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In brief

The Mexican government published a Decree that amends and incorporates several provisions of the Power Industry Law (“Amendment“) in the Federal Official Gazette on 9 March 2021. The Amendment will severely affect the business of private entities investing in the power industry.


Recommended actions

We consider that the Amendment violates general constitutional principles such as free competition, free concurrency, non-retroactivity of the law, legality, judicial certainty, as well as other specific principles.

We have identified several legal actions to challenge the Amendment. These actions include “amparo” claims; antitrust and competition claims; and international arbitration claims against Mexico under the international investment protection agreements executed by Mexico. Under these agreements, foreign investors may start international proceedings against the government if Mexico violates the commitments that it undertook regarding the treatment and protection of foreign investments. These protections include the right to compensation in the event of unlawful expropriation and the right to fair and equitable treatment of the investments.

Since its entry into force, some companies have already launched amparo claims against the Amendment. On 11 March 2021, a federal court granted a temporary injunction against the implementation of the Amendment. The court stayed the implementation of the Amendment, and held that it the stay should apply to all the industry participants because the amparo actions seek to avoid the distortion of the Mexican electric market. The injunction is pending confirmation of the competent appellate court.

Although the court held that the injunction applies to all of the industry participants, we recommend that each company files its own amparo claim. This is because the general application of the injunction has not been upheld yet. Furthermore, it is still unclear whether a final amparo decision would have general effects and whether it would protect companies that did not challenge the Amendment within the statute of limitations.

In depth

The government has recently made a series of decisions detrimental to renewables.  The following are some of the most relevant changes proposed in the Amendment to the Power Industry Law:

  1. The Amendment changes the criteria and the form of dispatch. It seeks to prioritize the dispatch of CFE power plants (regardless of the generation technology), impacting private generators. The order of priority in the dispatch mechanism of the power plants is modified placing hydroelectric plants as first in line, which are owned by the Federal Electricity Commission (CFE). In second place, the remaining CFE power plants that utilize other technologies. Third, the combined-cycle power plants of Independent Power Producers (IPPs). Subsequently, in fourth place wind or solar technologies of private generators, and lastly, the combined-cycle power plants of private generators, as well as other technologies that can be dispatched.
  2. CFE Suministro Básico is released from the obligation to acquire energy through power auctions, which were conducted by the National Center for Energy Control (CENACE). With this amendment, CFE has preferential treatment, because they can acquire energy from any generator, under any scheme, and regardless of the generation technology and prices.
  3. The Amendment grants discretionary power to CENACE to deny power generators to interconnect to the National Transmission Network and the General Distribution Networks.
  4. The obligation to consider the generation and commercialization as a service provided under a free competition regime is eliminated;
  5. It creates a discretionary component for the Energy Regulatory Commission (CRE) to grant Generation and Supply power permits that are “rigorously aligned” to the planning criteria of the National Electric System, established by the Ministry of Energy (SENER). This power is granted under the argument that SENER’s planning criteria must be considered in the issuance of the permits.
  6. The issuance and obtainment of Clean Energy Certificates (CELs) not derived or obtained from new projects (that is, after the energy reform), is considered legalized.  This allows CFE to manipulate the behavior of the market, by issuing CELs for all of its power generation plants which existed prior to the energy reform.
  7. During its transitory regime, it establishes the following:
    1. Current self-supply permits may be revoked by CRE and, where appropriate, said permit holders may need to reapply for a single generation permit under the current Power Industry Law regime.
    2. Agreements executed with IPPs will be reviewed to ensure compliance of the profitability requirement for the Federal Government and, where appropriate, such agreements must be renegotiated or terminated early.

The analysis of the above mentioned defenses must be accompanied by an analysis of the collateral risks that, both the publication and the entry into force of the Amendments to the LIE, and the exercise of said means could bring into the relationship that currently exists between those affected and (a) CENACE, (b) SENER, (c) CFE, (d) CRE, and (e) the commitments with third parties, as a result of possible actions resulting from these, etc.

We are available to elaborate on this matter and/or further discuss the alternatives that could be explored, including a potential strategy if your projects could be affected.

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Author

Benjamín Torres-Barrón leads Baker McKenzie's Energy, Mining & Infrastructure Practice Group in Mexico. Mr. Torres-Barrón is listed as a recommended lawyer by Who’s Who Legal for oil, gas, and project finance in Mexico and was named by Chambers Latin America as one of the country's leading lawyers in the energy and natural resources practice. For several years, he has been acknowledged by the magazine Petróleo & Energía as one of the 100 leaders in Mexico's energy industry. He is a professor of the Master’s Degree in Energy and Sustainability Law at Universidad Autonoma de Nuevo Leon and of the Diploma Degree in Energy at Universidad Autonoma de Ciudad Juarez.

Author

Marco is a Partner in Baker McKenzie's Energy, Mining & Infrastructure Industry Group in Mexico City. He has over 17 years of international consulting experience in the private sector, the Mexican public sector and international energy-related organizations. He has also served as an external consultant to the International Atomic Energy Agency, leading professional missions for some Central and South American governments on issues of energy modelling and planning and was part of the energy and infrastructure team in PwC in Mexico.

Author

Daniel is a lawyer with over 18 years of experience in the corporate, energy, project finance and infrastructure fields. He has advised numerous clients, including multinational public and private corporations, local corporate groups, private equity funds and financial entities, real estate developers and investors, manufacturers and retailers.