Electric Reform to Affect Trade, Sustainability, Investment

President Andrés Manuel López Obrador sent the Chamber of Deputies a constitutional reform initiative that seeks to strengthen the participation and powers of the Federal Electricity Commission (CFE). This new proposal would not only cause an increase in energy prices and the withdrawal of private investment but it also puts competition, investment and the environment at risk, warns BBVA Research.  

The energy reform aims to provide the CFE a guaranteed 56 percent market share of electricity generation when it currently has a 38 percent market share. In addition, the National Center for Energy Control (Cenace), which is in charge of electricity distribution, would become part of CFE's organic structure. The document also proposes the disappearance of the National Hydrocarbons Commission (CNH) and the Energy Regulatory Commission (CRE), Mexico’s two autonomous regulatory bodies of energy matters.

These decisions are generating controversy in the private sector and might be in conflict with the USMCA. "The counter-reform proposal favors CFE, a parastatal company, in the regulatory framework to the detriment of competitors, many formed by foreign capitals from commercial counterparts within the Free Trade Agreement between Mexico, the United States and Canada (USMCA) and other commercial agreements. Regarding the USMCA, the reform proposal is opposed to chapters 14 (Investment) and 21 (Competition Policy)," according to a BBVA investigation. USMCA’s Article 14 specifies that each country will treat investors from the other countries no less favorably than their own. Article 21 commits the parties to ensure that competition policies treat their counterparts no less favorably.

President López Obrador’s proposal could go against these agreements by eliminating the free competition, argues BBVA Research. Moreover, the counter-reform could force consumers to consume a service higher cost. The reform is much more aggressive than what the market was expecting, as discussed in a previous MBN article. If approved, it would impact most of the contracts held by large industrial clients and wipe out investor confidence.

This reform could also have severe environmental implications and does not incorporate fundamental aspects such as climate change, renewable energies, the incorporation of the cost generated by environmental externalities and proper care of the environment in the productive processes of energy activities. Likewise, no mechanisms are contemplated to account for, prevent or minimize the possible environmental and social impacts resulting from the generation and use of energy, according to information from CEMDA. The proposed changes could make it harder for Mexico to comply with its national and international commitments in terms of reducing greenhouse gas (GHG) emissions. If the current scenario continues, it is estimated that in 2020 national GHG emissions will be 28 percent higher than in 2010.

The reform could also affect other sectors, argues BBVA Research, mainly those that supply the electrical industry such as oil derivatives, chemicals, minerals and business support. The costs of many services and products could also increase if the most efficient private companies are excluded from the market, including the prices of water, gas, minerals, education, plastics, rubber and housing, according to BBVA.