Power flows

Mexico's energy policy drives outflows from the sector.

Mexican President Andrés Manuel López Obrador (“AMLO”) continues his plans to centralise public sector control of any sector he sees as strategic. This time it is the turn of the electricity sector where a contentious new bill is being introduced that will favour the national power utility, the Comisión Federal de Electricidad (“CFE”). The bill is expected to be approved by the Chamber of Deputies today, before passing to Congress.

On 3 February, Mexico’s Second Chamber of the National Supreme Court of Justice (“SCJN”) declared parts of the current government’s new electricity policy unconstitutional as it hinders competition and “gives exclusive and unfair advantage” to state power company CFE. The bill aimed to achieve this by amending grid dispatch rules that favour fuel oil-fired generation and restrict the participation of private-sector developers, particularly in renewable energy.

The court ruling sets up a tussle between the judicial and executive branches in the months ahead. The courts have largely ruled in favour of companies seeking suspension of regulatory changes over the last year but AMLO has said he will pursue constitutional reform if his policy aims cannot be met within the current framework.

Regardless of the outcome, the uncertainty created by such reforms are already spooking private and foreign investors.

An energy industry spokesman reported, “It is true that all the legal processes against the government have been won, but [the officials] always find a way to continue postponing and restricting the operations of companies.”

A Mexican energy infrastructure expert was concerned, “It is not only the legal framework that is going to scare investors, but also the state debts in the energy sector that are reaching critical point: PEMEX owes millions of dollars to suppliers and contractors, they even owe salaries. Therefore, it is highly unattractive to enter into any government partnership, it is increasingly clear that there is no place for private investment under the current government.”

“It is increasingly clear that there is no place for private investment under the current government.”

Energy infrastructure expert, Mexico

As the state seeks to centralise power and marginalise the private sector, there are an increasing number of corruption rumours, an energy industry executive reported, “The state is becoming hard to work with unless you have direct access to AMLO. There are more and more rumours of ‘commissions’ being paid to facilitate payments and permits, it’s just like the old days, but worse! It seems that this is being orchestrated from the highest levels so no one dares to talk about it. If you cause problems your company gets attacked in a ‘mañanera’ or the Financial Intelligence Unit (“FIU”) links you to something personally.”

“There are more and more rumours of ‘commissions’ being paid to facilitate payments and permits, it’s just like the old days, but worse!”

Executive, Energy Industry, Mexico

A Mexican investment banker agreed that the current political environment was affecting investment, “Only those who have already invested have an incentive to confront the government. If you are new, it is easier to look outside Mexico. North American companies have better prospects because they have the protection of the UMSCA [United States–Mexico–Canada Agreement] and international arbitration. Even so, having this permanent uncertainty that the government can change the rules at any moment is already resulting in significant capital outflows.”

 

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