Juan Fernando Flores Ruiz
Director General
Expert Contributor

Good Agreements, Good Benefits

By Juan Fernando Flores Ruiz | Wed, 02/03/2021 - 13:11

A change of government has taken place in the US and with it, a new president. There will be items to address on the agenda in the energy sector, not only for that country but for the countries involved in USMCA, especially Mexico.

Let us recall a few things from the USMCA treaty that influence this sector: 

  • Chapter 11 deals with technical barriers to trade in USMCA, which aims to facilitate free trade in goods between the parties of the agreement, including the promotion of good regulatory practices.

Specifically, the chapter will promote transparency, best practices and regulatory cooperation between the parties. It mentions the development of regulatory cooperation, with the objective of addressing unnecessary technical barriers to trade in specific sectors, and that for all of this there will be a committee to follow up on the agreement of this chapter.

  • Chapter 12 reinforces the good regulatory practices applicable to the productive sectors, aiming at regulatory homogeneity.
  • Chapter 14 updates investor protection disciplines, as it will strengthen investment certainty.
  • Chapter 22, which deals with state-owned enterprises and designated monopolies, states that the activities of these companies should be carried out under the principles of nondiscrimination and commercial considerations so that they do not affect trade or investment by other companies.
  • Chapter 28 mentions again good regulatory practices, recognizing regulatory coordination bodies such as CONAMER in the Mexican context.

Specifically on Mexico regarding regulation and monopolies of state-owned enterprises, let us take a look at what has happened:

SENER has eliminated 20-year permits to import fuels. With this, there will be stricter guidelines for granting this type of permit, allowing only one year and up to five for private companies. This agreement, which was published in the Official Journal of the Federation (DOF), did not comply with the 45-day period for public consultation. On this same issue, COFECE stated that if the agreement was granted, “it would seriously hinder competition and free competition in the commercialization of petroleum products, and would affect the possibility for consumers to have access to more supply options and the best possible prices.”

Free competition is due to the fact that the long-term permits somehow guarantee the investment that is required for storage and transport infrastructures for these sector products to be imported.

In previous years, the Energy Regulatory Commission (CRE) has reduced the number of permits granted across the entire sector, even though companies met all the technical, legal and formal requirements to obtain them. The Mexican government assures that it will defend the interests of the nation by strengthening state-owned companies.

In statements by the Mexican government itself, it says that its main objective is to put an end to oil imports, meaning the country will have to produce the required supply with its own capacity. This is not what we call taking care of the supply of fuels; it puts the supply at risk because depending on a single source is not safe. This is why the Energy Reform of 2014 was carried out, to ensure free competition and the existence of fuel options.

As an indication that the Mexican government itself requires these imports, most of the natural gas needed to generate electricity is imported from the US.

Going back to the issue of Mexico's regulatory coordination bodies, the government has expressed its disagreement with the structure of these organizations, to the extent of proposing the elimination of some of them, such as CRE and COFECE.

An important basis of the Energy Reform is that there should be different offers to meet the demand for different products. Reinforced by USMCA, these bodies are there to introduce regulatory best practices to jointly ensure the security of national and foreign investment in the supply of products in the sector, but also to ensure the supply of fuels and electricity.

Everything that has happened in Mexico, with its positions in relation to the sector, has worried US businessmen, who have made their discontent clear and requested support from their country's legislators to take part in agreements and to respect USMCA in order to continue doing business with Mexico. This is an issue that the current president should review and take up again so that both countries can come to an agreement to protect private investment in the energy sector in Mexico.

Enormous Capacity

Mexico has an enormous capacity for business in the sector, whether national or private. What the country must do is to be receptive to businessmen willing to help secure fuel supply, to be achieved with joint or private investments, which would be the best option to continue providing appropriate supplies.

It is important not to hijack these institutions and allow them to do their work because as a country, we need to take a firmer step forward, given that the world reality and the progress made in other countries is far from what we have been able to achieve.

USMCA and the Mexican Energy Reform of 2014 are the basis for this. Strengthening institutions and regulatory bodies will help achieve the security and national sovereignty that Mexico seeks, and good relations with the countries that are part of the trade agreement will help strengthen this sector.