Are the Sweeping Electric Reform and the USMCA Compatible?

Private companies have responded to the government’s efforts to drastically reshape Mexico’s energy sector with successful litigations. If the government alters the Constitution, the previously successful appeals to regulation not being unconstitutional will no longer work. Nevertheless, international treaties, such as the USMCA, might still provide a legal base.

In the 90’s Mexico first opened its electricity market for private companies under certain conditions, by 2014 the Energy Reform had truly liberalized Mexico’s energy sector. In recent years, Mexico consolidated this reform further through international treaties such as the Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the United States-Mexico-Canada Agreement (USMCA), as well as dozens of investment treaties. These agreements include provisions to protect investments made by countries that signed the documents, factors that could become categorically relevant if the reform passes through congress and is ratified by a majority of state legislatures.

Companies could therefore assess how the reform proposal would affect their business within the wider context of such treaties, but some argue that treaties such as the USMCA simply do not apply. In an interview with El Pais, Mexico’s Minister of Energy, Rocío Nahle, reiterated what the government had claimed before: that the USMCA does not stretch as far as the energy sector because this is a national matter. When El Pais asked Nahle if the reform would affect the USMCA, her response was a clear and concise “No”. She later referred to the planned division of the sector where CFE would have a 56 percent market share: “That is why they have their 46 percent. The USMCA did not stipulate that [private companies] were going to have 100 percent or that they were going to have the majority; it said that they were going to be present in the market and will remain at 46 percent. There is no problem.”

Law firm Jones Day reported that domestic parties would have little resources to fight against the proposal. A constitutional change, at the end of the day, is difficult to prove to be unconstitutional. Nevertheless, guarantees of a healthy environment and sustainable development as well as principles of progressivity and nonretroactivity may prove to be incompatible.

Jones Day sees more room to maneuver for foreign investors because international treaties are in theory “on par with rights granted under Mexico’s Constitution,”. Regarding the USMCA, some US investors could appeal through Annexes 14-D and 14-E. The law firm furthermore sees that the USMCA’s predecessor, NAFTA, did specifically exclude the energy sector. As for USMCA, these explicit exclusions are no longer the case.

Last week, a key Morena law maker hinted that the government would remove a clause that would cancel every private contract signed in the electricity market or active in the legacy market. If this rings true, the government would remove at least one barrier that could face strong litigation efforts. Regardless of these changes, much will depend on how the government is to enact its reform if and when it is voted through.