Mexican power bill seeks legal compromise for bruised investors

MEXICO CITY: Mexican President Andres Manuel Lopez Obrador is gambling he can use a contentious new bill to cement public sector control of the electricity sector without inundating his government with more lawsuits from investors already smarting from his policies.

Corporate lobbies have objected to the bill, which will give priority in electricity dispatch to national power utility the Comision Federal de Electricidad (CFE), and eliminate Mexico's obligation to buy power through auctions.

Mexico's Business Coordinating Council (CCE) called the shake-up an "indirect expropriation", while the US Chamber of Commerce said it violated the United States-Mexico-Canada Agreement (USMCA) trade deal.

The proposal to put the CFE, a heavy 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 lower the risk of lawsuits if the fast-tracked bill respects contracts signed under a 2013-14 constitutional reform enacted by the last government to open the sector to private capital, even as it curbs future incentives for companies to invest.

The overhaul will not be retroactive, which will safeguard existing projects, said Manuel Rodriguez, a member of Lopez Obrador's National Regeneration Movement (MORENA) who heads the lower house of energy committee that now has the bill.

"Investments already made in accordance with the rules of the energy reform are guaranteed, and will continue, there won't be a change of rules for those investments," he told Reuters.

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

Going forward, amended rules would apply to new investors, such as companies having to cover the cost of back-up energy rather than piggybacking on the CFE, he noted.

REPUTATION

Lopez Obrador has said his predecessor's energy opening distorted the market in favor of private firms at the expense of the CFE and state oil company Petroleos Mexicanos (Pemex).

His government has tried to walk back the reform by holding up projects and issuing regulations that tied up companies in litigation, angering the private sector and causing friction with major trade partners.

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

Investors believe it could violate Mexico's constitution and USMCA commitments.

Last week, the Supreme Court threw out provisional regulations the energy ministry has pushed through to help the CFE. An actual change in the law would be harder for the court to overturn, legal experts said.

In his defense, Lopez Obrador has pointed to a chapter in USMCA recognizing that Mexico has a "sovereign right to reform its constitution and its domestic legislation." However, it suggests that any such change should be "without prejudice" to the "rights and remedies" of the United States and Canada.

If Mexico does not guarantee existing investments, it can expect a flood of litigation, said Andres Rozental, a former Mexican deputy foreign minister for North America.

Even assuming all prior investments are guaranteed, Mexico might still face further legal wrangling.

For instance, under USMCA, if Mexico reduces market access to its energy sector, the United States and Canada should get 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 retaliatory measures equivalent in value to the loss of market access, said the former official.

Rozental acknowledged USMCA does not oblige Mexico to continue opening its energy sector, but said the bill gives investors another reason to feel unwelcome.

"A reputation gets damaged overnight," Rozental said. "A reputation's rehabilitation takes a lot of time."