October 08, 2021
In Chapter 4 of our series regarding regulatory developments in the Mexican power sector during 2020 and 2021, we examined the bill introduced by President Andrés Manuel López Obrador (hereinafter, “AMLO,” and his administration, the “AMLO Administration”) on September 30, 2021 to amend the Mexican Constitution and unwind Mexico’s 2013 Energy Reform (hereinafter, the “Presidential Bill”). The Presidential Bill appears to be in furtherance of AMLO’s stated objective of pursuing any legislative and legal actions necessary to bring the entire power generation value chain into State ownership and control.
In this Chapter, we examine the extent to which AMLO’s proposed Presidential Bill could give rise to arbitration and other disputes against Mexico.
As discussed in Chapter 4 of our series, key aspects of the bill include:
If the Presidential Bill is enacted, existing energy projects would be subject to grave uncertainty. Valid power generation permits would be terminated. Existing projects that are not completed would be subject to substantial changes in the regulatory environment. Indeed, the regulations governing any such projects have not been defined, thereby raising questions as to how such projects will operate and whether the projects would be able to meet their payment obligations or generate a return on their investment. Likewise, the process and timing for issuing new permits for existing facilities and the pricing conditions offered by CFE for new power purchase agreements are not settled, nor are parameters described in the Presidential Bill. In addition, the conditions under which self-supply legacy permits would operate are even more uncertain. It is unclear if self-supply legacy permit holders would even be able to apply for a new permit, or if the rationale behind the Presidential Bill was to decommission—or even seize—those facilities. The Presidential Bill paints an incomplete and fractured picture of the power industry beyond its enactment.
The 2013 Energy Reform created a stable and transparent legal regime over the Mexican power sector. Permits were issued for fixed terms and could not be arbitrarily terminated by the Mexican government. As a result, significant private investments into the Mexican power sector were made by local and foreign investors following the 2013 Energy Reform.
If enacted, the Presidential Bill will abrogate investors’ contractual rights, undermine the regulatory regime that investors have relied upon for years, substantially impair the economic value of investments, and fundamentally deprive investors of ownership rights in their investments. Together, these consequences are likely to give rise to a significant number of commercial and investor-state disputes. The nature of any commercial disputes will depend on the specific terms of an investor’s commercial contracts, but almost certainly would include claims for breach of contract, force majeure, material adverse change, and changes to local laws and regulations. Investors should analyze their contracts to identify potential claims and liabilities that could arise if the Presidential Bill is enacted, with particular care given to any applicable notice requirements to ensure that claims are protected.
In addition to commercial disputes, investors may be able to assert claims under one or more of the over 40 bilateral and multilateral investment treaties (hereafter, “Investment Treaty” or “Investment Treaties”) to which Mexico is a party. These include bilateral treaties with Spain, France, the Netherlands, China, Germany, Korea and the United Kingdom, as well as multilateral treaties with the United States and Canada, such as NAFTA and the USMCA.
Investment Treaties protect “investors” from one treaty country that make “investments” in another treaty country from certain adverse government actions. Such investments include physical assets owned in Mexico, equity shares held in a company, debt instruments, property interests, certain contractual rights, and other tangible and intangible interests arising out of capital investments made in Mexico. Subject to the nationality of the investor and the terms of the specific treaty, investments in the Mexican power sector likely to be affected by the Presidential Bill should be covered.
Investment Treaties serve two principal purposes. First, they define the types of protections accorded to foreign investors and investments. These protections include:
Second, investment treaties provide private investors a direct right of action against a host government for violations of international law. Most investment treaties—and all investment treaties to which Mexico is a party—give investors the right to bring claims either in the local courts of the host country or before an international arbitral institution.
Each investment treaty will contain its own dispute resolution provision that sets out the options and requirements for bringing claims against a host state. Investors wishing to bring investment treaty claims against the Mexican government would need to do so in accordance with the procedures set out in the various treaties. For example, certain of the Investment Treaties to which Mexico is a party require investors to wait six months after a dispute has arisen to initiate arbitration. Other treaties require investors to pursue claims in the local courts (either through a final decision or for a defined period of time) before a claim may be submitted to arbitration. Investors, therefore, will need to ensure they have complied with the necessary preconditions to initiating arbitration so as not to put their claims in jeopardy.