New measures threaten investments in the Mexican energy sector

Recent regulatory changes in the Mexican electricity sector, announced in late May and June 2020, have given rise to additional concerns regarding the viability of investments in renewables projects in the country.

On May 28, 2020, in an extraordinary session, the Mexican Energy Regulatory Commission (Comisión Reguladora de Energía, or “CRE”) adopted two resolutions which significantly increase the wheeling charges for legacy energy generation facilities (“CRE Resolutions”). Subsequently, on July 8, 2020, Mexico’s Energy Ministry (Secretaría de Energía, or “SENER”) published the 2020-2024 Energy Sectoral Program (“PROSENER”) which, among other things, seeks to give preferential treatment to Mexico’s 100% state-owned productive enterprises over privately held interests in the sector. These measures, in addition to those adopted in April and May 2020 by Mexico’s National Center for Energy Control (Centro Nacional de Control de Energía, or “CENACE”) and SENER, significantly modify the regulatory framework applicable to the renewable energy sector and affect the viability of multiple renewables projects in Mexico.

In this article, we consider the impact of these developments. In particular, we discuss the measures adopted pursuant to the CRE Resolutions and those still to be implemented under the PROSENER, their impact on renewables projects and the strong criticism which has been leveled at these developments.

Current Mexican regulatory landscape

In April and May 2020, CENACE and SENER issued measures that, as explained in our previous article, drastically modified the Mexican renewable energy regulatory framework. In response, Mexico’s Federal Commission for Economic Competition (Comisión Federal de Competencia Económica, or “COFECE”) and the government of the State of Jalisco filed constitutional actions (controversias constitucionales) challenging these measures. On June 29, 2020, Mexico’s Supreme Court granted COFECE’s request and preliminarily suspended the measures until the case is resolved on the merits. In addition, the measures have been challenged by private parties before Mexican courts, which have also granted provisional and definitive suspensions.

Against this background, the recent announcement by the Mexican government, and the new rounds of measures issued by the CRE and SENER, have given rise to additional concerns regarding the future of the renewables sector in Mexico.

The administration of President López Obrador has outlined an amendment of up to 23 regulatory measures, and the issuance of 5 new regulations, with the objective of “securing order and a level playing field” for the Federal Electricity Commission (Comisión Federal de Electricidad, or “CFE”), a 100% state-owned productive enterprise. These changes emerged as a result of a “list of petitions” that CFE sent to the CRE and to SENER, which would have the effect of granting CFE more influence in matters that, in fact, fall within the powers of the very bodies that regulate that entity.

Tariff increase for transmission services

Pursuant to the CRE Resolutions, on June 10, 2020, CFE published in the Federal Official Gazette (Diario Oficial de la Federación, or “DOF”) the “Charges for the transmission services for renewable or efficient cogeneration energy sources by level of tension.” Two days later, the CRE published in the DOF the “Procedures to determine the economic variables required for the calculation of the charges for transmission services in tensions equal or greater than 69 kV, applied by CFE Intermediación de Contratos Legados S.A. de C.V.” These measures will trigger an increase of between 400% and 800% in the tariffs that multiple energy generation facilities will have to pay in wheeling and distribution charges.

The CRE Resolutions undermine more than 251 legacy contracts that operate under the self-supply scheme (autoabastecimiento), with an accumulated value of $17 billion. According to Mario Morales Vielmas, the CEO of CFE Intermediación de Contratos Legados, these amendments seek to end the “black market” that operates under the self-supply scheme. As a result, multiple companies have filed amparo proceedings against the CRE Resolutions. However, in some cases, courts have declined to suspend these measures.

2020-2024 Energy Sectoral Program

To facilitate the implementation of these policies, on July 8, 2020, CONAMER published in the DOF the PROSENER. It shall be noted that the PROSENER was not subject to a regulatory impact analysis by Mexico’s National Commission for Regulatory Improvement (Comisión Nacional de Mejora Regulatoria, or “CONAMER”). Among its “priority objectives,” the document sets forth its aim “[t]o strengthen the State productive enterprises as guarantors of energy sovereignty and security, and a lever for national development.” As one of its guiding principles, the PROSENER states that “[t]he market does not substitute the State.”

Notably, the PROSENER includes the following measures aimed at strengthening Mexico’s state-owned productive enterprises: (i) in favor of CFE, eliminate the preferential dispatch criteria for renewable energy generation facilities and “rescue” CFE “by means of an energy policy based on the principle of national public interest;” and (ii) in favor of Petróleos Mexicanos (“Pemex”), eliminate the asymmetric regulations that limited the market dominance of Pemex, which “will have a positive impact on Pemex by allowing it to stop losing income.”

Criticism of the measures and potential investment treaty claims

On June 11, 2020, Michael J. Sommers, president and CEO of the American Petroleum Institute (“API”), sent a letter to US Secretary of State Michael R. Pompeo, among other senior officials. In this letter, API expressed concerns regarding the recent actions of the Mexican Government, which harm US investors and violate regional treaties, such as the North American Free Trade Agreement (“NAFTA”) and its successor, the United States-Mexico-Canada Agreement (“USMCA”). API pointed out that “recent actions taken by the Government of Mexico undermine [NAFTA’s] framework and discriminate against U.S. investors in violation of commitments that Mexico agreed to in both NAFTA and USMCA.” Additionally, API encouraged US officials to use diplomatic channels to engage with Mexican President López Obrador to urge him to uphold his commitments under the USMCA to treat US investors and exporters fairly.

On June 23, 2020, Chet Thompson, President and CEO of American Fuel and Petrochemical Manufacturers, sent a letter to US President Donald J. Trump, in which he denounced the preferential treatment accorded to PEMEX, and stated that the Mexican Government’s conduct “raises serious questions about whether such actions are permissible under Mexican law and Mexico’s obligations under the new USCMA.”

In addition, Spanish energy company Iberdrola announced that it would cancel it’s $1.2 billion investment in Mexico for the construction of a combined cycle generation facility.

As stated by Christopher Landau, the US ambassador to Mexico, “investors seek certainty, and there is nothing worse than changing the rules of the game.”

As a result of these measures, on top of those announced in April and mid-May, and with similar additional measures expected, foreign investors involved in energy projects in Mexico may wish to consider their rights and potential remedies under applicable investment treaties and other investment instruments.

In this regard, please see our series of articles on the potential for investment claims arising out of measures taken by states in response to the COVID-19 pandemic:

• Mexican renewable energy projects affected by new measures (May 19, 2020)
• COVID-19 and investment claims under NAFTA (May 15, 2020)
• State defenses to investment claims arising from COVID-19 (April 29, 2020)
• COVID-19 – a legitimate basis for investment claims? (April 21, 2020)

If you have any questions regarding these new requirements and their implications, please contact the authors, any member of our Energy team or your DLA Piper relationship attorney.

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This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.