Legal & Regulatory

Is It Safe to Invest in Mexican Energy Projects?

In late 2013, Mexico embarked on a path to transform its energy markets. Then-President Enrique Peña-Nieto oversaw constitutional reforms that ended state-run monopolies, and opened Mexico’s power market to competition and investment from foreign and private companies.

By most accounts, the policies were highly effective in spurring investments in renewable energy and efficient natural gas-fired power projects. A great deal of money has been funneled into Mexico by investors from as many as 45 countries since the law was enacted.

“The result of that was dramatically successful. I mean, you have millions and millions of dollars that were sunk into the power sector bringing in modern equipment, environmentally friendly, because there were a lot of renewable projects that went online. You see how the percentage of renewables changed in the last 10 years—you can see that it has been successful,” Roberto Aguirre Luzi, a partner with King & Spalding, said as a guest on The POWER Podcast.

However, Peña-Nieto is no longer in office, and President Andrés Manuel López Obrador wants state-owned power company Federal Electricity Commission (CFE) to get special treatment in the market. Under the previously enacted reform measures, dispatch priority was based on price, with the lowest-cost generation being delivered first. Earlier this month, Mexican policymakers passed legislation that would change the order in which electricity is dispatched, giving priority to CFE at the expense of private operators.

“There were a wave of amparos to challenge this law,” said Fernando Rodriguez-Cortina, senior associate with King & Spalding. An amparo is a protection provided for under Mexico’s constitutional law. It may be filed in federal court by Mexicans and by foreigners in an attempt to guarantee protection of the claimant’s constitutional rights. “The judge granted the amparo with general effects, and now the law is stayed,” said Rodriguez-Cortina. “With general effects” means the stay applies to everyone affected by the law, rather than simply to the amparo filer.

President López Obrador is not standing idly by, however. He asked the Mexican Supreme Court to open an investigation into the judge’s conduct, claiming that the judge, who was appointed under the previous administration, acted inappropriately.

“This is obviously a political maneuver, because this is not how you initiate a proceeding. I mean, if you want the judge to be investigated, you follow a different route. You don’t go to the Supreme Court,” said Rodriguez-Cortina. The chief justice ultimately referred the case to the proper court for resolution.

Aguirre Luzi suggested the actions taken by Mexico’s policymakers should be very concerning to all stakeholders and will have wide-ranging implications on future investments. He said when you have two branches of government making important energy policy changes with the intention of helping two state-owned entities—CFE and PEMEX, which is the fuel supplier to many of CFE’s power plants—it’s going to have long-term effects. “It’s a 180-degree change,” said Aguirre Luzi. “How do you come back from that?”

Only time will tell. Rodriguez-Cortina suggested court proceedings could go on for a while. “It usually takes around six months for the amparo to be resolved,” he said, and appeals could take the dispute all the way to the Supreme Court. “So, this is going to be a process that is going to take years to see the actual outcomes,” said Aguirre Luzi.

“It’s also going to be very costly for Mexico to defend against this in international arbitration claims, and also to pay the damages,” Rodriguez-Cortina said. For Mexican power customers, the increase in costs could also be significant. Rather than obtaining low-cost renewable energy and efficient gas-fired power based on market prices, end-users could be forced to pay CFE’s higher prices. “For sure, this is not going to be something that is going to end up well for the Mexican people,” Aguirre Luzi said.

To hear the full interview with the two King & Spalding attorneys, follow the links below to The POWER Podcast show pages on your favorite podcast platform or click on the SoundCloud player below to listen now:

For more power podcasts, visit The POWER Podcast archives.

Aaron Larson is POWER’s executive editor (@AaronL_Power, @POWERmagazine).

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