The new presidential administration in the United States, with its focus on the decarbonization of the electricity sector and having recently returned the country to the Paris climate accord, clashes head-on with the goals of Mexican President Andrés Manuel López Obrador's administration regarding the private sector in the electricity industry, where renewable energy generators stand out, as the Mexican government seeks to strengthen the State's electric corporation, the Federal Electricity Commission (CFE).
It is not far-fetched to think that this may open the door to claims by U.S. investors (under which the investor-State dispute settlement mechanism excludes Canada, although Canadian investors can access the mechanism through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership) under the rules of the United States–Mexico–Canada Agreement (USMCA).
The relevant provisions contained in Chapter 14-D are briefly outlined below. [Download Spanish Version]
Consultation, Negotiation and Mediation
The first step in submitting a qualifying dispute under the rules of the USMCA is an attempt by the plaintiff and defendant to resolve the dispute through "consultation and negotiation, which may include the use of non-binding third party procedures, such as good offices, conciliation, or mediation."
Widely discussed and investigated has been the fact that direct negotiation has shortcomings and presents challenges beyond the control of the parties. Those challenges can be procedural, technical, psychological or emotional. Mediation can overcome these obstacles and can significantly increase the chances of success of the negotiation.
In the case of the USMCA, this negotiation window represents an opportunity to curb the very costly tsunami coming for Mexico in electrical matters in the face of the government's attempts to reverse the energy reform promoted during the previous Mexican administration. This window, known in the world of investor-State disputes as the "cooling-off period," is also present in most international treaties that Mexico has signed, so the opportunity exists as well for investments that do not come from the United States.
However, if the negotiations do not succeed, the mechanism with which to proceed, and on which public and private forums and consultations around the Mexican energy sector are already widely spread, is arbitration. According to the USMCA, U.S. investments in Mexico would be protected against violations of “National Treatment,” “Most-Favoured-Nation Treatment,” and “Expropriation and Compensation,” with the exception of the latter from indirect expropriation.
The forecast for Mexico's energy sector is complicated, and the loss of value for businesses, governments and the general population may be very large if disputes end up in contentious proceedings. And the cost may not be paid by current public and private officials, but possibly by future generations.
On the other hand, the opportunity to sit and negotiate at the individual or collective level and use the advantages of mediation, which have been demonstrated globally in the energy industry and many others is a light that needs to be harnessed. The mechanisms of the USMCA and other treaties already provide for this.