Mexico's Supreme Court ruled on Wednesday against a controversial law favoring the state-owned electricity company over private power firms. The decision strikes at the core of Mexican President Andrés Manuel López Obrador's nationalist agenda, challenging his efforts to prioritize state-owned enterprises and reverse pro-business policies.
The five-judge panel's resolution declared that López Obrador's approach violated constitutional guarantees of free competition in the power sector. The invalidated law granted the state-owned Federal Electricity Commission (CFE) priority in selling power to the grid, placing private power generators, mostly foreign-owned, at the bottom of the priority list. This move contradicted the previous system where power plants bid based on providing the lowest price.
US Opposition to Mexico's Energy Policy
A Mexico flag flies in the Paddock prior to the F1 Grand Prix of Mexico at Autodromo Hermanos Rodriguez on October 30, 2022 in Mexico City, Mexico.
The energy policy, part of López Obrador's broader agenda, has led to trade disputes with the United States (US) and Canada as his prioritization of state-owned utility CFE clashed with international trade agreements.
The US government filed an objection to the law, citing violations of the US-Mexico-Canada Free Trade Agreement (USMCA), which prohibits favoring domestic companies over those from other member states.
According to a 2022 press release from the US Trade Representative, Mexico introduced energy reforms in 2013 that attracted investments from US companies.
These companies engaged in activities such as operating wind and solar energy farms, managing cogeneration and combined cycle facilities, and enhancing interconnection contracts to supply electricity to Mexico. Additionally, they imported US-origin fuels for sale at Mexican gas stations.
However, since late 2018, Mexico has shifted its energy policy to prioritize its state-owned electrical utility, CFE, and oil and gas company, PEMEX.
To achieve this, Mexico amended its Electric Power Industry Law in March 2021. This change directs the grid operator to prioritize CFE-generated electricity on Mexico's grid over electricity from all private competitors, regardless of cost or environmental impact.
According to US Trade Representative Katherine Tai, Despite attempts to address concerns with the Mexican government, unfair treatment of US companies persists.
"We have repeatedly expressed serious concerns about a series of changes in Mexico's energy policies and their consistency with Mexico's commitments under the USMCA," she said in the press release.
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Impact on Mexico's Energy Transition
The court stated that the invalidated law "violates the principles of competition" and hampers the issuance of clean energy certificates, discouraging new projects supporting the country's sustainable development. This ruling allows the energy sector to revert to its prior pace in the ongoing energy transition.
Viviana Patiño Alcala, a competition researcher at Mexico Evalua, expressed optimism about the future, stating, "This is an enormous victory not only for Mexico's energy sector, but also for the future. We can return to the pace we had before in our energy transition."
Despite this ruling, uncertainties loom regarding the specific relief and whether it applies exclusively to the companies involved in the appeal.
As López Obrador nears the end of his tenure, he remains committed to promoting state-owned enterprises and undoing pro-business policies established by earlier administrations. The nullified law not only gave preference to CFE but also concluded public electricity auctions.
Despite setbacks in the courtroom, López Obrador has pursued his vision through alternative means, such as purchasing national gas plants and a wind farm from Spanish firm Iberdrola SA. This has resulted in an increased market share for state utility CFE, reaching around 40%, and a combined share with private partners estimated at 69%.
While the Supreme Court's decision addresses the constitutional violations within the energy reform, it remains to be seen how the lower tribunals will apply this ruling to the multitude of other companies that have sought individual injunctions against the controversial legislation.
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