Following a fast-track approval by the Senate, a series of important amendments to Mexico’s Electricity Industry Law (Ley de la Industria Eléctrica, “LIE”) are awaiting their imminent publication in the Federal Register (Diario Oficial de la Federación) (the “Amendments”). The Amendments originated from a bill submitted by President López Obrador, approved by the House of Representatives and the Senate with almost no changes.

Main Aspects of the Amendments

As anticipated in our previous newsletters, the Amendments look at implementing a strengthening of Comisión Federal de Electricidad (“CFE”) to the detriment of private sectors players, and for such purposes address the following subject matters:

1. Abandon the economic dispatch mechanism, and give priority to all CFE plants (regardless of cost and technology).
2. Condition the issuance of generation permits by the Energy Regulatory Commission (Comisión Reguladora de Energía, “CRE”) to the discretion (through the planning criteria of the National Electric System) of the Ministry of Energy.
3. Establish that granting of Clean Energy Certificates would not be subject to requirements related to either the ownership of the power station or the commencement of its commercial operations.
4. Eliminate the obligation of the State-productive subsidiary of CFE in charge of Basic Supply, to acquire energy and associated products exclusively through long-term auctions (which auctions will now be optional).
5. Obligating the CRE to revoke self-supply permits granted under the former Electricity Utility Law (Ley del Servicio Público de Energía Eléctrica “LSPEE”) –which were grandfathered when the LIE was enacted-, whenever those permits were obtained under ‘fraud to the law’ or fraus legis facta basis (i.e. to circumvent third party supply restrictions).
6. Review the legality and profitability for the Mexican government of the power purchase agreements entered by the CFE and independent power producers under the LSPEE.
7. Repeal of any legal provisions that may contradict the Amendments (including any provisions in any other statutes).

With respect to new dispatch priority rules, it is important to note that, although the bill of amendments submitted by the President contemplated, as part of its explanatory memorandum, a proposed dispatch order giving priority to hydro-power generation and generation from CFE power plants, followed by combined cycle power plants of independent power producers selling power to CFE, private wind and solar power plants and other generation facilities (in that order), the proposed dispatch order was not expressly included as an amendment to the LIE. Instead, the Amendments only give dispatch priority to (i) CFE’s Legacy Power Plants, and (ii) External Legacy Power Plants supplying power under Electricity Hedging Agreements with Commitment of Physical Deliveries. In this context, the Amendments delineate these two concepts as follows:

1. CFE Legacy Power Plants:

Pursuant to the Amendments the scope of the term “Legacy Power Plants” is extended to include essentially all of CFE’s current and future power plants.

2. External Legacy Power Plants supplying power under Electricity Hedging Agreements with Commitment of Physical Deliveries:

External Legacy Power Plants are only the power plants operating under independent production permits granted prior to the enactment of the LIE (that is, prior to August 2014) and power plants which construction and operation had already been included in the Federal Expenditures Budget (Presupuesto de Egresos de la Federación) as conditioned investments when the LIE was enacted.

On the other hand, the Amendments include a new definition for the term “Electricity Hedging Agreements with Commitment of Physical Deliveries”, which are defined as power purchase agreements entered between Basic Suppliers (i.e. CFE) and Generators whereby the parties agree to purchase and sell energy, capacity or ancillary services at a certain future time or date, which include commitments for the physical delivery of energy, capacity and other products, under generation programs submitted by the Generator to the National Center for Energy Control (Centro Nacional de Control de Energía) (“CENACE”) through fixed schedule offers in the Wholesale Electricity Market.

Moreover, pursuant to the Amendments, energy, capacity and ancillary services offered in the Wholesale Electricity Market shall be offered based on unitary production costs, guaranteeing, first, the Electricity Hedging Agreements with Commitment of Physical Deliveries, and second, the supply of clean energy. This suggests that clean energies may be afforded dispatch priority after all power delivered under Electricity Hedging Agreements with Commitment of Physical Deliveries; however, this is not entirely clear.

Finally, the Amendments contemplate the possibility of establishing restrictions to access the transmission and distribution grids whenever such access is not technically feasible, and provides that the operation of such grids shall consider the dispatch priority afforded to Legacy Power Plants and External Legacy Power Plant will physical delivery commitments. This may, operationally, impact the ability for renewable plants to access the grid for dispatch even for supply to non-CFE qualified suppliers.

Remedies and Challenges

The Amendments are allegedly aimed at achieving national energy security and sovereignty, through the rescue and strengthening of CFE as the guarantor of universal electricity supply. However, the fact is that the Amendments provide an unjustified preferential treatment to CFE, to the detriment of competitors in the Wholesale Electricity Market, which contradicts the competition and sustainability principles embodied in the Mexican federal Constitution, and may be considered a violation of the free trade (including the USMCA, TPP and the EU-Mexico FTA) and investment protection treaties to which Mexico is a party.

Affected parties will have mechanisms to challenge these Amendments. The actions available include , (i)  for private stakeholders, an indirect amparo claim; and (ii) for public agencies and political subdivisions, (a) a constitutional challenge (controversia constitucional), and (b) an unconstitutionality action (acción de inconstitucionalidad).

The constitutional challenge is a constitutional judicial review action available to the federal Executive branch, Legislative branch, and Judicial branches, any of the 32 Mexican states, Mexican municipalities and autonomous constitutional entities, for purposes of claiming that the laws, regulations, or acts of other public entities are unconstitutional because there is either an encroachment of powers or an infringement to the federalism principle. It is expected that some states will resort to this action to challenge the Amendments due to the impact they might have in investment and economic development in their jurisdictions.

The unconstitutionality action is also a constitutional judicial review that may be filed by: (i) 33% of the members of the House of Representatives or the Senate, (ii) the Executive branch, (iii) any Political Party registered before the National Electoral Institute (Instituto Nacional Electoral); (iv) the National Commission of Human Rights (Comisión Nacional de Derechos Humanos); (v) the Attorney General, among other public entities; with the intention of resolving disputes concerning the constitutionality of certain law, regulation or international treaty.

Finally, at the international level, affected investors may seek remedies through international investment arbitration procedures, under the investment protection treaties to which Mexico is a party, for violation of several investment protection provisions contained in such treaties, from national treatment to expropriation protections, among others.

Due to the important effects that the Amendments are likely to have over the whole Mexican electricity industry, including its potential effects to investors and consumers at all levels, we anticipate that challenges will be initiated in the following weeks, both against the Amendments and against the cascade of changes in regulations, market rules and administrative provisions expected to follow in the short term.

Our team at Dentons Lopez Velarde will be analyzing and will be working with its clients in the most suitable strategies to protect their investments and establish the most suitable strategies to follow in response to these Amendments and the ensuing subsequent changes.

The Amendments will become effective on the day following their publication. The Ministry of Energy (Secretaría de Energía), the Energy Regulatory Commission (Comisión Reguladora de Energía) and CENACE will then have a term of 6 months to make all necessary implementing changes in the resolutions, guidelines, policies, criterion, manuals and other regulatory instruments in matter related to electricity matters in order to make those consist with the Amendments.

Our leading Energy practice in Mexico, in combination with Dentons’ global Investment Treaty Arbitration practice, gives us a unique position to assist clients in the design and pursue of legal strategies to defend their rights and investments against this unprecedented line of events. Leverage on a local team with decades of accumulated knowledge of the Mexican energy sector and a global team experienced in successfully counseling clients in investment arbitrations worldwide, working together to respond to your specific needs.