USMCA Could Shift Focus of Mexico’s Energy Policy

Q: What legal support is in demand by companies in Mexico’s energy sector?

A: The electric, oil and gas sectors have been living a different reality than the ones existing before the current administration. As a law firm, this has changed our outlook as well: instead of receiving numerous advisory requests from the private sector regarding new projects, ventures and power plants, we are, unfortunately, seeing more need for advice regarding how to restructure, litigate and file administrative or amparo procedures and defend themselves from government initiatives. Licenses, approvals and permits have almost come to a complete standstill. This, of course, partly has to do with the pandemic. Regulators are still in pandemic mode, meaning they need more time to complete procedures. The private sector is facing a perfect storm for these reasons.

The other problems we are facing have to do with regulation. In 2013, President Enrique Peña Nieto pushed the Energy Reform through Congress, essentially altering the Constitution so that private and international companies could enter the Mexican market. This reform required a level playing field, meaning asymmetric regulation and measures from the government that would affect the market share of PEMEX and CFE. The result stands almost directly against what the current administration wants to achieve, which is a stronger state-owned presence in the energy sector. To reach this goal, the executive branch began rolling out regulations under what it understood to be its executive power. However, federal law stands one level above measures such as SENER’s reliability policy, so when these initiatives breached these laws, they were halted. In a way, this was a learning curve for President Andrés Manuel López Obrador, who began to amend the federal Electrical Industry Law (LIE).

The constitutionality of this initiative was immediately questioned by the private sector. Not long before, the Supreme Court had ruled that SENER’s earlier policy was unconstitutional. This predicts the federal courts’ pending outcome of the amendments to the LIE and foreshadows the president making a constitutional change, considered the next objective for President López Obrador. Nevertheless, a constitutional change to the previously established reform will be difficult to achieve. After all, a right to health and a clean environment are anchored in the Constitution too.

We have represented many companies, particularly offtakers, in their goal to get amparos. This is still very much the main issue dominating the electricity sector. Although we would rather work on supporting new projects because this entails creating value and employment, we are definitely prepared to act as a legal service provider that guarantees existing rights to the players in the industry. The current situation is unfortunately expected to continue for the remainder of this administration unless something surprising happens.

Q: How can Santamaria y Steta help clients overcome the blockage in permitting and licensing?

A: We help clients meet all the requirements, as well as pushing for these permits to go through. We maintain good and sound professional relationships with these regulators, which allows us to get things done. The firm has been able to push regulators harder and speed up the process.

When we get few or no responses in our interactions with regulators on permits, a legal route through the court is the regrettable secondary option. The good news is that the courts have been responding efficiently and fairly. Some of the suspensions against the alterations to the LIE have been lifted. The final decision on the issue will likely take some months. Unfortunately, new project developments will slow down even more for the moment.

What is happening in the sector is a trend, which will eventually end. International players are used to these political swings and know that this is temporary. As their Mexican legal counsel, we are obligated to convey this message to our clients, as well as the assurance that the rule of law is to prevail. The legal framework cannot be destroyed. We simply need to protect investments and guard the legal framework for a while, and we certainly know how to do that.

Q: What other legal tools and treaties can Mexico’s private companies look toward in their effort to maintain the status quo in the energy sector?

A: There is one legal tool available to companies that I have not yet seen anyone use: free trade agreements and their investment-focused articles, as found in the USMCA. Once you sue the Mexican government for losses and damages in court, this is perhaps an indication that companies are at the point of leaving. Nevertheless, there might be an expectation in the energy sector that something will happen during the remainder of this administration under the USMCA umbrella. US President Joe Biden has been known to defend green and renewable energy. His agenda is full of clean energy and measures to combat climate change. Because Mexico is the US’ main commercial partner and the fact that they share a border, which is thousands of kilometers long, there is a chance that the geopolitical sphere will soon throw its influence on Mexican energy policy. The government’s initiatives are in violation of commercial treaties, let alone international climate change commitments to which Mexico is also a party. If the sector’s regulation is to be revisited, it must be to increase the sector’s openness to private investment in line with international commercial treaties, not vice-versa. We believe the US government will eventually act. We do not foresee a U-turn in President López Obrador’s direction but at the very least, he will soften the tone. After all, it is impossible for the entire world to move in one direction and for Mexico to stubbornly move in the opposite direction. The European Union is discussing carbon emission taxes, although this is not a policy yet, so we could see something similar come out of the USMCA.

Q: How do you assess the likelihood of public and private joint ventures in the current environment?

A: In a country the size of Mexico, there is a great deal of demand in the energy sector. Public-private partnerships are a massive benefit to achieving these goals but the government has set a negative tone by canceling the fourth long-term electric auction and pushing CFE back into the limelight. The first three long-term auctions, one held in 2016 and two held in 2017, resulted in progressively lower prices. The first auction averaged US$47.70/MWh, the second US$33.47/MWh and the third US$20.57/MWh. The third auction set a new world record for low-cost wind power generation with a price of US$17.70/MWh, with total investment in the auctions rounding US$9 billion. Investors came from 12 countries and more than US$1 billion in energy projects were awarded to US firms. Rather than focusing on big generation projects, CFE should aim to strengthen the country’s transmission system and to interconnect the isolated sides of our two peninsulas. Private companies have a great deal of experience in these efforts and can do these projects at low prices as well. It is, therefore, surreal that the government is not making use of these opportunities. But with a solid political will, public-private partnerships can just as easily once again become a reality.

Santamarina y Steta is a law firm with a team of over 100 legal professionals serving Mexico’s business community and investors in the world’s most important industries.