US to Monitor Energy Industry Violations Under USMCA

US President Joe Biden has requested companies to document violations of USMCA in the energy sector. This could indicate that the Office of the US Trade Representative (USTR) plans to establish a dispute resolution panel under the treaty, according to information from Reuters. 

Specifically, the US challenges a 2021 amendment to Mexico's Electric Industry Law, which prioritizes electricity produced by CFE over electricity generated by all private competitors. The US highlights Mexico's inaction, delays, denials and revocations of private companies' capabilities to operate in Mexico's energy sector, while challenging a December 2019 regulation that grants only PEMEX an extension to comply with maximum sulfur content requirements under Mexico's applicable diesel fuel standard for automobiles. Lastly, the US points to a June 2022 action that favors PEMEX, CFE and their products in the use of Mexico’s natural gas transportation network. 

The US and Canada requested dispute resolution talks with Mexico in July 2022. The following month, Mexico's Minister of Economy, Raquel Buenrostro, stated that the possibility of a dispute resolution panel being established by the US and Canada against Mexico in the energy sector had been "deactivated." According to Buenrostro, there was no conflict with the US and Canada because reforms to the Electric Industry Law were suspended by the judicial power due to amparo lawsuits filed by various affected parties. She expressed confidence that dissatisfaction with administrative permit delays by CRE would also diminish, as the regulator was in the process of streamlining its operations following disruptions caused by the pandemic.

The minister also addressed her counterparts' concerns regarding congestion in electric transmission and distribution lines, which would be addressed through CFE’s commitment to strengthen investments in these areas, within its exclusive legal competence. "There is an expectation of a tender by CFE to expand this equipment and transmission lines. It should be announced in the coming dates and that would be the first step to resolve the perception of discrimination in energy dispatch," she said. 

A minister of the Supreme Court has raised the possibility of declaring unconstitutional the reform to the law in the electrical sector. Javier Laynez has submitted a proposal to the Second Chamber of the SCJN, in which he advocates for confirming an injunction against the reform of the Electricity Industry Law. The proposal will be reviewed by the end of the month and Minister Laynez proposes to rule in favor of the six renewable energy companies that filed the injunction. The arguments in favor of the articles that prioritize the dispatch of energy generated by CFE (over that generated by private entities), as well as the arguments in favor of the article that excludes wind and solar energy companies, "are unfounded," says Minister Laynez's proposal. "The challenged regulatory system does indeed undermine the model of the electrical market provided for in the constitutional design," it argues.

A ruling in favor of this injunction could ease tensions between Mexico's trading partners. Despite the consultation process starting in July of last year not reaching an agreement, the US has been reluctant to escalate the dispute to be resolved by an independent dispute panel under the USMCA framework. If declared unconstitutional, as Minister Laynez proposes, it would not be necessary for the US to turn to the panel, as it would be a show of support for private companies.