Constitutional Energy and Mining Law Amendment Implications for United States

Constitutional Energy Amendment and Mining Law amendment - Implications for the United States 

By not getting the necessary votes for a constitutional amendment, the Chamber of Deputies stopped and rejected the initiative of constitutional amendment in electricity matters of President Andrés Manuel López Obrador on April 17, 2022. The purpose of this constitutional amendment initiative was to drastically limit the participation of private companies in this sector. 

Main changes proposed in the initiative of constitutional amendment in electrical matters.

The initiative proposed that the generation, transformation, distribution, and supply of electricity shall be carried out exclusively by the public sector.

Furthermore, the transitory articles of the constitutional amendment established that the Federal Electricity Commission (CFE) would have to develop at least 54% of the energy required in Mexico, while the private sector could only participate up to 46% in the generation of energy. Currently, the CFE and the private sector contribute to the 38% and 62%, respectively, in electricity generation, according to official sources.

The constitutional amendment also included that the Mexican government be in charge of the exploitation of lithium and other strategic minerals, as well as a prohibition of granting concessions for the exploration and exploitation of lithium.  
The constitutional amendment  eliminated the «legacy contracts» regarding the purchase and sale of electricity.
The constitutional amendment  aimed at the CFE basing its electricity dispatch in order of production costs but giving preferential treatment to its own plants.  

According to VTZ, the constitutional amedment was aimed at legitimizing the amendment of the Electricity Industry Law of 2021 and the current measures of the Mexican government to displace private investments and increase CFE’s participation in the electricity generation market. Although the constitutional amendment  initiative was not approved, foreign investors (and even governments) could still resort to dispute settlement mechanisms provided in the treaties.

Lithium and the Amendment of the Mining Law

It should be noted that a few days after the rejection of the initiative for constitutional amendment in electricity matters, the Chamber of Deputies and Senators approved a amendment to the Mining Law. On April 20, 2022, said amendment was published in the Official Gazette, entering into force on April 21, 2022. 

The amendment of the Mining Law establishes that lithium is of «public utility» and, therefore, it is forbidden to grant concessions, licenses or permits in the matter. This reform also proposes that lithium will be «exploited» by a sort of state-owned company (SOE).

What would the constitutional amendment have entailed if it had been approved?

Previously, U.S. Trade Representative (USTR), Katherine Tai, expressed concern about the developments in the Mexican energy sector. In fact, the media reported that on March 31, 2022, Katherine Tai issued a letter addressed to the Mexican Minister of Economy, Tatiana Clouthier, pointing out that the changes in energy policies constitute a violation of core obligations such as the principle of non-discrimination provided for in the US Mexico Canada Agreement (USMCA).

In that letter, the head of the USTR highlighted the enormous and important investment that U.S. companies have in the electricity sector, reaching approximately 10 billion dollars. Katherine Tai also mentioned that the U.S. government will use all legal measures available in the USMCA to «address the concerns» of the U.S. government.

Implications for Mexico

According to a Mexican NGO, Centro de Investigación Economica y Presupuestaria, A.C, if the constitutional electricity amendment  had been approved, the Mexican government would have had to allocate 0.65% of its 2022 GDP (182 billion pesos) to compensate private companies.

VTZ Reforma eléctrica y minera, implicaciones para Estados Unidos

"The initial costs derived from compensation, operation, investment, subsidies and health costs could represent 0.94% of Mexico’s GDP in 2022. This amount represents a third of the budget allocated to health in 2022 and 80% of the budget to public security."

Centro de Investigación Económica y Presupuestaria, A.C

Implications for the United States

According to the National Renewable Energy Laboratory, the rejected constitutional amendment initiative would have entailed that Mexico’s SOE having a much greater participation in the electricity market. Per estimations, the Mexico’s SOE participation could have soared up to a 74% participation in the electricity sector, while the participation of the private sector would have fallen from 60% to 26%, affecting the competitiveness and value chains of the region.

Mexico did not include the Electricity Industry Law in its USMCA list or annex of «non-conforming measures» on cross-border investment and services. However, Article 32.11 USMCA allowed Mexico to «reserve» measures that were compatible with reservations made in other trade agreements, as in CPTPP. Like recent energy policies, the constitutional amendment initiative was widely questioned as incompatible with Mexico’s international commitments. This is because Mexico’s reservations in CPTPP are mere reflection of the 2014 energy amendment, which created a «level playing field» for private companies vis-a-vis SOEs (e.g. CFE) and promoted the use of clean energy.

Finally, the recent amendment of the Mining Law and restrictions on the «exploitation» of lithium is also highly questionable in light of the USMCA and other trade agreements. Obviously, the exploitation of lithium by an SOE is not foreseen as a «non-conforming measure» in the USMCA or a reservation established in another FTA.

At VTZ we observe that the U.S. government is closely following legal and judicial developments in energy matters. The USTR’s Trade Barriers Report 2022 included an «energy» section of Mexico, mentioning that the Mexican Supreme Court would review the constitutionality of the recent amendments of the Electricity Industry Law (LIE); in this regard, we inform that the Supreme Court did not declare as unconstitutional the amendments to the LIE in its April 7, 2022, hearing.

While it is true that no changes to the constitution were approved and that institutional checks and balances can still correct energy policies, it is also true that Mexico is taking a controversial path. Now with restrictions on the exploitation of lithium, an essential mineral for advanced batteries and a key input to value chains considered «strategic» for the United States, Mexico continues to provoke its main trading partner. 

In that sense, it may be a matter of time before the USTR activates the dispute settlement mechanism, and with that Mexico may face the eventual risk that the USA may “suspends benefits” to Mexican goods.

For more information regarding Mexico’s potential disputes under the USMCA, please visit our next news item:

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