Reverting the Energy Reform: Will the Mexican electricity industry be placed back in the hands of the State?
Mexico Energy Commentary
After arduous legal battles in the Mexican courts with negative results for the Mexican Government in connection with a variety of regulatory and administrative provisions that 'de facto' set back the 2013 Energy Reform, the President of Mexico submitted before the Mexican Congress a bill amending various provisions of the Electricity Industry Law (the Bill). The Bill was filed as a "preferred" bill, so it is subject to a fast-track procedure of discussion, voting and, if applicable, passing.
The Bill includes amendments to Articles 3, 4, 12, 26, 35, 53, 101, 108 and 126 of the Electricity Industry Law and its main purpose is to grant competitive advantages to the state-owned companies to the detriment of private power generators.
However, it is anticipated that private power generators and other entities entitled to do so will file the legal remedies provided for in the applicable Mexican legislation alleging that the Bill goes against the constitutional principles of fair economic competition, environmental protection, non-retroactivity of the law, legal certainty, and due process.
It is also expected that foreign investors will file investment arbitration claims against the Mexican State under the various multilateral and bilateral treaties entered into by Mexico and the investors’ countries. The United States of America and Canada may be entitled to terminate the Treaty between the United Mexican States, the United States of America and Canada (USCAM) due to Mexico’s default if the Bill, as is, is passed.
The main features of the Bill are, as follows:
- The definition of "Legacy Power Plant" is modified to include those power plants owned by the Mexican Federal Energy Commission ("CFE") (the Mexican stated-owned public utility), even though they are not in operating conditions, and whose construction or delivery is foreseen for the CFE regardless of the project's financing scheme.
- The Bill incorporates the "Power Purchase Agreement with Physical Delivery Commitment", as that contract entered into between a Basic Services Supplier and a Generator, in which not only the Generator is obliged to sell energy or associated products but also to make the physical delivery of the agreed energy, Ancillary Services or Capacity. For such purpose, the Generator shall submit to CENACE (the independent system operator) the power generation programs of the Power Plants that are part of the contract through fixed program offers in the Wholesale Electricity Market. It is important to note that up to this date the only Basic Services Supplier is the CFE itself.
- In connection with the aforementioned, the Bill modifies the definition of Power Purchase Agreement to indicate that Basic Service Suppliers (CFE Suministros Básicos, a CFE subsidiary) are the only ones entities that are able to enter into Power Purchase Agreements with Physical Delivery Commitment.
- The definition of "Passed Contract for Basic Supply" is modified limiting it to that Electric Coverage contract that the Basic Service Suppliers (i.e., CFE) will have the option of entering into in relation to the energy of Passed Power Plants and Passed External Plants, with commitment of physical delivery.
- The Bill eliminates the statement that power generation and marketing of electric energy are services provided under a free competitive regime. This is of utmost relevance, since the clear intention to displace private power generators has not been upheld by the recent ruling issued by the Supreme Court of Justice of the Nation.
- The mandatory requirement to grant open access to the National Transmission Grid and General Distribution Networks on terms not unduly discriminatory is modified to make such access conditional upon it being technically feasible.
- The obligation to supply power, capacity and Ancillary Services to the Wholesale Electricity Market is modified to include the following rules: (i) unitary production costs must be considered and (ii) it must guarantee, in the first instance, the Power Purchase Agreements with Physical Delivery Commitment and, secondly, the supply of clean energy, in other words, CFE contracts with power generators that are able to commit to the physical delivery of power are prioritized.
- It provides that the Energy Regulatory Commission (Comisión Reguladora de Energía, as per its acronym in Spanish "CRE") -the regulatory body of the electricity industry- must consider the planning criteria of the National Electric System established by the Ministry of Energy (the Reliability Policy) when granting, modifying, revoking, assigning, extending or terminating generation permits, that is, to adopt the regulatory criteria that the courts have conclusively ruled to be unlawful.
- It includes the mandatory obligation of CENACE to consider priority in the use of the National Transmission Grid and the General Distribution Networks for the dispatch of the Passed Power Plants and the Passed External Power Plants with physical delivery commitment, giving a clear competitive advantage to CFE who owns most of such power plants.
- It provides the authority for Generators, Exempt Generators, End Users and/or applicants for the interconnection of Power Plants and the connection of Load Centers to group together to carry out, at their own expense, works, expansions or modifications necessary for the interconnection or connection that are not included in the expansion and modernization programs of the National Transmission Network and the General Distribution Networks, or to make contributions to the Transporters (CFE Transmisión, a CFE subsidiary) or Distributors (CFE Distribución, a CFE subsidiary) for their execution and benefit.
- The obligation of Basic Service Suppliers to enter into Power Purchase Agreements exclusively through auctions carried out by CENACE is eliminated, so that private power generators will have less opportunity to sell their energy output to CFE on competitive terms and conditions.
- It also provides that CENACE will determine the allocation and dispatch of Power Plants, Controllable Demand and import and export programs, considering the Power Purchase Contracts with Physical Delivery Commitment, exclusively benefiting CFE.
- It states that the allocation and dispatch of the Power Plants shall be conducted by CENACE maintaining the Security of Dispatch, Reliability, Quality and Continuity of the National Electric System citeria, allowing CENACE to discretionally determine an ambiguous dispatch criterion subject to the already overruled policies dictated by SENER.
- It sets forth that granting of Clean Energy Certificates to Power Plants will not depend on the ownership or the date of commencement of commercial operation of the same, once again benefiting CFE, so that it can include old technology plants that started operating prior to the establishment of the certificate scheme.
This would distort the motivation behind the granting of Clean Energy Certificates, as the ultimate goal of the program was to increase renewable generation infrastructure to achieve Mexico’s environmental goals.
In addition, and of utmost interest to private power generators, the transitiory articles of the Bill include the following relevant provisions:
- The self-supply permits, as amended, granted or processed under the former Public Power Service Law that continue to have legal effects, might be revoked by the CRE through the corresponding administrative procedure established in the Electric Industry Law. If applicable, such permits may be migrated to new power generation permits under the Electricity Industry Law.
This measure is clearly illegal because it is retroactive to the detriment of private power generators that hold those permits. Furthermore, such measure is illegal since it prevents private generators from competing on a leveled playing field with CFE to supply major off-takers.
- The Power Generation Capacity Commitment and Power Purchase and Sale Agreements entered into with independent power generators (known as Productores Externos de Energía) under the old Public Power Service Law must be reviewed to ensure compliance with the Federal Government profitability requirement established in articles 74, section IV, of the Constitution, 32 of the Federal Budget and Fiscal Responsibility Law and 18 of the Federal Public Debt Law. If applicable, such contracts must be renegotiated or terminated in advance.
This grants CFE the authority to terminate without a cause a significant number of contracts with private generators currently participating in perhaps the most successful electric energy production program of recent times.
Supreme Court Resolution
On the other hand, just this week the Administrative Chamber of the Supreme Court of Justice of the Nation ruled definitively invalid several administrative provisions issued by the Ministry of Energy in 2020 known as "Policy of Reliability, Security, Continuity and Quality in the National Electric System". This policy, based on distorted technical arguments, illegally displaced from the market private power generators, particularly those with power plants with intermittent renewable sources. All of this in order to give a competitive advantage to the CFE.
The most important features of the Supreme Court's decision are, as follows:
- The guidelines issued by the Ministry of Energy granting CFE a more active role in the planning of the expansion and modernization of the National Transmission Grid are declared valid, as well as those related to the payment of the Wind and Photovoltaic Power Plants of Related Services necessary to guarantee the reliability of the National Electric System and the non-accreditation of capacity for the representatives of such Power Plants.
- The guidelines issued by the Ministry of Energy related to the imposition of additional requirements for the interconnection of Wind and Photovoltaic Power Plants, such as the interconnection feasibility report issued by CENACE, were declared invalid.
- The guidelines issued by the Ministry of Energyestablishing a preferential priority for the interconnection of strategic projects were declared invalid, since such priority would go against the obligation to guarantee open and not unduly discriminatory access to the National Electric System.
- The guidelines issued by the Ministry of Energy related to placing system security and reliability for dispatch purpose before economic efficiency, as well as the additional Reliability requirements that CENACE should consider to evaluate the feasibility of interconnection of Wind and Photovoltaic Power Plants were declared invalid.
In conclusion, the Supreme Court ruled that the invalid provisions violate Articles 28 and 25 of the Mexican Constitution by going against free economic competition, sustainability and the constitutionally recognized environmental goals.
It is expected that, in due course, the Supreme Court could rule in the same sense with respect to the Bill, in the event Congress passes it.