Mexican Energy Regulatory Commission imposes sanction of more than US$450 million; Mexico’s Supreme Court issues precedent disfavorable to permit holders
On May 25, 2022, Mexico’s Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) imposed a punishing penalty of more than MX$9.145 billion (~US$450 million) on a major player in the Mexican energy sector. The company holds an electric power generation permit under the self-supply scheme (autoabastecimiento). The CRE declared that the company was restricted to supplying electricity for itself and its shareholders’ needs, and not permitted to receive compensation from its shareholders for the electricity it generated.
According to the CRE, the company’s acceptance of compensation for its electricity supply to shareholders infringed upon Article 40, section V, of the Electric Power Public Service Law (Ley del Servicio Público de Energía Eléctrica or LSPEE).
Likewise, on June 17, 2022, the Mexican Supreme Court of Justice (Suprema Corte de Justicia de la Nación or SCJN), issued a binding decision (precedente), providing that if the resolution granting an investor an electricity generation permit is overturned, the investor’s rights under the permit are also overturned because the legal framework under which the permit was granted is no longer operative.
Below we provide (i) a brief explanation of the self-supply power generation scheme under Mexican law; (ii) a summary of the most relevant aspects of the CRE’s decision; (iii) a brief description of the SCJN’s precedent; and (iv) a look at the implications on private investments in the Mexican electricity market.
The self-supply scheme under Mexican law
In accordance with the self-supply scheme, the CRE issued permits enabling private power plants to generate energy to meet the needs of its co-owners, partners or shareholders.
This self-supply scheme was established under the LSPEE and remained in force despite the 2014 Electricity Industry Law (Ley de la Industria Eléctrica or LIE) that repealed it.1 The self-supply scheme survived because of LIE’s "legacy regime" providing that self-supply permits existing as of LIE’s enactment, remained valid.
Since the self-supply scheme’s implementation, various companies have used it to acquire electricity at a lower price than that offered by the Federal Electricity Commission (Comisión Federal de Electricidad or CFE). The lower price is achieved through the use of renewable energy generation plants, which have lower energy generation costs than the CFE's conventional plants, and receive technical and financial incentives from the CFE.
According to the Instituto Mexicano para la Competitividad’s (IMCO) data, “between September 1994 and May 2019, the CRE granted a total of 468 permits for the generation of electricity under the self-supply modality.”2
The CRE’s sanction resolution
In the CRE’s sanction decision, or Resolution, it determined that the applicable legal framework3 “does not allow the Permit Holder to generate and deliver electricity under the self-supply scheme to its shareholders in exchange for a consideration [compensation], since this is equivalent to carrying out an activity expressly prohibited by the [LSPEE], which is the sale, resale or transfer of electrical energy and is in conflicts with the purpose of self-sufficiency (meeting own needs). . . .”
The CRE concluded that the company’s sale of electricity to its shareholders was unlawful because the sale of electricity was prohibited under the LSPEE, and the conduct did not fall under any of the prescribed legal carve-outs which allow for the sale of electricity:
- Production surpluses, which must be made available to the CFE
- Force majeure, when public service is interrupted or restricted, the permit holder is obliged to provide the electrical energy required for the period of interruption or restriction
- Emergency, when the supply of electricity is put at risk, provided that the requirements of article 125, section V, of the Regulation of the LSPEE are met, the permit holder may deliver electricity to the CFE.
The CRE’s retributive fine of MX$9,145,388,400 is equivalent to one hundred times the current daily general minimum wage for Mexico City, for each KW sold or consumed in the fiscal year 2020 – the last year in which the infringing conduct occurred.
The SCJN’s decision
On June 17, 2022, the SCJN rendered a binding decision establishing that permit holders do not have acquired rights, since these are not created from the terms of the permit itself or the corresponding administrative act, but based on the applicable legal framework.
The First Chamber of the SCJN unanimously determined that the effectiveness of electricity generation permits is conditioned on their compliance with the applicable laws and regulations, “which, like any legal system, are subject to reforms and modifications, as required by public interest.”
Consequently, according to the First Chamber, "the fact that the the conditions set forth in the aforementioned permits are modified by means of the issuance of legal norms, does not imply that acquired rights are affected, since these conditions are linked to the applicable legal framework, hence there is no right in charge of the permit holders that is opposable to eventual reforms.”
The impact on the market
The energy policy of President López Obrador has unleashed a wave of criticism for its detrimental effects on the sector. The CRE’s Resolution has raised concerns because it calls into question the legitimacy of the self-supply companies’ investment scheme. The scheme itself has been recognized since 1994 as an effective mechanism to promote clean energy. If the CRE’s reasoning in the Resolution is generally applied, it would practically extinguish the self-supply scheme.
As the IMCO points out, “the disappearance of self-supply would be detrimental to the environment and the energy transition, and the investment climate, the rule of law and Mexico's competitiveness.”4 In addition, the Resolution severely restricts a fundamental contractual principle: the freedom to contract.5
The SCJN’s decision constitutes a setback for the stability of the legal framework of the Mexican electricity sector. The various reforms to Mexico’s legal framework have generated uncertainty regarding the conditions under which the companies invested in their projects and obtained permits. In addition, these actions do not conform with the standard of fair and equitable treatment as set forth in numerous treaties to which Mexico is a party.
As a result of the President’s energy measures adopted since 2020, and those set forth in the Resolution, foreign investors involved in electricity generation projects under the self-supply scheme may wish to consider their rights and potential remedies under Mexican law – including amparo protection – as well as under the applicable investment treaties and other international instruments, for instance, investor-state international arbitration.
Please see our series of articles on the potential for investment claims arising out of measures taken by the Mexican government in connection with the Energy sector:
- Mexican Congress rejects electricity constitutional reform and approves bill to regulate lithium (April 20, 2022)
- Mexican Supreme Court dismisses Unconstitutionality Action against Electricity Industry Law reform (April 8, 2022)
- New developments in the Mexican energy sector generate uncertainty (November 17, 2021)
- President of Mexico files constitutional reform bill on electricity (October 7, 2021)
- Reforms in the energy legal framework in Mexico and challenge mechanisms (June 4, 2021)
- Mexico’s Hydrocarbons Law Reform Bill: A controversial new measure in the Mexican energy sector (April 8, 2021)
- New measures threaten investments in the Mexican energy sector (July 14, 2020)
If you have any questions about these measures and their implications, please contact any of the authors.
[1] See second in fine and tenth transitory provisions of the Decree of publication of the LIE of August 11, 2014.
[2] Instituto Mexicano para la Competitividad, “El autoabasto eléctrico en datos”, May 5, 2022, https://imco.org.mx/wp-content/uploads/2022/05/Autoabasto-ele%CC%81ctrico-en-datos_IMCO_05052022.pdf, Last consultation date: May 30, 2022.
[3] Specifically, "articles 36, first paragraph, section I, subsection a) and second paragraph number 4) of the LSPEE and 90, section I of its Regulation, and the third and seventh condition of the self-supply Permit".
[4] Instituto Mexicano para la Competitividad, “El autoabasto eléctrico en datos”, May 5, 2022, https://imco.org.mx/wp-content/uploads/2022/05/Autoabasto-ele%CC%81ctrico-en-datos_IMCO_05052022.pdf, Last consultation date: May 30, 2022.
[5] According to this principle "the will of the parties is the supreme law in contracts." Pasapera Mora, Alfonso, Obligaciones, Mexico City, Editorial Porrúa, 2022, p. 138.
