The recently published Decree amending Mexico’s Electricity Industry Law is poised to significantly affect foreign companies investing in Mexico’s energy sector.
Investors in Mexico should assess whether and to what degree they are likely to be affected by the Decree.
While the effects of the Decree are currently suspended by an injunction granted by a federal court, it is not certain that the injunction and its effects on third parties will be upheld by Mexico's federal circuit court. Affected companies may benefit from pursuing domestic litigation proceedings in Mexico. Time is of the essence, since Mexican law provides for a 30-day period for affected companies to challenge the Decree before the local courts.
Foreign investors may avail themselves of protections afforded by the investment arbitration system, which has proven to be an effective dispute resolution mechanism in previous cases of energy reforms affecting foreign investors’ interests.
Domestic and international proceedings should be coordinated in order to prevent foreign investors from potentially forfeiting their legal rights.
The Decree amending Mexico’s Electricity Industry Law entered into force on 10 March 2021.1 Consolidating the plans of President Andrés Manuel López Obrador to “rescue” Mexico’s energy sovereignty, the Decree reverses the 2013-2014 energy market liberalization reform, which aimed at attracting private investors to Mexico’s energy sector by prioritizing low-cost power generation.2 It has, however, faced criticism from a host of national and international actors,3 including the Mexican Bar Association, which argued, among other things, that its effects might breach Mexico’s international commitments.4
The following are some key examples of the Decree’s amendments to the Electricity Industry Law that will likely negatively impact foreign investors in the Mexican energy sector:
- The grid dispatch rules now prioritize the plants run by CFE (Comisión Federal de Electricidad, the Federal Electricity Commission) despite the cost and pollution implications.
- CFE’s plants can now obtain clean-energy certificates, which are no longer contingent on the date of a plant’s commercial operation date or its ownership. This destroys the value of clean-energy certificates once held only by the renewable energy suppliers.
- CFE is no longer required to purchase energy through long-term auctions, which might lead to CFE purchasing energy from its own plants in lieu of cheaper energy from private companies.
- CFE can revoke the widely held self-supply permits allowing private companies and its associates to generate power for their own usage if it deems that such permits were obtained fraudulently.
- The legality of long-term purchase contracts with Independent Power Producers must be reviewed, which might lead to the renegotiation or termination of such contracts.
The companies operating in Mexico’s energy sector will be the first ones affected by the Decree, although they will not be the only ones. The Decree is likely to negatively impact financial institutions that have invested in such projects, whether in the form of loans or other financial instruments. Given that the Decree is projected to increase electricity rates,5 it will likely also impact investments in other, not directly related, industries—for example, manufacturing.
Remedies Available to Private Companies Affected by the Decree
Mexican law provides for a 30-day period for affected companies to file a Constitutional Appeal Action (Amparo) challenging the constitutionality of the Decree. To restrain Mexican authorities from enforcing the Decree while the Amparo is pending, energy sector investors should also seek an injunction. On 18 March 2021, a federal judge granted an injunction halting the effects of the Decree for every potentially affected company (in order not to give a competitive advantage to the private party that had initiated the proceeding) until the final decision on the Amparo.6 Such decision is subject to appeal. It is not certain that the decision granting the injunction and its effects on third parties will be upheld by the federal circuit court. Thus, affected companies are well-advised to pursue their own Amparos and injunctions, but should do so in a way that will not impact their international dispute resolution options.7
Investor-State Dispute Resolution
Given President López Obrador’s state-centric plans for the energy sector, which includes constitutional reform if the electricity sector overhaul is stopped by the local courts,8 international arbitration may be the most promising avenue of relief for foreign investors. Many investors similarly affected by energy reforms in Spain, Italy, the Czech Republic and other jurisdictions, have successfully arbitrated their disputes with those sovereigns.
Mexico is party to over 40 bilateral and multilateral treaties that afford important rights to foreign investors in Mexico.9 Such rights include, among others, protections against expropriation, unfair and inequitable treatment, and arbitrary and discriminatory measures—some of which might be implicated by the Decree and its enforcement. In addition, many of these treaties provide an opportunity for a foreign investor to arbitrate their disputes with Mexico before neutral arbitrators, instead of (or in addition to) litigating them in Mexico’s courts.
Affected foreign companies should also consider the rights granted to them in their contracts, if any, with Mexico or its organs. Such contracts may provide for international arbitration even in the absence of an international treaty granting the same.
1) The Decree was published in the Federal Register (Diario Oficial de la Federación) on 9 March 2021. See DECRETO por el que se reforman y adicionan diversas disposiciones de la Ley de la Industria Eléctrica, Diario Oficial de la Federación (9 Mar. 2021), https://www.dof.gob.mx/nota_detalle.php?codigo=5613245&fecha=09/03/2021.
2) See Elisabeth Malkin, "To Halt Energy Slide, Mexico Turns to a Trusted Provider: Mexico," The New York Times (11 Apr. 2019), https://www.nytimes.com/2019/04/11/business/energy-environment/mexico-oil-electricity-gasoline.html?searchResultPosition=3.
3) For example, Mexico’s Federal Economic Competition Commission (COFECE) reportedly stated that the amendments “would ‘seriously damage’ the conditions of competition for generation and commercialization of electricity in Mexico.” See Adriana Barrera, "Mexican antitrust watchdog urges Congress to reject power market bill," Reuters (15 Feb. 2021), https://www.reuters.com/article/us-mexico-energy-electricity-cofece-idUSKBN2AF1TS.
4) Barra Mexicana de Abogados, Posicionamiento de la Barra Mexicana, Colegio de Abogados, A.C., en torno a la iniciativa preferente para reformar diversas disposiciones de la Ley de la Industria Eléctrica (5 Feb. 2021), http://www.bma.org.mx/assets/bma-posicionamiento-lie.pdf.
5) See Adriana Barrera, "Mexican antitrust watchdog urges Congress to reject power market bill," Reuters (15 Feb. 2021), https://www.reuters.com/article/us-mexico-energy-electricity-cofece-idUSKBN2AF1TS.
6) See Amy Stillman, "Mexico Judge Suspends Controversial Power Law Indefinitely," Bloomberg (19 Mar. 2021), https://www.bloomberg.com/news/articles/2021-03-19/mexico-judge-suspends-nationalistic-electricity-law-indefinitely.
7) Particularly, foreign investors should assess whether a potentially applicable investment protection treaty contains the so-called “fork in the road” provision, as such a provision may preclude an investor’s ability to pursue international arbitration under an applicable treaty depending on how (e.g., the identity of the claiming entity, the types of claims pursued, the type of relief sought) the investor chooses to pursue proceedings before a national court.
8) See Dave Graham, "Mexico president threatens constitutional change if power bill struck down," Reuters (17 Mar. 2021), https://www.reuters.com/article/us-mexico-energy-electricity/mexico-president-threatens-constitutional-change-if-power-bill-struck-down-idUSKBN2B924R.
9) See UNCTAD, Investment Policy, International Investment Agreements Navigator: Mexico, https://investmentpolicy.unctad.org/international-investment-agreements/countries/136/mexico.