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The Mexican Supreme Court declared amendments to the electric industry law (LIE) that Mexican President Andrés Manuel Lόpez Obrador put through the Mexican Congress in March 2021 partly unconstitutional.

The January 31 decision came in a constitutional injunction proceeding known as amparo.

The court said a number of provisions in the LIE amendments of 2021 violate the competition and free participation rights protected by the Mexican constitution.

The decision does not create a mandatory precedent because it was not approved by a qualified majority of at least four justices. However, other federal courts and district judges are expected to come to the same conclusion when resolving several ongoing amparo trials related to the 2021 LIE amendments.

The Supreme Court’s declaration of unconstitutionality will prevent power sector authorities from applying the provisions declared unconstitutional to other market participants, regardless of whether they have filed for amparo injunctions challenging the LIE amendments. This is important for avoiding market distortions if only the parties that have filed constitutional claims are granted relief.

The Supreme Court said the state-owned utility, Comisión Federal de Electricidad or CFE, must compete in the electricity market on the same basis and is subject to the same rules that apply to private participants.

The LIE provisions that were declared unconstitutional include those aimed at granting dispatch priority to power plants owned by CFE that enter into "physical delivery agreements," those provisions that purport to allow older CFE generating facilities to receive clean energy certificates, as well as the rules that exempted CFE from its obligation to purchase power exclusively through competitive public auctions.

The Supreme Court said that such provisions are contrary to the free competition principles embedded in the federal constitution since they grant more favorable conditions to a group of companies to the detriment of all other market participants. The court also ruled that the now-declared-unconstitutional provisions create barriers to the proper operation of the electricity market, inhibit the participation of new generators and ignore the principle of neutrality that must be followed by the Mexican independent system operator (CENACE).

Not all the provisions of the LIE reforms of 2021 were declared invalid. The transitory articles that allow the Energy Regulatory Commission or CRE to revoke permits obtained “fraudulently” remain in force, as well as the provisions acknowledging CFE’s right to renegotiate, cancel or terminate the independent power producer agreements entered into pursuant to the electric energy public service law or Ley del Servicio Público de Energía Eléctrica, which was in force before the LIE, if these contracts are not profitable for the government. The legality of any such permit revocation or contract cancelation, if applied by CRE or CFE, would probably be challenged in the Mexican courts on a case-by-case basis to determine whether the revocation or cancellation complied with applicable laws.

More details about the specific provisions declared unconstitutional and those that will remain in effect, as well as the consequences, will be clearer once the court releases its full opinion.