Energy Battle to Determine Sector’s Course

The Mexican energy industry continues to adapt to an uncertain landscape ushered in by a fundamentally different government vision that favors state institutions over the private sector. Yet, despite a slew of governmental measures, the regulatory framework remains much the same, resulting in a stalemate whose end could determine which way the battle goes.

The government’s campaign to reformulate the energy sector began when President López Obrador officially canceled the fourth energy auction, after having it postponed at the end of 2018, which was considered a blow to the private energy industry. Some of the more notable recent decisions include a policy agreement from SENER, increased wheeling charges and changes to the electricity industry law (LIE), as well as a constitutional change that remains on the table.

While these decisions and initiatives were made with the country’s energy sovereignty in mind, experts believe that the results have not been optimal. “Although the strategy to reestablish state control over the energy sector has been useful in strengthening Lopez Obrador’s relationship with the political bases that underpin his government, the actions taken within the framework of a new energy policy have not necessarily contributed to the proper functioning of this sector. On the contrary, it seems they have carried it toward a standstill,” wrote Arturo Carranza, an Energy Adviser and Consultant, for MBN.

Carranza highlights the reasoning behind the government’s actions, which are aligned to a wider goal of keeping energy prices increase in line with annual inflation and to produce and distribute power equitably and fairly. President López Obrador often points to the “corrupting” influence of the international industry, arguing that the Energy Reform was steeped in dishonesty. For López Obrador, the fair way forward is through the public sector, all subject to the president’s anti-corruption program.  

That approach, many insiders say, appears wrong-footed. “I understand that the government is protecting CFE but I think that by allowing CFE to compete, they could strengthen it even more,” Ramón Basanta, CEO of ATCO Energía, told MBN.  

Despite the government’s efforts to backtrack it, the status quo established after 2014’s Energy Reform has so far been protected by courts. By invoking injunctions, or amparos, companies have been able to challenge the constitutionality of decrees and proposed regulatory changes, resulting in a blanket protection for all investors affected by these measures. The most recent wave of amparos came after the president introduced a bill with changes to the LIE. Many claimants were successful, thus spreading the legal basis for these amparos to become applicable to everyone. Amparos are subject to appeal, however. Even though some were later revoked, law experts within the industry point out that this is merely because of technicalities.

With the LIE suspended, the final decision regarding its new construction lies with Mexico’s Supreme Court. Because these changes were part of a legislative bill, lawyers know that it will take more time for the Supreme Court to review the issue. Constitutional or not, the bill was voted through by a democratically elected Congress. Experts warn that nothing can be said for sure until the Supreme Court issues its ruling but many lawyers and industry insiders are optimistic that the ruling will favor the status quo beneficial to the private industry, especially considering previous rulings that deemed initiatives unconstitutional.

“If the Court rules the amendments to the LIE to be constitutional, this would be a surprise to most of Mexico’s energy lawyers,” says José Estandia, Energy Partner at Jones Day. July’s mid-term elections, which saw the ruling coalition keep their majority but lose votes in its goal to reach a supermajority, are likely going to play a role in the final decision. “By the end of 2021, we will see the Supreme Court make a political decision based on the mandate of the elections in regard to how the future of the sector should be shaped,” says Hector Olea, President and CEO of developer Gauss Energía.

A Constitutional Change Ahead?

If the Supreme Court does rule that the changes to the LIE are to be upheld, further governmental efforts to change the law would not be necessary, said Estandia. But this scenario is not what is expected. “The government will likely prepare a constitutional change soon enough. Pushing this plan might take the rest of what is left of this administration’s term,” he said. For Carranza, the articles most likely to be altered are 25 and 28. This would allow the government to argue that the grid’s stability takes precedence over competition and free participation. Nevertheless, Juan Carlos Machorro, Partner at Santamarina y Steta, argues that there are more provisions in the Constitution that would harm the government’s chances to prioritize its own power production, at times more polluting than that of private companies. “After all, a right to health and a clean environment are anchored in the Constitution, as well,” Machorro highlights. The influence of a newly-reinforced USMCA should not be underestimated, either.

The size of the changes aside, the president remains unlikely to be able to push through with sweeping constitutional alterations after the elections. “Any future initiative intended to reform the Constitution will require the consensus of not only one party and its allies but of the majority of the parties in the house, plus the approval of the majority of the 32 state legislatures,” says Edmond Grieger, Partner at Von Wobeser y Sierra. The ruling coalition only has the support of a little over half of both Congressional chambers.

These numbers do not pant the whole picture, however. “During the past three years, even when López Obrador did not rely on a two-thirds majority, he was able to gain the necessary consensus to reform the Constitution in relation to very important topics of his political agenda, such as social welfare for vulnerable groups,” Carranza says. “In any case, the most relevant question is not whether a constitutional reform to strengthen CFE will be approved or not. The most important question is whether the president is willing to tone down his narrative and bridge the gaps between his government and the private sector to get past the standstill that the sector currently faces.”

The stability of the legal system, the government’s respect for the Supreme Court and the somewhat unlikely outcome of a constitutional change to the Energy Reform are generally good news for Mexico’s private energy players. But much has already changed either way. “Even though the courts have generally ruled against the government’s measures, a great deal of harm has already been done. For instance, CRE has stopped granting all permits, even though it is mandated to deliver them within a certain period. It is a pity that we will need to wait for the Supreme Court’s resolution to restart investments,” says Estandia. “We recently saw reports that CRE has not issued permits in about eight months. Previously, if you applied and complied with requirements you automatically received the necessary permits. This is no longer happening.”

Zooming out on the legal battle between the public and private sectors, the standoff lingers. “I think we will still see a struggle between two very opposite ideological views. I do not see many of the core issues being completely resolved, so growth perspectives may continue to be challenged,” says Salomon Amkie, Director at Citibanamex.

Grieger expects to see some positive impact in the energy investment climate, nonetheless, as a result of greater stability gained after the elections, mainly in generation, transmission and infrastructure projects. “This new panorama should bring some confidence back to investors regarding the present and future of the energy sector in Mexico. With the country’s rock-solid fundamentals still in place, there is great opportunity from a long-term perspective.”