Electricity law reform project in Mexico would protect investments already made

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Electricity law reform project in Mexico would protect investments already made




FILE PHOTO. The logo of the state electricity company of Mexico, known as the Federal Electricity Commission (CFE), at its headquarters in Monterrey, Mexico


© Reuters / DANIEL BECERRIL
FILE PHOTO. The logo of the state electricity company of Mexico, known as the Federal Electricity Commission (CFE), at its headquarters in Monterrey, Mexico


Por dave graham

MEXICO CITY, Feb 9 (Reuters) – Mexican President Andrés Manuel López Obrador is betting that he can use a controversial new bill of law reforms to consolidate state control of the electricity sector without flooding his government with more demands from investors, already resentful of their policies.

Business groups have opposed the bill, which aims to give priority to the state Federal Electricity Commission (CFE) in power dispatch and will eliminate Mexico’s obligation to buy power through auctions.

The Business Coordinating Council (CCE) called the reform an “indirect expropriation,” while the US Chamber of Commerce said it violated the trade agreement between the United States, Mexico and Canada (TMEC).

The proposal to put the CFE, a major consumer of fossil fuels, ahead of private wind and solar plants also caused consternation among advocates of renewable energy in Mexico.

Legal experts say the administration will reduce the risk of lawsuits if the preferential bill honors contracts signed under a 2013/14 constitutional reform, enacted by the previous government, which deepened the sector’s opening to private capital, even if it slows down future incentives for companies to invest.

The law will not be retroactive, which will safeguard existing projects, said the deputy of the ruling Morena party, Manuel Rodríguez, who heads the energy committee of the lower house, which is in charge of discussing the initiative.

“The investments that have already been made according to the rules of the energy reform, those are guaranteed, and they will continue, there will be no change in the rule for those investments,” Rodríguez told Reuters.

That point could be stipulated in transitory articles attached to the legislation, he said.

In the future, the new rules embodied in the initiative, if approved, would apply to new investors, such as the cost of backup power for companies that do not have it and that are now absorbed by the CFE, he said.

REPUTATION

López Obrador has said that his predecessor’s energy openness distorted the market in favor of private companies at the expense of the CFE and the also state oil company Pemex.

His government has tried to reverse reform by delaying projects and issuing regulations that have engulfed companies in litigation, provoking anger from the private sector and causing friction with Mexico’s main trading partners.

Shortly after López Obrador’s proposal was unveiled last week, consultations began between embassies in Mexico and the private sector, according to diplomatic sources.

Investors believe that it could violate the Mexican Constitution and commitments in the TMEC.

López Obrador said Tuesday at his daily press conference that the new United States government, led by Democrat Joe Biden, has not expressed its disagreement with the initiative, as the previous one by Republican Donald Trump did by letter.

In addition, he warned that his Government will respond in court to the resources that are filed against the bill, if necessary. “They can do it, they are within their rights; we are going to do the same, but we have to defend the national electricity industry as we are going to defend oil.”

Last week, the Supreme Court rejected regulations that the Energy Secretariat has promoted to help the CFE. A change in the electricity law would be more difficult to overturn in court, legal experts said.

In his defense, López Obrador has indicated a chapter of the TMEC that recognizes that Mexico has a “sovereign right to reform its Constitution and its internal legislation.” However, it suggests that any such change must be done “without prejudice” to the “rights and remedies” for the United States and Canada.

If Mexico doesn’t guarantee existing investments, it can expect a deluge of litigation, said Andrés Rozental, a former Mexican undersecretary for North America at the foreign ministry.

Even assuming that all investments are guaranteed prior to changes in the law, Mexico could face new legal disputes.

For example, according to the TMEC, if Mexico reduces access to its energy sector, the United States and Canada should gain more access to another sector to compensate, said a former trade official who has advised the private sector and the government.

If not, Mexico could face retaliation measures equivalent in value to the loss of market access, the former official said.

Rozental acknowledged that the TMEC does not force Mexico to continue opening its energy sector, but said the bill gives investors another reason not to feel welcome.

“A reputation is damaged overnight,” Rozental said. “Restoring a reputation takes a long time,” he added.

(Reporting by Dave Graham, translated by Adriana Barrera; Edited in Spanish by Javier López de Lérida)

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