Mexico’s President Proposes Amendments to Electricity Industry Law

On January 29, 2021, the President of Mexico sent to the Chamber of Deputies of the Congress proposed amendments to the Electricity Industry Law, namely, an "Initiative with a Draft Decree by which various provisions of the Electricity Industry Law are amended and added."

(1) New Framework

The initiative amends nine articles of the law with the ultimate purpose of strengthening the Federal Electricity Commission (CFE) as a whole by:

• No free competition. Deleting the provision that states that "the generation and commercialization of electricity are services that shall be provided in a regime of free competition."
• Dispatch preference for CFE. Modifying the dispatch criteria to be applied by the National Energy Control Center (CENACE) so that the dispatch is carried out in this order: (1) hydroelectric plants, (2) plants owned by CFE, (3) solar and wind plants owned by private parties and (4) combined cycle plants owned by private parties.
• No obligation for public auctions. Deleting the provision that requires that basic service suppliers enter into electricity coverage contracts exclusively through public auctions.
• Transmission and distribution preference for CFE. Requiring that CENACE give priority to the legacy power plants (operated by the CFE) for use of the national transmission network and the general distribution networks.
• Network access restriction. Establishing open and not unduly discriminatory access to the national transmission network and the general distribution networks only if "technically feasible."
• Energy market to discriminate clean energy. Requiring the wholesale electricity market to give preference, in first instance, to "Electricity Coverage Contracts with a Physical Delivery Commitment" (which may only be entered into by basic service suppliers) and, in second instance, contracts with clean energy generators. In addition, these contracts, unlike the current electricity coverage contracts, would include the commitment to physically deliver the electric energy, power or other associated products.
• Restriction of permits. Subjecting permits to be granted under the law to compliance with the "planning criteria" established by the Ministry of Energy.
• Provision of Clean Energy Certificates. Granting Clean Energy Certificates to any generator that produces energy from clean energy (regardless of the date of commencement of commercial operation of the corresponding plant, which would include, among others, CFE’s hydroelectric and nuclear plants).

(2) Retroactive Provisions

In its transitory articles, the initiative provides the following:

• Cancellation of self-supply permits. The self-supply permits that are governed by the previous Electric Power Public Service Law may be revoked by the Energy Regulatory Commission in accordance with the administrative procedure established by the law. The criteria for said revocation would be that they were obtained fraudulently, e.g., by means of artificial corporate and contractual arrangements.
• Termination of electric power contracts. Contracts for the purchase of capacity and electric power entered into with independent power producers in terms of the abrogated Electric Power Public Service Law may be reviewed by CFE and, where appropriate, renegotiated or terminated early. The purpose of the review would be to verify compliance with the "profitability requirement" mandated by law. In the event that said requirement is not met, the referred contracts could be renegotiated or terminated early.

(3) Legislative Process

The initiative shall be discussed and approved by a simple majority in both chambers of the Congress. Since the initiative was presented as "preferential," the entire discussion and voting process shall be completed in approximately two months.

(4) Follow-up Regulations

The initiative provides that, if the amendments are approved, the Ministry of Energy, the Energy Regulatory Commission and CENACE shall have a period of six months to modify the related regulations so that they are consistent with the content of the initiative.

(5) Effects on Costs, Prices and Investment

• Generation. The initiative could increase energy generation costs as CFE plants will have priority in dispatching energy (even though its plants are among the most expensive).
• Supply. The initiative could also deter private investment as CFE Basic Supply will be allowed to purchase electricity through private contracts (most likely from CFE's own generation plants) instead of competitive public bids (with the participation of private generators).
• Final users. The above points could impact the tariffs to the final user.
• Clean Energy Certificates. By allowing CFE’s existing clean energy plants to obtain Clean Energy Certificates (originally meant to increase capacity), the value of such instruments could decrease.
• Retroactivity. The initiative allows the federal government to cancel permits and review/renegotiate/terminate contracts granted before the 2013-2014 Energy Reform, leaving investors with great uncertainty.

* * *

Please contact any of the authors to discuss or seek advice on the above initiative, potential effects and available means of defense.