On October 1, 2021, an initiative sent by Mexican President Andrés Manuel López Obrador (“AMLO”) to reform Articles 25, 27 and 28 of the Mexican Constitution (the "Initiative") was published in the Parliamentary Gazette (Gaceta Parlamentaria) of the House of Representatives.

Although intended to strengthen the finances of the Federal Electricity Commission (Comisión Federal de Electricidad “CFE"), the Initiative would certainly have negative repercussions for all companies involved in the energy sector.

In general terms, the Initiative can be summarized as proposing three main actions: (i) empowering CFE through various modifications, (ii) eliminating the Energy Regulatory Coordinated Bodies [i.e., the Energy Regulatory Commission (Comisión Reguladora de Energía), National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos) and National Energy Control Center (Centro Nacional de Control de Energía)], and (iii) granting the Mexican government the exclusive right to exploit lithium.

Empowerment of CFE

With respect to the empowerment of CFE, there are several actions sought to return CFE to the position it had before the 2013 Energy Reform—and with even more power—which can be summarized as follows:

1. Reintegration of the sector's activities to a strategic activity within Article 28 of the Constitution.

2. Considering CFE to be a decentralized administrative organization (instead of a State Productive Company) that will be in charge of the Energy Transition in electricity matters. Likewise, this implies the eventual repeal of the Strict Legal Separation regulation.

3. Putting CFE exclusively in charge of supply so that private companies will only be able to generate the equivalent of 46 percent of the energy required, which can only be sold to CFE through short-term contracts.

4. Elimination of Self-supply permits (Autoabasto).

5. CFE not recognizing the surplus generation from Independent Producers.

6. Elimination of subsidiaries and affiliates of CFE (with certain exceptions maintained for foreign trade and TELECOM).

7. Putting CFE in charge of dispatching power plants by economic merit and in charge of entering into private contracts with private parties.

8. CFE determining Transmission and Distribution rates and end user tariffs.

9. Cancellation of Clean Energy Certificates.

Elimination of Energy Regulatory Coordinated Bodies

The elimination of the Energy Regulatory Coordinated Bodies would lead to several consequences in the energy sector—and not only in the electricity sector. The Initiative proposes that the Ministry of Energy resume handling the functions of the Energy Regulatory Commission and the National Hydrocarbons Commission. The responsibilities of the National Energy Control Center, operator of the transmission lines, will be returned to CFE.

The elimination of the aforementioned institutions is the result of the rejection of the 2013 Energy Reform in the electricity industry by the current administration. The Initiative mentions that the structure of CFE will return to the terms "on which national electric development had been founded," unifying the activities of energy transformation, conduction, distribution and generation.

In practice, the reintegration of CENACE to CFE and the elimination of the company's subsidiaries will mean the elimination of the Local Marginal Prices that allowed competition through the lowest prices at the local nodes.

The transitory articles mention that instead of using the marginal price of electricity production as a clearance criteria, the total production costs will be considered. With this, the contracting modalities will be defined again, and now by CFE.

The Initiative does not mention Pemex directly, but the fact that the Initiative replaces the mention of the State Productive Companies with the category of decentralized entities suggests that the change will also apply to Pemex.

Regarding the actions to be taken, the Initiative states that the cancellation of permits granted or in process will be necessary; however, no details are mentioned in this regard. In addition, if the Initiative is approved, it would be necessary to change most secondary legislation to adapt it to these changes.

Establishment of Lithium Reserves as Government Assets

The Initiative would establish lithium and other strategic mineral reserves as property of the Mexican government—granting exclusive powers to the government for its exploitation. This also implies the cancellation of certain mining permits that had already been granted and the review of mining concessions in which lithium has been discovered. CFE will be in charge of the exploitation of this resource.

Looking Forward

If the Initiative moves ahead, it will probably be challenged in court because the Initiative eliminates free competition in the power industry. Furthermore, the changes would affect not only the power market but the entire energy sector. Sector participants will resent the changes to their operations and their legal frameworks. And an industry that represents more than half of the country’s revenue will be facing complete uncertainty.