Mexican rollbacks move to the courts

Mexican rollbacks move to the courts

December 08, 2020 | By Hernán González Estrada and Javier Félix Muñoz in New York

While the López Obrador administration has been dialing back private participation in the Mexican power sector, the Mexican federal courts have been holding firm against the government's changes in policy.

Generally, the Mexican federal government's energy agenda focuses on strengthening state-owned companies, CFE and Pemex, by favoring them over their competitors.

To achieve that goal, the Ministry of Energy (Secretaría de Energía or SENER), the Mexican ISO (Centro Nacional de Control de Energía or CENACE) and the Energy Regulatory Commission (Comisión Reguladora de Energía or CRE), among other authorities, have focused on changing the electricity market regulatory framework to the detriment of private generators.

Main actions

Actions by the federal government to pursue its objectives include the expeditious enactment of a new electricity policy by SENER and the issuance of several resolutions by CENACE and CRE, respectively. These actions retroactively changed some of the operating rules for the grid to the detriment of privately-owned projects.

None of these actions was subject to public consultation as is required by Mexican law. What follows is a brief summary of those actions.

First, in late April 2020, CENACE, the grid operator, issued a resolution suspending all pre-operative tests for wind and solar power plants. Until such tests are done, new wind and solar projects cannot connect to the grid.

CENACE's resolution also provided for the registration of CFE's thermal power plant units as "must-run" units, violating economic dispatch rules and potentially leading to market distortions. (For earlier coverage, see "Mexican ISO prevents wind and solar projects from reaching commercial operation.")

CENACE argued that such a measure was required to preserve the system's safety and reliability during the low-demand period caused by the COVID-19 pandemic.

Second, in May 2020, SENER adopted a policy that significantly changed the grid's operating rules to the detriment of private power producers, especially wind and solar power projects. In general, SENER's policy strengthens the roles of SENER and CENACE by providing them with discretionary power. It also imposes roadblocks on the issuance of new power generation permits and additional restrictions for new wind and solar power plants. (For earlier coverage, see "New policy in Mexico puts dagger in private participation in the electricity sector.")

Third, CRE issued two resolutions disrupting legacy power projects operating under a superseded regime. Among other benefits, legacy power projects have postage-stamp wheeling tariffs and may incorporate offtakers to their generation permits unrestrictedly. A resolution by CRE in May 2020 led to at least a fivefold increase in wheeling tariffs for those projects. In late October 2020, CRE issued a separate resolution to limit the legacy permit holders' rights under existing power generation permits. As a result, legacy permit holders can no longer add large consumers and offtakers already being supplied by CFE to their generation permits. While the plan is for legacy projects to migrate to the current regime once their interconnection agreements expire, CRE seems determined to accelerate that process by changing former conditions. Such changes would presumably render CRE's resolution illegal as it affects the legacy permit holders' rights granted under a law that is no longer in effect.

Reactions

Industry participants and other federal and state authorities have openly questioned the federal government's plans and have launched various legal challenges.

For instance, the Mexican Federal Competition Commission (Comisión Federal de Competencia Económica or COFECE) issued an opinion on May 7, 2020 harshly criticizing measures taken by CENACE. For earlier coverage, see "Mexican Competition Commission criticizes actions against wind and solar projects.")

More recently, a group of bipartisan US lawmakers also complained about the Mexican federal government's energy agenda. They claimed that its advancement granted preferential treatment to Mexican state-owned companies, violating the new US-Mexico-Canada free trade agreement that became effective in July 2020.

Private generators and NGOs filed constitutional challenges and sought injunctions in the Mexican courts against SENER's new policy as well as CENACE's and CRE's resolutions.

Separately, COFECE and state governments challenged SENER's authority to impose the new energy policy before the Supreme Court on constitutional grounds. As a result, the Supreme Court and federal district courts issued injunctive relief measures against the federal government's actions during the pendency of the constitutional trials. Generally, both courts held that the risks posed by imposition of the new policy and resolutions could lead to serious market distortions, result in setbacks to the energy transition and harm the environment. The courts highlighted that the consequent damage to society would be irreparable if the policy and the resolutions were allowed to stand.

CENACE and SENER retaliated by challenging the court decisions. The Mexican courts then reaffirmed their positions and validated the injunction relief measures. More specifically, the first chamber of the Supreme Court confirmed the interim relief granted to COFECE against SENER's energy policy without even debating SENER's challenge. Consequently, President Andres Manuel López Obrador harshly criticized the first chamber's decision and threatened to amend the constitution if need be.

A federal district court has recently resolved the merits of constitutional claims filed against CENACE's resolution and SENER's policy by private companies. In separate trials, the federal court concluded that both the resolution and the new policy are unconstitutional.

Among the various reasons for ruling against them, the resolving judge held that their imposition would ultimately affect end users and the people's right to a clean environment. The judge explained that the policy changes would prevent wind and solar power generators from entering the market and impair their ability to operate accordingly. The judge said that CENACE's and SENER's actions unjustifiably affected free competition in the power sector. He indicated that those actions gave priority to dispatch of CFE's old polluting power plants over more efficient and cleaner ones, violating the economic dispatch rules currently in effect.

Perhaps more importantly, the judge decided that both the resolution and the policy had failed to meet several legal requirements. He held that the issuance of CENACE's resolution exceeded its authority, as the power to regulate the electricity market and its operation resides in the CRE. As for SENER's policy, the judge explained that its expedited enactment violated due process and public consultation laws. Potential stakeholders had not been given a chance to comment on the policy's effects, the judge said.

The federal judge's decisions have essentially rendered CENACE's resolution and SENER's policy universally void.

Those decisions were, in fact, a result of constitutional claims filed by three companies, Desarrollos Eólicos Mexicanos de Oaxaca, S.A. de C.V., Desarrollos Eólicos Mexicanos de Oaxaca 2, S.A. de C.V. and EGP Magdalena Solar, S.A. de C.V. While normally decisions of this type would only benefit petitioners, the judge concluded that his judgments must be given general effect.

CENACE and SENER may still ask a higher court to review the district court decisions in an attempt to reverse them.

Federal courts also granted preliminary injunctions against the CRE's May 2020 resolution. However, they have not yet addressed the merits of the relevant constitutional claims.

The federal court decisions prove that checks and balances in Mexico continue to work despite governmental pressure. Indeed, the outlook is positive for private generators and renewables, but the Supreme Court will probably have the final word on the federal government's energy agenda.

Although the first chamber of the Supreme Court has been keen to suspend the application of SENER's policy, the merits of all claims may be ultimately resolved in a plenary session in the presence of all ministers. Overall, the Supreme Court has been inclined to support the federal government's plans. As such, the outcome of these cases remains unpredictable.