by CFE, without any traceability in the actions to be implemented or any clear or forceful measures being distinguished in this area.

Violation of fundamental rights, constitutional principles and international commitments

The Statement of Reasons for the Initiative is based on conclusions based on dogmatic and ideological considerations that are difficult to support a serious and objective analysis of the sector. This constitutes a first element of analysis regarding the legal solidity of the Initiative.

In our view, the proposed amendments to the constitutional text are contrary to the application of multiple constitutional principles including universality, interdependence, indivisibility and progression in human rights matters.

This Initiative also generates an evident antinomy, incongruity and constitutional opposition with respect to aspects of equality, non-discrimination, the right to health and a sustainable environment, prohibition of exclusive laws, retroactivity, legal certainty, guarantee of hearing, administration of justice, private property, free competition and concurrence, proportionality, rationality, legitimate trust and competitiveness.

Furthermore, the Mexican State is a party to more than forty bilateral and multilateral treaties and agreements that protect investments originating in the participating States.

The spirit and purpose of trade agreements is essentially to ensure that economic agents participating in a given market are treated equally and fairly regardless of their nationality.

The ability of the Mexican State to modify its internal legal regime is therefore limited by the obligations assumed in the context of these agreements. In some of the treaties applicable to the case, for example, if a State Party grants a new benefit to another Party (not provided for in the treaty in question), You cannot subsequently remove this benefit and return to previous levels provided for in the treaty (ratchet clause).

The Mexican State's international commitments in this area include the United States of America, Canada, the United Kingdom, Spain, Japan, France, the Netherlands, New Zealand, China, Germany and South Korea, among others. In all cases, there are investors from these countries who operate productive assets and hold equity stakes in companies in Mexico with interests in the electricity sector.

The measures envisaged in the Initiative may constitute a situation of indirect expropriation of the sector, by putting the value of investments at risk as a result of government actions (including regulatory changes in the sector).

The Initiative clearly violates principles embedded in international instruments including National Treatment, Most Favored Nation, Market Access, Performance and Local Presence Requirements, Non-Commercial Assistance, Non-Conforming Measures and Cross-Border Trade in Services, Investment and State-Owned Enterprises and Designated Monopolies, among others, all designed to prevent arbitrary actions by the States Parties that affect the trade and investments of their trading partners.

Means of Defense

Although the Initiative proposes reforms to the Political Constitution of the United Mexican States, there are national and international arguments and defense mechanisms available to the agents involved and affected, in order to maintain and respect the balance and certainty of the current legal framework in the energy sector and other affected sectors.

In order to determine the most suitable means of defense, it is necessary to evaluate each particular case in order to identify specific effects and needs. Our office offers the possibility of supporting companies based on the arguments presented in general in this document, as well as specific aspects derived from the analysis and study of the specific case. We develop strategies for each situation, with the collaboration of lawyers specializing in energy, environmental, international, economic competition and human rights matters, constitutional litigation and protection of rights under the dispute resolution mechanisms contemplated in international treaties.

If you require additional information, please contact the partner responsible for your matters or one of the lawyers mentioned below: