LIE: CFE to Monopolize Electric Sector

The Federal Electricity Commission (CFE) is to reassume complete responsibility of Mexico’s electric industry under the revised Electricity Industry Law (LIE), according to experts the proposed amendments spell out a de facto nationalization which they anticipate will result in higher energy prices and the withdraw of private investment.

The state agency would monopolize the country’s energy sector through its absorption of oversight authorities such as the National Hydrocarbons Commission (CNH) and the Energy Regulatory Commission (CRE). The National Energy Control Center (CENACE), which guarantees the dispatch and rates of the national electricity sector, will also become an extension of the agency. The six independent generation subsidiaries that were established in 2013 when the market was liberalized, will also be reintegrated. The resulting framework would allow CFE to set a new market were they would dictate who is able to participate after existing permits are annulled.

If approved, the modified constitution would grant CFE the authority to prioritize their plants in the order of dispatch over large private energy producers which represent 17 GW of installed capacity in the country. This would have a negative impact on the generation matrix which ultimately could “compromise supply to the population," said Rodolfo Rueda, partner at Holland & Knight. Moreover, granting CFE which reported a 68 percent jump in operating costs a fixed portion of the market will not reduce prices but increase them says BBVA Mexico. Overall, the reform is much more aggressive that what the market was expecting, said Bernardo Cortes Araujo, partner at Cortes & Quesada, adding that if approved it would impact most of the contracts held by large industrial clients and thereby wipeout investor confidence.

Although the reform has been outright repudiated by The National Action Party (PAN) and The Democratic Revolution Party (PRD), the president’s party MORENA could potentially negotiate with the Institutional Revolutionary Party (PRI) who has expressed a willingness to debate the proposal after internal assessment.

"The Institutional Revolutionary Party expresses its openness to debate the energy issue, under the premise that national growth and development should be promoted, without affecting Mexican families" reads the press release.

Learning from experience, the reform initiative also charged the state company with leading the country’s energy transition effectively putting in language to avoid the legal hurdles they faced with previous attempts which were undone based on environmental arguments said Diego Campa, partner at Campa.

Since a formal public debate between Morena and PRI is yet to be had, it is unclear what concessions or demands, if any, will be presented. Nevertheless, with this we have seemingly reached a crossroads where the integrity of Mexico’s energy sector will be decided.