Mexican renegotiation of power industry upsets market; participants prepare for legal battle

RIO DE JANEIRO, BRAZIL – Power generators and end users are getting ready to fight amendments to Mexico’s electricity law that modify the order in which the national grid operator Cenace dispatches energy after the amendment was approved by the upper House of Congress.

The amendment, presented by President Andres Manuel Lopez Obrador in early February, was approved March 3 without discussion or modifications by the members of his Morena Party in the Senate and its allies. The move surprised observers and opposition parties alike, as the initiative was expected to be discussed extensively during this week, as happened in the lower House.

The bill will be signed into law by the president.

Mexico’s anti-trust watchdog Cofece has warned the bill hurts competition in generation and marketing of energy, dis-incentivizing investments and raising prices to consumers.

Market participants may see this law affecting their interests in different ways, as it is broad, and each will have to determine their best strategy to fight it, panelists said March 3 during a webinar on the matter. Most market participants say the order of dispatch of power plants is the main concern, but there are other ways companies can be affected, they said.

“Surely, only a couple of days after the law is published there will be a surge of legal moves in Mexico,” said Marcial Diaz, a lawyer at Mexico City-based consultancy Lexoil.

In Mexico, one of the most sorted out mechanisms of legal protection is an “amparo” lawsuit, a temporary restraining order that prevents implementing a law until a decision has been made by a judge.

“The situation is coming to a point where soon everyone in the sector will have to live with an amparo under his arm,” Diaz said.

Mexico-based Fresnillo, the largest independent silver miner in the world, has already said it will take legal action against a part of the bill that allows state generator CFE to again become the power supplier of industrial clients, despite their own capabilities, under certain conditions.

“We will defend somehow our right to source our energy from the cleanest most cost-effective source,” Fresnillo CEO Octavio Alvidrez said March 2 during the conference call with analysts.

Julia Gonzalez Romero, of counsel at Mexico City-based law firm Gonzalez Calvillo, explained during the March 3 webinar that one possible argument against the bill will be to prove it is unconstitutional.

To do so, Gonzalez Romero said, there are three ways, the most common one being the “amparo,” as it can be obtained by practically anyone. The other two are reserved for regulators or other authorities whose area of influence has been invaded and for senators or lawmakers.

Panelists further agreed the judicialization of the electricity sector is not positive for a country that needs investments in infrastructure projects.

Mexico needs over $10 billion in the next five years to develop the projects the country has outlined in its short-term infrastructure plan, but given the decisions of the government it is hard to see private capital taking the risks, panelists said.

“Who in sound mind would invest in a place where there are no legal certainties,” Diaz said.

Source: S&P Platts