Energy Regulation: Opportunities in Collaboration

You can watch the video of this panel here.

The attempted changes proposed by the current administration to Mexico’s energy reality are still clouding investors’ vision, but industry experts assure that there are still plentiful opportunities in the sector and underline the necessity of public-private collaboration to ensure Mexico’s successful energy transition into the 21st century.

Legal uncertainty has fraught Mexico’s energy sector since Congress passed President Andres Manuel López Obrador’s renewed Electrical Industry Law (LIE) bill in March of this year. The proposed reform has met resistance from private companies whom have pointed to the administration’s obvious effort to reform the economic hierarchy with state companies Federal Electricity Commission (CFE) and PEMEX at the top. A clear violation to the principles of free competition anchored in the 25th article of the Mexican Constitution’s Energy Reform.

The fear and ambivalence that has marked the energy sector during this tumultuous regulatory period in Mexico, even internationally, has led to a more organized and cohesive sector in which concerns and technical analyses are shared, with the latter also being encouraged, said Valeria Vázquez, Partner at Deloitte. “As actors in the energy sector, we need to understand regulations, their implications and how they could affect the sector."

Readiness and understanding are key to pivot according to regulatory changes, should they come to fruition. For this however, as pointed out by Claudio Rodriguez-Galán, Partner at Holland and Knight, companies must first make a clear distinction of what is legally binding and what is dogmatic. Doing so will help companies make strategic decisions based on legal certainty instead of fear and speculation. This thought process puts into perspective how preemptive risk-adverse decisions may be premature, considering how the LIE bill has been continuously stunted since its introduction to Congress. Only 24hrs after its promulgation, the bill had been definitively suspended by Judge Gómez Fierro due to violations to the right to free market competition as underlined in Art. 25th of the Constitution.

It was feared that during the mid-term elections (June 6th), the president’s political party MORENA, would be able to gain the supermajority needed to amend the constitution and push the LIE bill through. However, people placed a de facto referendum on the administration which had been notably hostile towards foreign investors given its nationalistic view on the utilization of resources. The market reacted positively, gaining nearly 1 percent during early Monday, June 7, trading after months of volatility. A month later and after a court lifted the indefinite judicial suspension issued against the LIE bill – as judges ruled that there were no general direct effects on companies – private players had the option to push for new legal protection measures against specific parts of the reform that could directly affect their business. The Supreme Court will have the final say; results are unclear but industry insiders highlight how the entity has fulfilled its role as a political tie-breaker. In other words, even though private market players have observed a volatile market, the judicial system has repeatedly stood firm in the face of political pressures and interested parties.

Given the circumstances, the president drafted a new, more palatable reform in which he granted CFE the capacity to produce and distribute 54 percent of the nation’s energy, while leaving the remaining 46 percent to the private sector. This is the first sign of compromise and readiness to work with private energy providers, although the resubmission was met with a wave of amparos. Lifting these will be no easy task: “These matters do not have a black and white answer. Not all rulings will move the same way,” said Vázquez in previous interview with MBN. "The issues will be interpreted differently by various courts. However, I do not believe that the energy sector’s model will be changed through these decisions.” All that remains now is to observe how these cases play out in court and prepare accordingly.

As the battered sector looks towards an inevitable global energy transition, experts emphasize the need for public-private dialogue and combined efforts to not only meet growing energy demand but to ensure Mexico’s successful energy transition. Despite challenging conditions plaguing 2020 and 2021, demand has not been stifled, not from direct consumers or other energy sectors that are also racing against the clock to reduce their carbon footprint, according to Edmond Grieger, Partner at Von Wobeser y Sierra.

As the sector moves forward, energy producers must work within their current limitations to offer creative ESG solutions if they wish to remain competitive. Although CFE has reduced the number of market competitors, it has established tenders for companies to offer services, a possible opening for future cooperation. This is an opportunity for the private sector to fill energy sector niches in which they are more knowledgeable and efficient. "Public and private sectors should come together to generate a much higher value in the energy sector, instead of competing with each other," said Rodríguez-Galán. There are limitations, but even within that narrow space, there are still business opportunities that can be exploited “through creativity and a proper regulatory strategy,” says Sofía Tamayo, Regulatory Affairs at AES México.

Beyond the federal level, energy actors should look to work directly with state and local groups involved in the regions where they hope to develop projects to avoid disruptions and delays. Tamayo highlighted the CFE and TC Energy Tuxpan-Tula gas pipeline in Puebla that got delayed for having “caused problems for the indigenous residents of the Sierra de Puebla, increasing costs by hundreds of millions of dollars.”

In conclusion, although this may have not been the regulatory framework that market actors envisioned upon entering in 2015, it is the existing one, and just like any other market disruption industry actors must adapt or die out. In this case, a strategic development map must account for regulatory contingencies and ESG practices that consider social and environmental implications. The good news is that energy demand is here to stay and unequivocally essential to the development of Mexico’s economy, therefore there should be plentiful business opportunities for companies to fill were CFE alone cannot and it waits for the Supreme Court to deliver a verdict.