The U.S. Government requests consultations with Mexico under USMCA on measures affecting the energy sector

Mexico - 

Administrative Alert Mexico

Following a series of reforms in the Mexican energy sector implemented by the current administration, the Office of the United States Trade Representative (USTR) has submitted a request for consultations with the Mexican government pursuant to Articles 31.2 and 31.4 of the U.S.-Mexico-Canada Agreement (USMCA).

The USTR claims that the following measures and actions of the government of Mexico are inconsistent with several of Mexico's obligations under the USMCA:

1) The 2021 legislative reform to the Electricity Industry Law

As we reported in a previous alert regarding the counter-reform of the electricity sector in Mexico, the Electricity Industry Law (LIE) in force grants a competitive advantage to the Mexican state-owned companies to the detriment of the private sector.  The government of  the United States considers that such legal reform, together with the decision of the Mexican Supreme Court of Justice in the Action of Unconstitutionality 64/2021, is incompatible with (i) the national treatment obligation established in Article 2.3 of the USMCA and its incorporation by reference to Article III of the General Agreement on Tariffs and Trade (GATT 1994), and (ii) the obligation of no less favourable treatment to foreign investors in relation to Article 14.4 of the USMCA.

2) Inactivity, delay, denial, and revocation of permits held by private companies operating in the energy sector

The government of the United States claims that by means of sundry administrative actions the government of Mexico has obstructed the operation of private companies, particularly in the renewable energy sector and in the import, export and storage of fuels and electricity, as well as in the construction and operation of fuel stations. The USTR finds that these measures, in addition to being contrary to the same provisions under which the LIE is challenged, breach (i) the obligation not to impose restrictions or prohibitions on imports set forth in Article 2.11, (ii) the obligation not to exercise regulatory discretion in an impartial manner in Article 22.5.2, and (iii) the obligation to apply administrative procedures in a uniform, impartial and reasonable manner in relation to Article 29. 3 of the USMCA.

3) The deadline extension to PEMEX to comply with the maximum sulfur content according to the automotive fuel regulation in Mexico

The measures challenged by the United States government under this section are: (a) the Resolution of the Energy Regulatory Commission that grants Pemex Transformación Industrial a deadline extension to comply with the specification of sulfur content in automotive diesel as provided for in the Official Mexican Standard NOM-016-CRE-2016; (b) the Resolution of the Energy Regulatory Commission pursuant to which it issues the Official Mexican Standard NOM-016-CRE-2016, Oil Quality Specifications; and (c) the Resolution of the Energy Regulatory Commission that modifies the Official Mexican Standard NOM-016-CRE-2016, Oil Quality Specifications.  In this regard, the government of the United States considers that the Energy Regulatory Commission has exercised its powers partially and in violation to the national treatment obligation of Article 2.3 and Article 22.5.2 of the USMCA.

4) The policies of the Mexican Ministry of Energy (SENER) that favor PEMEX, the Federal Electricity Commission (CFE) and their products in the use of Mexico's natural gas transportation system.

Finally, the United States government claims that SENER, through the issuance of certain official communications to the Energy Regulatory Commission and the National Center for the Control of Natural Gas, has promoted less favorable treatment of products of foreign origin, by requiring users of the natural gas transportation system to prove that they have purchased natural gas from PEMEX or the CFE. The USTR finds that Mexico has breached (i) the national treatment obligation under Article 2.3 and (ii) the obligation not to impose restrictions or prohibitions on imports under Article 2.11.

Where are we and what is next?

In accordance with Article 31.4.5 of the USMCA, consultations shall commence no later than 30 days after the submission of the request. The two governments will engage in bilateral meetings in which they will try to reach a mutually satisfactory solution. If the dispute is not solved within 75 days, the U.S. government may request the establishment of an arbitration panel to settle the dispute.

It should be noted that, although this dispute has been raised by the United States government in the State-to-State modality and for the benefit of its nationals, the effects of a favorable resolution could benefit private companies with investments in the energy sector in Mexico regardless of their nationality. In any case, foreign investors who have been harmed by such measures or other may still be eligible to resort to Investor-State arbitration.  

Lastly, the government of Canada has also expressed its opinion on this matter and has stated that it supports the consultations submitted by the United States government, though it will submit its own request for consultations regarding the same matter.