Juan Manuel Ávila Hernández
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What Does the Energy Reform Vote Mean?

By Juan Manuel Ávila Hernández | Wed, 05/04/2022 - 16:00

Since the beginning of this administration, concepts such as energy sovereignty have been the focus of public policy. This has translated to several plans aimed at increasing state control over the power market, including awarding state agency CFE a minimum 54 percent market share. The attempt to change the Constitution culminated on Sunday, April 17, with a Congressional vote on the administration’s proposed energy reform. Many analysts had predicted the reform, if passed, would not only increase the price of electricity, making it harder to compete with other countries, but it also could have triggered international arbitration under the USMCA agreement, as stated by Congressman and former Minister of the Economy Ildefonso Guajardo, potentially prompting penalties and costs for Mexico that could have totaled US$30 billion.

After a stormy debate and ballot that lasted almost 12 hours, a unified opposition brought the bill to an end with 222 votes against while ruling party MORENA and its allies mustered 275 votes, well shy of the 332 needed. This was not a minor challenge as most of Mexico witnessed that day. Never has the Congress TV Channel had such a high rating, especially on a holiday Sunday. Not only that, but every news outlet and social media platform was talking about it. This special interest in the debate was not sudden or unorganized. Far from it. Through Twitter over the course of the previous weeks, many influencers and activists were asking their congressmen and women not only if they were going to vote but also about the sense of the vote. The response from all members of the opposition made it crystal clear they would vote against the reform, thus making it less likely to pass. Nevertheless, in politics especially in Mexico, things can always change at the last minute. MORENA and the administration made many attempts to sway the opposition, as we saw in their first attempt to pass this bill at the end of last year.

This was not the first time the federal government had tried to change regulation to benefit CFE. In 2020, there were two attempts plus the regulatory change we saw at the beginning of 2021, despite the fact that at the start of this administration there were numerous statements that the prevailing Energy Reform was not going to be changed and the investments already made were going to be respected, which, as we witnessed, was not the case.

Investors, companies and users launched a legal battle on that front in 2020, although some legal challenges go back as far as 2019 when the administration tried to change how CELs (CERs) were obtained. Since then, most of the legal claims have benefited the private sector and a constitutional reform was drafted as a pathway to enforce the changes in regulation without repercussions, or at least that was the promise at the end of 2021.

One of the most notable results of Sunday’s ballot was that the opposition was able to transition from an electoral alliance to a Congressional coalition. This means that unlike previous alliances that were specific for an election, we now see an opposition that acts as a block and could do so all the way to 2024, the end of this presidential term. If that is the case, which is most likely, the administration could face legislative gridlock, at least regarding attempts at constitutional reform.

Market players in the industry have stated that although this was a major win for the energy transition and a competitive-efficient power market, the current administration will continue to employ delaying tactics for permits and authorizations that will continue to be challenged legally; nevertheless, all the market uncertainty regarding how the regulation would unfold has now become a certainty. Competition is still in the Constitution, monopolies are still banned and thus all attempts to prioritize CFE by dispatching its energy first will not have grounds at the constitutional level, paving the way for greater legal recourse for companies. Still, the industry remains in standby mode. The current administration will not ease up in its efforts to find ways to stall permits. Eventually, this will yet again translate into market uncertainty.