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Jul 28, 2020

Recent Regulatory Developments in the Mexican Power Sector—Chapter 2: The Tug of War Continues

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RECENT REGULATORY DEVELOPMENTS IN THE MEXICAN POWER SECTOR—CHAPTER 2: THE TUG OF WAR CONTINUES

As a follow-on to our May 27, 2020 note “Recent Regulatory Developments in the Mexican Power Sector” (referred to hereinafter as “Chapter 1”), this note highlights further developments in the escalating clash between the administration of President Andrés Manuel López Obrador (hereinafter, the “AMLO Administration”) and wind and solar generation companies—in particular, those that hold power purchase agreements awarded in the first, second and third power auctions conducted by the National Center for Energy Control of Mexico (Centro Nacional de Control de Energía-CENACE).

On April 29, 2020, CENACE issued a Resolution to Guarantee the Efficiency, Quality, Reliability, Continuity and Stability of the National Electric Grid of Mexico during the SARS-CoV2 Virus (COVID-19) Epidemic (sic)[1] (the “CENACE Resolution”), which implemented temporary technical and operational measures purportedly to mitigate the effects of the COVID-19 pandemic on the National Electrical Grid of Mexico (Sistema Eléctrico Nacional-SEN), and that were widely seen to disproportionately affect wind and solar power plants. Industry stakeholders reacted swiftly, including, as noted in Chapter 1, by filing claims to enjoin the CENACE Resolution. At the time of writing of Chapter 1, 23 wind and solar generation companies had obtained a provisional injunction against the CENACE Resolution[2] and on May 25, 2020 the stay of the CENACE Resolution took effect.[3] The legal process to resolve the filing of appeals and final ruling on the matter typically would be required to be resolved within three to five months[4], but taking into account judicial delays due to the COVID-19 pandemic, expectations are that it will likely take several months longer. During the period pending final resolution, the CENACE Resolution is definitively enjoined and many of the impacted projects will be able to continue construction and achieve commencement of commercial operations.

On May 15, 2020, the Ministry of Energy (Secretaría de Energía-SENER) published the Resolution for issuance of the Policy on Reliability, Stability, Continuity and Quality in the National Electric Grid[5] (the “SENER Policy”). The SENER Policy is a combination sweeping policy statement and regulatory restructuring measure aimed to tilt the Mexican power sector in a manner that disfavors wind and solar power plants and favors conventional power, which is predominantly provided by the Federal Energy Commission (Comisión Federal de Electricidad-CFE). As of the date of writing of Chapter 1, the SENER Policy had received swift and wide condemnation from industry stakeholders but, to public knowledge, had not yet been subject to legal challenge. On June 4, 2020, the SENER Policy was provisionally enjoined via a ruling in favor of Greenpeace México that is of general application nationwide, and which also enjoins the CENACE Resolution nationwide.[6] The presiding judge noted in his opinion that the SENER Policy puts at risk the environment, the health of the Mexican public and Mexico’s international treaty commitments to reduce its fossil fuel consumption. Notably, the opinion also reviews in detail the regulatory process for public comment and cost-benefit review analysis that the SENER Policy should have undergone, but which were ignored in a controversial manner with its publication late on a Friday evening in the Official Gazette of Mexico (Diario Oficial-the “Gazette”). Greenpeace México was granted a definitive amparo injunction on June 24, 2020.[7] Further, another non-governmental entity, Asociación Civil Defensa Colectiva (ACDC), was successful in obtaining a definitive amparo injunction against the SENER Policy on June 10, 2020, which also applies nationwide to all affected generating companies.[8] At the same time, various wind and solar generation companies continue to pursue amparo claims against the SENER Policy for their individual benefit, which in some cases have also resulted in definitive injunctions.[9]

Adding to the fray, the Federal Economic Competition Commission (Comisión Federal de Competencia Económica-COFECE) announced on June 22, 2020 that it filed a constitutional claim against the SENER Policy, alleging that the SENER Policy: (a) violates the fundamental principle of free competition established in the Mexican Constitution (Constitución Política de los Estados Unidos Mexicanos) and (b) constitutes an attempt by SENER to exceed its constitutional mandate and scope of authority.[10] In its related press release, COFECE stated that the SENER Policy negatively impacts the economic structure of the energy sector in Mexico and eliminates the ability of the sector to operate in a competitive manner and efficiently, imposes potentially discriminatory measures on the operation of the wholesale energy market, provides advantages to certain participants, and establishes barriers to entry, leading to reduced efficiency and competition. For these reasons, COFECE filed a claim with the Supreme Court of Mexico (Suprema Corte de Justicia de la Nación) to adjudicate the limits of the SENER Policy, which it alleges contradicts the constitutional mandate of COFECE to ensure free competition and the wellbeing of the consumer.[11] The Supreme Court of Mexico provisionally suspended the SENER Policy and its effects in response to COFECE’s claim in early July 2020.[12]

Moreover, several Mexican state governors have publicly announced that they will work together to oppose the SENER Policy.[13] The governors of the states of Jalisco, Colima and Tamaulipas filed constitutional claims against the SENER Policy and in early July 2020 each was granted a provisional suspension order by the Supreme Court of Mexico.[14]

While wind and solar generation companies and other industry stakeholders are successfully obtaining injunctions in the Mexican courts, and COFECE and Mexican state governors are supporting the rights of industry stakeholders with constitutional claims and successful suspensions, the Energy Regulatory Commission (Comisión Reguladora de Energía-CRE) and CFE are taking further coordinated actions to uphold the CENACE Resolution and the SENER Policy and ostensibly disfavor privately held wind and solar power plants. CRE is developing new regulations that rollback protections for legacy wind and solar generation projects built before the energy sector reforms were enacted under the Peña Nieto administration in 2013 (and for which implementing legislation was subsequently issued in 2014). On May 28, 2020, CRE unanimously approved two resolutions amending transmission charges for legacy renewable, cogeneration and conventional power plants (collectively, the “CRE Resolution”), increasing wheeling rates for renewable and high-efficiency cogeneration power plants that, prior to the regulatory reforms of 2013–2014, signed legacy interconnection contracts with CFE Intermediación de Contratos Legados, S.A. de C.V., an affiliate of CFE (collectively, “Legacy Interconnection Contracts”).[15] Similar to the approach of CENACE and SENER last month, CRE acted swiftly to implement the new measures, calling an extraordinary session to vote on their implementation without consultation with industry participants or consumer groups.[16] Nevertheless, the CRE Resolution was provisionally suspended via an amparo injunction in early July 2020.[17]

The CRE Resolution was issued following a 2019 request from CFE (in the form of the pliego petitorio (i.e., CFE’s “wish list”)) for CRE to analyze whether transmission charges assessed on various types of power generation companies under their interconnection contracts—in particular under Legacy Interconnection Contracts—fairly and proportionally reflect the cost of providing transmission services to such companies.[18] CRE concluded that the charges were not fair, alleging that the current regulations restrict free economic competition in the Mexican Wholesale Electricity Market (Mercado Eléctrico Mayorista-MEM) and that consumers bear the difference in actual transmission charges in the MEM and under Legacy Interconnection Contracts.[19]

CRE states that it implemented the CRE Resolution pursuant to its power to regulate and manage technical and operational aspects of the MEM under the Regulatory Energy Sector Agencies Law (Ley de Órganos Reguladores Coordinados en Materia Energética), with the goal of ensuring fair economic competition among all participants, consistent with the objectives and principles of the current administration’s energy policy.[20] Nevertheless, commentators have been quick to point out that the CRE Resolution followed numerous previous statements by CFE representatives alleging that wind and solar power plants were afforded preferential treatment—most recently, Manuel Bartlett, the director of CFE, accused wind and solar power generators of not bearing their fair share of costs to ensure the continuous uninterrupted supply of electricity in the SEN.[21]

CRE’s actions follow, as did the CENACE Resolution and SENER Policy, requested changes outlined in the “wish list” attributed to CFE that leaked to the public late last year, and that aims to empower CFE in the Mexican energy sector and afford it advantages vis-à-vis private wind and solar power producers.[22] The Business Coordination Council (Consejo Coordinador Empresarial-CCE) of Mexico estimates that the CRE Resolution would affect at least 100 privately held power plants of various sizes,[23] and, contrary to CRE’s statements about enhancing competition, would result in the opposite effect by increasing electricity prices for consumers.[24]

Meanwhile, according to a power point presentation attributed to CFE that leaked to the press in early June[25] (the “CFE Agenda”), CFE is pressing ahead with its “wish list” by organizing electricity market regulators in Mexico to follow its direction. The CFE Agenda sets out a roadmap for reorganizing the electricity market in Mexico according to a CFE-led plan to modify up to 23 existing, and to create five new, regulatory instruments. CFE intends to coordinate the tasks among itself, CRE and CENACE over the course of 12 months, and sets out 15 working groups that are scheduled to meet for several hours per day, five days a week in order to execute the plan. Per the CFE Agenda, CFE would be given power to identify to SENER strategic projects that should have priority for interconnection and priority to request the required related studies from CENACE. In addition, among other things, the CFE Agenda proposes developing new methods for granting generation permits and interconnection studies, that wind and solar power companies should bear the costs of the Ancillary Services (Servicios Conexos) described in the SENER Policy due to their intermittent nature, and that wind and solar power companies should be required to have higher reserve requirements.[26]

Further to the “wish list” and the CFE Agenda and indicative of close coordination between CFE and CRE, on June 10, 2020, CFE published in the Gazette a notice setting forth new transmission charges for renewable and high-efficiency cogeneration power plants party to Legacy Interconnection Contracts, with the rates increasing by approximately 469% for high voltage transmission, 428% for medium voltage transmission, and 820% for low voltage transmission, as compared to the rates previously in effect for the month of May.[27] These tariff increases were provisionally suspended via an amparo injunction in early July 2020.[28]

Finally, further underscoring the AMLO Administration’s strategy regarding the energy sector, on July 8, 2020, SENER published the Energy Sector Plan 2020–2024 (Programa Sectorial de Energía 2020–2024-PROSENER), in which it reinforced many of the concepts underlying the SENER Policy, the “wish list” and the CFE Agenda.[29] In the PROSENER, SENER states that it is following through on the objectives of the National Development Plan 2019–2024 (Plan Nacional de Desarrollo 2019–2024) to “rescue the energy sector” and emphasizes that the actions that the State takes to control, among other things, the national electric grid and the public service or transmission and distribution of energy are not monopolistic but rather are strategic State activities. SENER takes pains to describe the allegedly unfair treatment that CFE has suffered from competition with the private sector, such as having to provide services to competitors under the Legacy Interconnection Contracts, as well as preferential dispatch for intermittent solar and wind power companies that were awarded power purchase agreements under the renewable energy auctions. SENER also claims in the PROSENER that greater State participation in the renewable energy sector is necessary and, echoing the SENER Policy, that the growth of renewable energy should be implemented through a regulatory framework that ensures the efficiency and stability of the SEN and strengthens the influence of productive State-owned companies.[30]

While the various amparo injunctions against the CENACE Resolution and the SENER Policy are not final judgments on the matters, they indicate that industry stakeholders’ claims have prima facie merit in the Mexican courts. The filing by COFECE of a constitutional claim against the SENER Policy further underscores that business-minded stakeholders in Mexico have faith in the Mexican court system to right the ship and protect private, and largely foreign, investments in the Mexican energy sector. At the same time, the AMLO Administration, including the leadership of CENACE and SENER, have made various public statements insisting that they are acting in accordance with the law and will pursue challenges to any proceedings against the CENACE Resolution and SENER Policy. CRE and CFE continue to push forward the AMLO Administration’s agenda on separate fronts with the wheeling and tariff increases, respectively. The discord between the private wind and solar generation industry and COFECE, on the one hand, and the CFE-centered goals of the AMLO Administration, on the other hand, appears set to continue to play out during the course of 2020 and, quite possibly, into 2021. Yet, for the time being, at least with respect to the CENACE Resolution and the SENER Policy, private industry and environmental groups have hit the pause button on the “wish list” and CFE Agenda.

Read “Recent Regulatory Developments in the Mexican Power Sector—Chapter 1.”

Footnotes

 [1] In the original Spanish, the “Acuerdo para garantizar la eficiencia, calidad, confiabilidad, continuidad y seguridad del Sistema Eléctrico Nacional, con motivo del reconocimiento de la epidemia de enfermedad por el virus SARS-CoV2 (COVID-19),” CENACE website.
[2] CENACE Oficio No. CENACE/DOPS/079/2020 in respect of the CENACE Resolution, May 19, 2020.
[3] Sentencia Definitiva de fecha 25 de mayo de 2020 al Amparo Indirecto promovido por RECURSOS SOLARES PV DE MÉXICO, S.A. de C.V. y otras. Incidente de Suspensión: 89/2020 y acumulados 90/2020, 91/2020, 92/2020, 99/2020, 102/2020, 103/2020, 104/2020, 105/2020, 106/2020, 107/2020, 108/2019 y 109/2019. Juzgado Primero de Distrito en Materia Administrativa, Especializado en Competencia Económica, Radiodifusión y Telecomunicaciones, con residencia en la Ciudad de México y jurisdicción en toda la República.
[4] Article 92 of the Ley de Amparo.
[5] In the original Spanish, the “Acuerdo por el que se emite la Política de Confiabilidad, Seguridad, Continuidad y Calidad en el Sistema Eléctrico Nacional,” Gazzette website.
[6] Suspensión Provisional de fecha 4 de junio de 2020 al Amparo Indirecto promovido por GREENPEACE MÉXICO. Incidente de Suspensión 104/2020. Juzgado Segundo de Distrito en Materia Administrativa Especializado en Competencia Económica, Radiodifusión y Telecomunicaciones, con residencia en la Ciudad de México y jurisdicción en toda la república.
[7] “Greenpeace consique amparo en contra de la política energética de AMLO,” PUBLIMETRO, June 24, 2020.
[8] Diana Nava, “Juez suspende de manera definitiva medidas de Cenace y Sener que limitan a las renovables,” EL FINANCIERO, June 11, 2020.
[9] Diana Nava, “Conceden a 13 proyectos suspensión definitiva a medidas de Cenace,” EL FINANCIERO, July 15, 2020.
[10] “COFECE interpone controversia constitucional contra la emisión de la Política de confiabilidad, seguridad, continuidad y calidad en el Sistema Eléctrico Nacional,” COFECE website.
[11] Id.
[12] Édgar Sígler, “El ente antimonopolios logra suspensión contra la política eléctrica de Sener,” EXPANSIÓN, June 29, 2020.
[13] Andrea Cruz, “Bartlett vs. IP y gobernadores por acuerdo sobre energías limpias,” POLÍTICO.MX, May 25, 2020.
[14] “Jalisco y Colima promueven demandas contra política energética de AMLO,” POSTA, July 8, 2020. “Colima y Jalisco ganan amparo contra acuerdo energético,” DIARIO VANGUARDIA DE VERACRUZ, July 14, 2020.
[15] Comisión Reguladora de Energía, ORDEN DEL DÍA SESIÓN EXTRAORDINARIA, May 28, 2020. Comisión Reguladora de Energía, ORDEN DEL DÍA SESIÓN ORDINARIA, May 28, 2020. Comisión Reguladora de Energía, ACUERDOS.
[16] As a result of the 2013-2014 reforms, private renewable power generators were able to deliver power directly to CFE without having to pay wheeling charges. “UPDATE 1—Mexican Regulator Approves New Power Rates Amid Public Dispute,” REUTERS, May 29, 2020.
[17] Ulises Juárez, “CRE impone barreras arbitrarias a la inversión: CCE”, ENERGÍA A DEBATE, May 29, 2020.
[18] Recurso de queja de fecha 6 de julio de 2020 Q.A.I.B. 78/2020 interpuesto por Eólica El Retiro, sociedad anónima promotora de inversión de capital variable por virtud de la cual se concede la suspensión provisional solicitada en el incidente a que esta queja se refiere. Segundo Tribunal Colegiado en Materia Administrativa Especializado en Competencia Económica, Radiodifusión y Telecomunicaciones con residencia en la Ciudad de México y jurisdicción en toda la República.
[19] Comisión Reguladora de Energía, “Comunicado de la CRE respecto a la sesión extraordinaria,” May 28, 2020. See also “Mexican CRE approves new rates for electricity providers,” Global Transmission Report, May 29, 2020.
[20] Comisión Reguladora de Energía, “Comunicado de la CRE respecto a la sesión extraordinaria,” May 28, 2020.
[21] Id.
[22] “Empresas de energía renovable deberían pagar parte del costo de la red: Bartlett,” LATINUS, May 22, 2020. “CRE incrementa las tarifas a centrales de energía renovable,” LATINUS, May 28, 2020.
[23] Jude Webber, “Mexico Plans Crackdown on Private Electricity Market,” FIN. TIMES, December 21, 2019.
[24] Ulises Juárez, “CRE impone barreras arbitrarias a la inversión: CCE,” ENERGÍA A DEBATE, May 29, 2020. Lilia González, “Aumento de tarifas aprobado por la CRE impactará a 100 plantas de generación eléctrica: IP,” EL ECONOMISTA, May 29, 2020. The President of CCE stated that the CRE Resolution sets the Mexican power sector 30 years back by limiting competition and introduces questions about the integrity of the process fundamental to maintaining free economic competition in the market – the setting of tariffs. Ulises Juárez, “CRE impone barreras arbitrarias a la inversión: CCE,” ENERGÍA A DEBATE, May 29, 2020.
[25] Edgar Sigler, “CFE toma las riendas y se da un año para ganar su batalla contra las renovables,” EXPANSIÓN, June 09, 2020.
[26] Id.
[27] The rates increased to 0.27857 Pesos/kWh for high voltage transmission, 0.25865 Pesos/kWh for medium voltage transmission and 0.89284 Pesos/kWh for low voltage transmission. Diario Oficial de La Federación, Avisos Generales, June 10, 2020 at 105. Édgar Sígler, “La CFE aplica ‘tarifazo’ de hasta 800% a un grupo de renovables,” EXPANSIÓN, June 10, 2020.
[28] Recurso de queja de fecha 6 de julio de 2020 Q.A.I.B. 78/2020 interpuesto por Eólica El Retiro, sociedad anónima promotora de inversión de capital variable por virtud de la cual se concede la suspensión provisional solicitada en el incidente a que esta queja se refiere. Segundo Tribunal Colegiado en Materia Administrativa Especializado en Competencia Económica, Radiodifusión y Telecomunicaciones con residencia en la Ciudad de México y jurisdicción en toda la República.
[29] Programa Sectorial Derivado del Plan Nacional de Desarrollo 2019-2024, published in the Diario Oficial de la Federación on July 8th, 2020.
[30] Id.

Special thanks to Tony H. Centurión, Shearman & Sterling Visiting Attorney, for his assistance with this alert.

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