Mexican Supreme Court dismisses Unconstitutionality Action against Electricity Industry Law reform

During a plenary session held on April 7, 2022, the Mexican Supreme Court (Suprema Corte de Justicia de la Nación or SCJN) dismissed Unconstitutionality Action 64/2021 (acción de inconstitucionalidad 64/2021) that challenged the Decree Amending and Adding Various Provisions of the Electricity Industry Law (Decreto por el que se reforman y adicionan diversas disposiciones de la Ley de la Industria Eléctrica or the Contested Reform). The Contested Reform was published on March 9, 2021 in the Federal Official Gazette.

 

Mexican Senate members filed the Unconstitutionality Action alleging that the Contested Reform violated certain provisions derived from the 2013 Constitutional Energy Reform. This 2013 reform sought to broaden the scope of private investments in the energy industry, create suitable conditions for the participation of private companies in the sector and promote the use of clean energy sources.

This article analyzes the key details of the Contested Reform, the SCJN’s decision and its implications.

 

The Contested Reform

 

The Contested Reform:

 

• Provides new rules for generators to access the grid – prioritizing the energy produced by the Federal Electricity Commission (Comisión Federal de Electricidad or CFE) power plants, regardless of the generation costs[1]
• Commands the Mexican Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) to revoke privately held self-supply permits “obtained as a result of legal fraud”
• Creates physical power delivery and network capacity contracts that restrict the participation of the private sector in this activity
• Increases the CFE’s market participation
• Establishes that the permits granted under the Energy Industry Law (Ley de la Industria Eléctrica or LIE) are subject to the National Energy System planning criteria issued by the Mexican Ministry of Energy (Secretaría de Energía)
• Provides that the issuance of Clean Energy Certificates (Certificados de Energías Limpias or CELs) shall not depend on the ownership or commencement date of power generation facilities’ commercial operations, thereby benefiting CFE’s hydroelectric facilities
• Eliminates the obligation to purchase power via auctions by the Basic Services Supplier (a subsidiary of the CFE), therefore undermining the market-based framework that governed the market and
• Requires a revision of the generation capacity commitment and power purchase agreements with independent power producers.

The SCJN’s ruling

 

The SCJN dismissed the Unconstitutionality Action 64/2021 as the eight-vote requirement to declare the Contested Reform unconstitutional was not met. This means that the Contested Reform will enter into force; however, the Contested Reform can still be declared unconstitutional by means of a different constitutional control mechanism (namely, through an amparo lawsuit or a constitutional controversy).

 

Consequences of the ruling

In this context, the SCJN’s decision does not affect the legal course of the amparo lawsuits previously asserted by private companies or the provisional suspensions granted in said amparos (both with general and individual scope). Thus, these amparo lawsuits will continue their legal course and eventually be resolved by the Judiciary according to simple majority rules.

In other words, although the necessary eight-vote majority was not met to declare the Contested Reform unconstitutional, the simple majority vote of the justices suggests that there is a possibility that the Contested Reform could be declared unconstitutional through the concession of amparo protection to private companies.

 

The SCJN’s decision overlaps with the beginning of the analysis by the Mexican Congress of the constitutional reform in the electricity sector, promoted by President Andrés Manuel López Obrador (previously discussed in another article). If said constitutional reform is approved on its terms by both Chambers, the amparo protections granted to private parties would be dismissed. Consequently, the legal instrument that manages to stop the measures promoted by the executive of the federal government would no longer be available to private parties (as described in our previous publications, noted below).

 

The energy policy of President López Obrador has unleashed a wave of criticism due to the potential effects on the sector. Ken Salazar, US ambassador to Mexico, stated that the Contested Reform "will probably open the door to litigation." In addition, as pointed out by Katherine Tai, US trade representative, it could also imply a violation of the United States-Mexico-Canada Agreement (USMCA).

 

As a result of the measures adopted since 2020 and those set forth in the Contested Reform, foreign investors involved in energy projects in Mexico may wish to consider their rights and potential remedies under Mexican law, such as amparo protection, as well as under the applicable investment treaties and other international instruments, such as 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:

 

• 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)
• Reform to the Electric Industry Law: a new risk for energy projects in Mexico (March 10, 2021)
• New measures threaten investments in the Mexican energy sector (July 14, 2020)
• 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 measures and their implications, please contact the authors.

 

Read this article in Spanish.