Schreiner Parker
Senior Vice President and Head of Latin America
Rystad Energy
Expert Contributor

AMLO Has Pushed the Energy Envelope, Will It Bend or Break?

Wed, 08/31/2022 - 12:00

Mexico’s president is beholden to no-one but himself. Since Andrés Manuel López Obrador took over the presidency, he has charted his own course when it comes to things as varied as turning the old presidential office, Los Pinos, into a museum, canceling a half-built new international airport in the capital, declaring his tourist train in the Yucatan as a national security project to avoid dealing with civil litigation and, of course, inaugurating a new refinery in his home state, which isn’t actually refining anything at the moment. When it comes to his international relationships, he is quite keen to assert Mexico’s independence, going as far as to snub the Biden administration during the most recent Summit of the Americas. Because President Joe Biden did not invite the leaders of Cuba, Nicaragua and Venezuela, AMLO decided to boycott the event, which was held in California, claiming that regional unity required all heads of state to be present.  

But he may have finally pushed his largest trading partner to the brink. US Trade Representative Katherine Tai announced that the US has requested dispute settlement consultations with Mexico under the USMCA.

The statement goes on to say “the consultations relate to certain measures by Mexico that undermine American companies and US-produced energy in favor of Mexico’s state-owned electrical utility, the Comisión Federal de Electricidad (CFE), and state-owned oil and gas company, Petróleos Mexicanos (PEMEX).” AMLO has long been accused by critics of favoritism and even pseudo-nationalism but this is the first time the issue will be brought up at this level.

The crux of the issue deals with power, both political and electrical. Last year, the Mexican Congress passed a reform bill that gives preference to CFE as a source of power supply. The bill requires power grid operators in Mexico to take power generated by CFE over and before power generated by foreign firms. During the energy reforms of 2013 under the Peña Nieto administration, CFE’s monopoly on the Mexican power sector was ended and the space was opened to private investment. This opening was codified in the 2014 Electric Industry Law (Ley de la Industria Eléctrica) and had set out very clear directives regarding access to the Mexican grid, which were based on power generation costs. Before the 2021 reform, the priority was given to the least expensive generated electricity.

It is important to remember the context of the opening of the electricity sector. Prior to the 2013 reforms, electricity generation in Mexico was problematic on several levels. The overall generating capacity was somewhat limited and, coupled with using fuel oil in the electricity generation process, produced high electricity rates. The build out that happened after the 2013 opening saw massive amounts of foreign and private capital invested to build pipelines from the Permian basin to supply gas-fired electricity plants in Mexico, as well as wind and solar facilities. The idea was that an open market would diversify supply, increase productivity, and reduce electricity cost.

AMLO has taken a different view and not without good reason. There is a sentiment that foreign companies were “over prioritized” in the 2013 reform. For example, private firms were not obliged to pay any fees to CFE when they wanted to distribute power through transmission lines, which are government owned. At the same time, CFE did have to pay for the upkeep of the transmission lines. Among other grievances, the AMLO administration has seen an eroding market share for CFE as a point of concern and, as with other parts of the energy sector in the country, has sought legal mechanisms to strengthen state-owned institutions. Although the 2021 reform of the Electric Industry Law was upheld in the Mexican Supreme Court, a subsequent movement to alter the Constitution to enshrine these protections failed to pass the Mexican Congress earlier this year.

The United States and Canada see the 2021 reform bill as a violation of the USMCA free trade agreement, which specifically prohibits member states from passing any legislation that favors state-owned enterprises or even domestic producers in the electricity generation space. The Mexican government has expressed a desire to resolve this issue during the consultation phase of the dispute settlement, rather than triggering trade sanctions if it were to take the issue all the way and lose, although AMLO has added his own rhetoric regarding “interests dedicated to plundering Mexico.” He has also expressed that this is a political rather than an economic issue. Under the extremely adversarial Trump administration, this argument may have held water but, from an international perspective, it is hard to see the Biden administration in the same light.

Applying a wider lens, this issue is just one manifestation of an underlying current that flows through AMLO’s thinking. His worldview is Mexico-centric, which is arguably the right mindset to have as the leader of Mexico. However, he is being caught up in the inexorable march of time, which has delivered us to the global society we now live in. The “merits” of that globalization are not sacrosanct; there is a great deal of room for discussing the adverse effects globalization has produced, especially for marginalized populations. There was a time when Mexico was a leader of the “third way” and was fiercely independent in its politics and self-sufficient in its economy, especially energy. It is a time that AMLO remembers fondly. And one that he would like to repeat.     

Photo by:   Schreiner Parker