On September 30, 2021, President Andres Manuel Lopez Obrador submitted to the House of Representatives (Cámara de Diputados), a bill to amend articles 25, 27 and 28 the Mexican federal constitution in matters concerning the electricity industry (the “Bill”). The Bill is preceded by a series of regulatory actions taken by the Mexican government and an amendment to the Electricity Industry Law (Ley de la Industria Eléctrica) (“LIE”) that affected private players in the electricity sector, which have been successfully challenged by several stakeholders (including the private sector, the Federal Economic Competition Commission (Comisión Federal de Competencia Económica) state governments and groups of legislators). As a result of such challenges, most regulatory actions and the amendment to the LIE have been enjoined or even overruled by the federal courts, after finding them unconstitutional.

The statement of reasons contained in the Bill argues that the constitutional amendments enacted in 2013 damaged the Nation’s rights over its energy assets, dismantled the electricity industry and debilitated the National Electric System (Sistema Eléctrico Nacional) (“SEN”), energy security and national security as whole, imposing private interests over public interests. Consequently, the Bill is aimed at completely reversing the 2013 energy reform in matters related to the electricity sector, although it also contemplates important changes for the oil & gas and the mining sectors, such as the elimination of the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos), the elimination of all references to state productive enterprises conducting oil & gas exploration and production activities (which suggests that Pemex shall become again a governmental instrumentality), and the prohibition to grant concessions to exploit lithium and other “strategic minerals”.

In order to be passed, the proposed constitutional amendment shall be approved the favorable vote of at least 2/3 of the legislators present at plenary session of each of the House of Representatives and the Senate, as well as a simple majority of the local congresses of the states of Mexican Republic.

The main aspects of the amendments and saving provisions proposed under the Bill are as follows:

1. The electricity sector, including the generation, transmission, transformation, distribution and supply of electricity, is characterized as a strategic sector exclusively reserved to the State, through Comisión Federal de Electricidad (“CFE”) (i.e. the national power company). CFE shall generate at least 54% of the electricity required nationwide, while the private sector shall be allowed to generate up to 46% of the required electricity.
2. The supply of power as a public utility service shall be undertaken by CFE exclusively, who may acquire electric power from the private sector. For that purpose, CFE shall enter into long-term, bilateral, financial hedging agreements for the purchase of power and capacity, or will undertake short-term purchases of energy and capacity through a competitive dispatch process based on the lowest-offered production costs.
3. The Energy Regulatory Commission (Comisión Reguladora de Energía) and the National Hydrocarbons Commission shall disappear and their functions shall be assumed by the Ministry of Energy (Secretaría de Energía) (“SENER”).
4. The Bill proposes the re-integration of CFE as a horizontally and vertically integrated state monopoly operating as a single, autonomous governmental instrumentality (as opposed to its current organization as a state productive enterprise and a series of subsidiaries and affiliates), while maintaining only one subsidiary and three affiliates. The State, through CFE, shall be responsible for the SEN, who shall also be in charge of preserving energy security and sufficiency, and the continuous supply of electric power to all the population.
5. The National Center for Energy Control (Centro Nacional de Control de Energía) (“CENACE”), which was split from CFE back in 2013 in order to become the independent operator of the SEN and the Wholesale Electricity Market (Mercado Eléctrico Mayorista) (“WEM”), shall be re-integrated to CFE. CFE shall determine the service rates for the transmission and distribution grids, as well as the rates payable by end users, and will be in charge of the economic dispatch of all generation units, in compliance with reliability, continuity and stability criteria.
6. Private generators allowed to participate in the generation of power to be sold to CFE (up to the 46% mentioned above), shall abide by CFE’s planning and control of the SEN, and the regulation applicable in matters related to continuity and reliability. The private generation that will be allowed to continue (under a new legal regime) includes the power generated by: independent power producers (but without considering any surpluses), power plants built after 2013 energy reform (including those that supply power under contracts awarded through CENACE’s long term auctions), and “authentic” self-supply power plants, to the extent their operation has been consistent with the terms of the Electric Power Public Utility Law (Ley del Servicio Público de Energía Eléctrica).
7. Unlike previous constitutional amendments that recognized the vested rights of those already undertaking activities affected by the relevant amendment, the Bill provides that, on the same day on which the amendments become effective, all current power generation permits, all power purchase agreements with the private sector and all pending permit applications, shall be cancelled.
8. All clean energy certificates are cancelled.
9. CFE shall be responsible for the execution of all energy transition activities related to electricity matters. The development of industries required for the energy transition is characterized as a “priority sector”, to be developed under an “industrial policy for electricity”, covering from the transformation of natural resources, to the manufacture of equipment for end users, national science and technology, intellectual property of the State over technologies, systems and equipment, the manufacturing of critical components and equipment by public entities, and financing provided by development banks and the domestic market to create public, social and private entities of domestic capital.
10. All references to state productive enterprises engaged in oil & gas exploration and production are eliminated. Consequently, although not expressly indicated in the Bill, we assume that Pemex (same as CFE) would no longer be a state productive enterprise and shall return to be a public instrumentality.
11. No concessions shall be granted to exploit lithium and other “strategic minerals” necessary for the energy transition, but this restriction shall not apply to existing mining concessions where lithium exploration activities approved by the Ministry of Economy (Secretaría de Economía) have previously taken place.
12. All provisions contradicting the decree of amendments are repealed (this would take place on the date on which the amendments become effective).

If approved, the constitutional amendment shall become effective on the day following its publication. The Bill provides that Congress shall issue, within a term of 180 days following the enactment of the constitutional amendment, the necessary amendments to the current legal framework in order to make the amendment effective.

The Bill contains a number of inconsistencies and lacks clarity on the potential effects of some of the proposed amendments. In addition, we believe some of the proposed amendments may violate international treaties to which Mexico is a party, which could lead to international disputes in the context of such treaties.

Our Firm will continue analyzing the effects and implications of the Bill, and will closely follow the corresponding legislative process.

This communication is for informative purposes only and it does not constitute legal advice.