GC Alert | Energy Constitutional Reform Bill

On September 30, 2021, President Andrés Manuel López Obrador submitted a bill to amend the Mexican Constitution with respect to the electricity and mining sectors (the “Initiative”). The Initiative is primarily focused on strengthening the Mexican state-owned electric utility company, the Comisión Federal de Electricidad (“CFE”) and ensure that the Mexican State will have preference in the generation and dispatch of electricity. The Initiative also seeks a constitutional reservation of rights for the Mexican state to monopolize the exploitation of lithium.

With respect to the electricity sector, the Initiative would revoke the 2013 constitutional energy reform and materially affect the underlying legal framework under which the energy sector operates today. Pursuant to the Initiative CFE would now be responsible for the execution of the Energy Transition in all matters related to electricity and all necessary activities for such purposes. Due to the importance of the Energy Transition, no concessions will be granted for the exploitation of lithium and other strategic and necessary minerals. Existing concessions would be honored.

In order for the Initiative to be approved and enforced, it will require the favorable vote of two-thirds (qualified majority) of the lawmakers of each of the houses of Congress. The Initiative will need the affirmative vote from opposition parties to reach the required qualified majority in Congress. If approved as such by Congress, the Initiative must thereafter be ratified by an absolute majority (one half plus one) of the local legislatures of Mexico’s states and Mexico City. Finally, the Initiative must be published in the Official Gazette of the Federation.

Some of the principal provisions in the Initiative include the following concepts:

1. That CFE would be responsible for generating 54% of all electricity (compared to 38% that CFE says it currently generates today), while the private sector would be allowed to generate up to the remaining 46%. Electricity generated by the private sector would be purchased exclusively by CFE, based on economic dispatch and contractual arrangements to be determined by CFE.

2. The disappearance of the Mexican energy regulators – the Energy Regulatory Commission (CRE) and the National Hydrocarbons Commission (CNH) – having their attributions assumed by the Ministry of Energy (SENER). The National Center for Energy Control (CENACE), would also disappear and be absorbed by CFE.

3. The exclusive right for the Mexican State over the strategic electricity sector, which consists of generating, conducting, transforming, distributing, and supplying electric power.

4. The cancellation of all existing power generation permits and the private contracts for the sale of
electricity, effective, as of the day of enactment.

5. The transformation of CFE into a very powerful State agency, responsible for the Energy Transition, in charge of the electricity strategic sector and the National Electric System, including planning and control thereof, the public service of transmission and distribution of electric power and generation of at least 54% of electricity.

6. All of CFE’s subsidiaries and affiliates (other than CFE Telecomunicaciones e Internet para Todos, CFEnergía, CFE Internacional and CFE Capital) will disappear, and all their relevant functions will be assumed by the new CFE.

7. With respect to the public service of supply of electric power, such service will be rendered only by CFE; however, CFE would be allowed to purchase electricity from private generators, considering CFE’s preferential dispatch status.

8. The cancellation of all private generation arrangements, including those deriving from the former Law of the Public Service of Electric Energy (e.g., Independent Power Producers, Self-supply, etc.) and those created by the current Electric Industry Law (e.g., Auctions, Electricity Coverage Contracts). Existing power plants under such canceled arrangements will be allowed to generate and compete to offer electricity to be purchased exclusively by CFE, according to the contractual structures to be set forth by CFE.

9. Tariffs for transmission and distribution, as well as tariffs of electricity for end-users, will be determined by CFE.

10. The cancellation of Clean Energy Certificates.

If the Initiative is approved as presented, it will fundamentally alter the Mexican energy sector in ways that are difficult to fully predict.

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