February 3, 2021

Latam

MEXICO: Confrontation brewing over rehabilitation of state utility’s monopoly

BY Nicholas Watson

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( 3 mins)

Proposed changes to the 2013 Electricity Industry Law (LIE) represent another lurch towards energy nationalism. A bill sent to the lower house of Congress on 1 February proposes altering grid dispatch rules to benefit the state-run CFE electricity utility; scrapping long-term power purchase auctions; and eliminating self-supply permits. Although the bill faces a relatively straightforward path through the legislature, the proposals will meet with multiple legal challenges, both domestically and under the aegis of the United States-Mexico-Canada trade agreement (USMCA). These may delay, dilute, or potentially even thwart the proposals. While the situation should become clearer over the coming weeks, the combination of regulatory uncertainty, discriminatory action against private companies, policy radicalization, and impending litigation is a potent mix of negatives looming over the energy sector and wider business environment.

President Andres Manuel Lopez Obrador (AMLO)’s purpose is to reconstitute the CFE’s monopoly position. The bill does not come out of the blue but follows the suspension of connection tests for new wind and solar farms; a pressure campaign against independent regulators; and interference in the clean energy certificates (CELs) system – all of which were designed to benefit the CFE. In fact, the bill consolidates these measures, some of which have faced legal challenges; for instance, the Supreme Court (SCJN) last June suspended new power grid rules following a complaint by the Cofece antitrust regulator. Presumably AMLO is banking on changing the rules to undermine the notion that his new policies are in breach of fair competition. The governing National Regeneration Movement (Morena) has the numbers to pass the bill, which might not be the case after the June mid-terms. Meanwhile, the bill’s priority status means that it should be passed quickly – within a month in the lower house and in a similar timeframe in the Senate.

What is so striking is that the quest to restore the CFE to a dominant market position is being pursued at the expense of grid reliability, cost efficiency, and the environment. A recent massive power outage affecting around one third of the grid is a sign of CFE weaknesses, so it is counter-intuitive to double down on a sole provider and limit diversification. The new dispatch order prioritizes ownership over price and source, which – if passed – would make electricity more expensive, thereby undermining competitiveness and raising the prospect of subsidies – that the government can ill afford – should there be a public backlash against rising tariffs. The proposals are also short-sighted given the recent advances and continuing potential of renewable energy in Mexico. Friction with the new US administration, and not just US energy investors, is likely to be a secondary effect of excluding renewables. Moreover, these moves come at a time when private investment will be essential to reactivate the economy following last year’s 8.5% contraction.

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