Electric Reform Fails in Mexico
The debate over the Electric Reform has been at the center of the political discourse in Mexico for the past months, and it has intensified in the past few days. The Electric Reform sought to amend the Mexican constitution in the area of energy and electricity. Specifically, the Reform restructured the energy sector by reclassifying the Comision Federal de Electricidad and Petroleos Mexicanos as governmental entities and no longer just state-owned companies.[1] Substantively, the Reform gave the Commission Federal de Electricidad the right to exclusively generate at least 54% of the country’s electricity, leaving the remaining 46 percent to the private sector.[2] To achieve this percentage, the Reform contemplated the cancellation of existing private sector contracts, directly affecting electric sector investments.
On April 11, 2022, the reform was approved by the joint committees on Constitutional Points and Energy of the Chamber of Deputies.[3] The discussion before the plenary of the Chamber of Deputies was scheduled for the following Tuesday, but it was postponed to April 17, 2022.[4] Late night on April 17. 2022, with 275 votes in favor, 223 against and 0 abstentions, the constitutional reform failed to obtain the required two-thirds majority.[5]
Unsurprisingly, the reform did not garner support from the opposition parties[6] or the private sector[7] to facilitate its approval. Specifically, the reform was criticized as violating Chapters 14 and 22 of the USCMA.[8] But what is the USCMA and did the electric reform really violate the specified chapters?
The United States, Mexico, and Canada signed a trilateral agreement on November 30, 2018, in the city of Buenos Aires. [9] It was revised in December 2019[10], and this final version entered into force on June 1, 2020, after all three countries ratified it.[11] This is the USCMA.
The USCMA has numerous provisions, but for purposes of the Electric Reform, the relevant provisions are Chapters 8, 14, and 22. Chapter 8 states that “Mexico reserves its sovereign right to reform its Constitution and its domestic legislation.” [12] Additionally, Chapter unequivocally states that “Mexico has the direct, inalienable, and imprescriptible ownership of all hydrocarbons in the subsoil of the national territory, including the continental shelf and the exclusive economic zone located outside the territorial sea and adjacent thereto, in strata or deposits, regardless of their physical conditions pursuant to Mexico’s Constitution.”[13] Read together, these two provisions of chapter 8 confirm that the USMCA does not alter Mexico’s right to amend its Constitution as it sees fit regarding hydrocarbons.
As relevant to the Electric Reform, the Reform did not simply affect the electric sector, but “the proposed changes also ha[d] a direct impact on the entire value chain of the hydrocarbon sector.”[14] As explained above, in the matter of hydrocarbons, Chapter 8 is dispositive. Thus, due to the exclusive right retained by Mexico through Chapter 8, any aspects of the Reform that affected the law of hydrocarbons did not violate the USCMA. As to the other aspects, Chapters 14 and 22 are relevant.
Chapter 14 concerns investments and details guidelines concerning national treatment, most-favored-nation treatment, and the minimum standard of treatment.[15] The concept of national treatment and most-favored-nation treatment stipulates that “[e]ach Party shall accord to investors of another Party treatment no less favorable than the treatment it accords to investors of any other Party or of any non-Party.” Basically, the chapter calls for equal treatment of investors. As drafted, the Reform made a distinction between the public and private sectors when it reserved for the public sector the right to generate at least 54% of the electricity. This distinction, together with the possibility of cancelling private sector contracts, was pointed out as violating the equal treatment of investors specified in Chapter 14. However, this distinction did not violate Chapter 14. The Reform only distinguished between the private and public sector and not between private sector investors. The 54% mandate to the Comision Federal de Electricidad affected all investors equally, regardless of their country of origin. The Reform did not exclude Mexican investors from being affected by the 54% mandate or from having their contracts canceled in pursuance of the mandate. Consequently, the Reform did not violate Chapter 14 of the USCMA. A private-public distinction is not contemplated by Article 14. That is addressed in Chapter 22 of the USCMA.
Chapter 22 concerns state-owned enterprises and monopolies. Similar to the treatment provisions of Chapter 14, Chapter 22 mandates the party’s state-owned enterprise or monopoly to accord, “in its purchase of a good or service,” a treatment “no less favorable than it accords to a like good or a like service supplied by enterprises of the Party, of any other Party or of a non-Party.”[16] Again, basically, this chapter calls for state-owned enterprises and monopolies to treat all enterprises equally. And again, the Reform did not call for favorable treatment of Mexican enterprises by the state-owned enterprises. The Reform did not call for a state-owned enterprise or monopoly to sell or buy from a Mexican enterprise under terms more favorable than U.S. or Canadian enterprises. Additionally, Chapter 22 of the USMCA specifically states that “nothing in this Chapter shall be construed to prevent a Party from: (a) establishing or maintaining a state enterprise or a state-owned enterprise; or (b) designating a monopoly.” Consequently, the Reform did not violate Article 22 of the USCMA.
As was drafted, the Reform did not violate Article 14 or 22 of the USCMA because it treated all private investors and enterprises equally. It is worth mentioning that this was simply the reform to the constitutional language. The secondary legislation was to be debated and approved afterward. Whether that secondary legislation violates the USCMA would have required an additional analysis.
[1] https://www.hklaw.com/es/insights/publications/2021/10/la-reforma-energetica-en-mexico
[2] https://www.hklaw.com/es/insights/publications/2021/10/la-reforma-energetica-en-mexico
[3] https://www.elfinanciero.com.mx/nacional/2022/04/11/reforma-electrica-supera-primer-obstaculo-diputados-la-aprueban-en-comisiones-y-pasa-al-pleno/
[4] https://politica.expansion.mx/congreso/2022/04/11/morena-y-aliados-posponen-discusion-de-reforma-electrica-hasta-el-17-de-abril
[5] https://www.excelsior.com.mx/nacional/no-pasa-reforma-electrica-morena-no-alcanza-mayoria/1510279
[6] https://www.milenio.com/politica/pri-pan-prd-perfilan-votar-reforma-electrica-amlo
[7] https://www.forbes.com.mx/negocios-reforma-electrica-reduce-competitividad-y-viola-t-mec-empresarios-mexicanos-en-eu/
[8] https://www.forbes.com.mx/negocios-reforma-electrica-reduce-competitividad-y-viola-t-mec-empresarios-mexicanos-en-eu/
[9] https://www.gob.mx/epn/prensa/mexico-the-united-states-and-canada-sign-usmca-183674
[10] https://www.dw.com/es/m%C3%A9xico-ee-uu-y-canad%C3%A1-firman-el-texto-final-del-t-mec/a-51614926
[11] https://www.worldwideerc.org/news/public-policy/united-states-mexico-canada-trade-agreement-ratified
[12]https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/08_Recognition_of_Mexican_Ownership_of_Hydrocarbons.pdf
[13]https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/08_Recognition_of_Mexican_Ownership_of_Hydrocarbons.pdf
[14] https://www.hklaw.com/es/insights/publications/2021/10/la-reforma-energetica-en-mexico
[15] https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/14-Investment.pdf
[16] https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/22_State-Owned_Enterprises.pdf
