May 26, 2021
Throughout the past year, Mexican President Andrés Manuel López Obrador (AMLO) and his administration (the “AMLO Administration”) have vigorously pursued regulatory changes in favor of the state-owned companies the Federal Electricity Commission (Comisión Federal de Electricidad—CFE) and Mexican Petroleum (Petroleos Mexicanos—PEMEX), culminating in the past few months in the submission of amendments to existing law that, if fully implemented, would reorder these sectors in the Mexican economy. We recently explored the AMLO Administration’s amendments to the Oil & Gas Law (Ley de Hidrocarburos—LH) (such amendments, the “LH Amendments”) and their potential impacts on private investment in a client alert dated May 18, 2021.
In this note, we will discuss the main provisions of the AMLO Administration’s amendments to the Electric Industry Law (Ley de la Industria Eléctrica—LIE) (such amendments, the “LIE Amendment”) and likely impacts on private investment in the power sector in Mexico. We will also analyze the potential options available to investors that are likely to suffer the economic consequences of the LIE Amendment and/or the LH Amendments.
On March 9, 2021, the Mexican Ministry of Energy (Secretaría de Energía—Sener) published the LIE Amendment in the Official Gazette. The LIE Amendment is, hopefully, the conclusion to a series of governmental actions taken by the AMLO Administration to tip the scales of regulatory power in favor of the CFE, and to reverse the private-investment-friendly Constitutional energy reforms of 2013 and ensuing legislation that was enacted in 2014 (collectively, the “Energy Reform”). For further discussion of the regulatory actions of the AMLO Administration in the Mexican power sector leading up to the LIE Amendment, please see our prior three chapters in this series: Chapter 1, Chapter 2 and Chapter 3.
Key changes in the LIE Amendment include: (i) modifying the dispatch order of power plants to prioritize power produced by CFE irrespective of economic or efficiency merit; (ii) permitting legacy, including in particular CFE, power plants (i.e., those operating before the Energy Reform) to qualify for clean energy certificates (Certificados de Energía Limpia—CELs) for power generated; (iii) allowing CFE (as residential supplier) to purchase power directly from market participants and not exclusively from public energy auctions administered by the National Energy Control Center (Centro Nacional de Control de Energía—CENACE); (iv) mandating that the Energy Regulatory Commission (Comisión Reguladora de Energía—CRE) terminate all existing legacy self-supply permits; (v) mandating that new generation or supply permits by CRE only be granted if the relevant generation activities are consistent with the planning criteria outlined by SENER for the National Electric System (Sistema Eléctrico Nacional—SEN); and (vi) allowing CFE to renegotiate or terminate existing long-term power purchase agreements (PPAs) executed with independent power producers (IPPs) for certain legacy projects, to ensure adherence to law and profitability for the State.
The LIE Amendment may have serious adverse impacts on existing private investment in the Mexican power sector, while also jeopardizing the development of future projects and any appetite for investment therein.  Some of the main consequences of the LIE Amendment include:
Considering these potential risks associated with the LIE Amendments, several industry players have expressed concern about possible negative effects on their projects and are now looking more closely to the dispute resolution mechanisms and other options and means of recourse that may be available to them to protect their investments in Mexico. On the local side, judicial claims have been filed by various permit holders resulting in temporary and definitive injunctions suspending the effects of the LIE Amendment nationwide. However, AMLO has stated that his administration will pursue any means available to uphold the LIE Amendment, including sending a new bill to the Mexican congress to amend the Mexican Constitution and Amparo Law to render the LIE Amendment constitutional. Although AMLO’s Morena party does not hold enough seats in the Mexican Federal congress—nor in the local State congresses—to pass such a Constitutional amendment, AMLO’s statements make it clear that, hell or high water, unwinding the Energy Reform is a top priority for the AMLO Administration.
As can be surmised, the LIE Amendment is likely to create commercial and operational issues for power generators operating in Mexico, particularly as they confer specific advantages upon CFE. Similarly, the LH Amendments’ preferential treatment of Pemex and increases in the government’s discretionary powers could create significant adverse economic impacts on private investors in the oil and gas sector. Such issues may give rise to a number of complex commercial and investor-state disputes. The nature of any commercial dispute will depend on the specific terms of an investor’s commercial contracts, but could include claims against their counterparties (whether state-owned or otherwise) relating to breach of contract, force majeure, “material adverse change” and changes to local laws and regulations.
The nature of any investor-state dispute will turn on a combination of the specific actions taken by the government and the terms of the applicable investment treaties or laws. Mexico is a party to over 40 bilateral and multilateral investment treaties, which give foreign investors a direct right of action against the Mexican government for breaches of international law. Such treaties include bilateral agreements between Mexico and countries like Spain, France, Netherlands, China, Germany, the UAE, Korea and the United Kingdom, as well as multilateral treaties such as NAFTA, the USMCA and the CPTPP.
While the specific terms of each treaty will vary, they each will cover qualifying “investments” made by qualifying “investors,” as those terms are defined in the relevant treaties. These treaties will include investments such as 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 ultimate investor (or any intermediate company through which the investment is channeled), virtually all of the treaties should apply to investments in the Mexican power sector and oil and gas sector affected by the LIE Amendment and LH Amendments, respectively.
These treaties are intended to protect foreign investors from adverse government actions falling into three general categories:
First, investors are protected against the uncompensated expropriation (or taking) of their property. An expropriation can occur directly, where a government formally seizes title and possession to an investor’s property, or indirectly, where the investor retains title and possession of its property, but the value of that property is materially diminished through a government’s action (including the passage of laws and regulations). For example, the LH Amendments provide the Mexican government with a discretionary right to “intervene” in the operations of oil and gas permit holders if the government finds there is an imminent danger to national security, energy security or the national economy. These provisions, if acted upon, could be ripe for expropriation claims.
Second, the treaties protect foreign investors against discriminatory treatment. In particular, under the concept of National Treatment, a foreign investor may not be treated worse than a similarly situated domestic investor. Thus, for example, Mexico would have difficulty enacting measures that prefer domestic power generators over foreign power generators operating in the same sectors. Similarly, under the concept of Most Favored Nation, Mexico could not enact measures or take actions that treated foreign investors from one country better than foreign investors from other countries. Overall, the anti-discrimination provisions in investment treaties are intended to ensure that similarly situated parties are treated equally, regardless of nationality. The LIE Amendment appears to give CFE preferential treatment on commercially significant matters such as the electric grid dispatch order rules and access to clean energy certificates in a manner that will disadvantage and discriminate against foreign investors. This may give rise to claims of discriminatory treatment by foreign investors.
Third, foreign investors are protected against unfair and inequitable treatment and are entitled to the full protection and security of the law. These provisions require a host state to ensure a certain level of transparency and stability within the law and may hold a state responsible where its actions undermine a foreign investor’s reasonable expectations regarding the investment climate in which it is operating. The LIE Amendment likely will materially affect foreign investors’ expectations regarding the operating environment for power generation facilities, including, for example, the criteria in Mexico for access to clean energy certificates, expectations with respect to equal access to dispatch priority on Mexico’s power grid and the validity of existing power purchase agreements for legacy projects. Similarly, the LH Amendments will likely create substantial uncertainty in the oil and gas sector, such as through the new “deemed rejection” standard for permit holder requests for consent to assign oil and gas marketing permits if the government has not responded to such requests within the statutory period. That said, the availability of such a claim will depend upon the specific wording of a given treaty. For example, the scope of the “fair and equitable treatment” right in the USMCA is significantly more limited compared to several of Mexico’s bilateral treaties.
Investors wishing to bring investment treaty claims against the Mexican government in connection with the LIE Amendment or LH Amendments would need to do so in accordance with the procedures set out in the various treaties. Perhaps most importantly, investors will need to consider how a particular investment treaty affects their right to bring claims in the Mexican courts and, similarly, how challenging Mexico’s actions in the local courts could affect their ability to bring claims in arbitration. In this regard, treaties to which Mexico is a party typically fall within one of the following categories:
Most treaties to which Mexico is a party also require significant notice to the Mexican government before a claim can be submitted to arbitration, and include prescription periods which bar claims from being brought after a specific period of time (typically three or four years). For example, under several of Mexico’s bilateral treaties, an investor is required to provide at least six months’ notice to the Mexican government from the date of the event(s) giving rise to the claims before those claims can be submitted to arbitration. Investors are also typically obliged to engage in negotiations with the government before bringing claims in arbitration.
Accordingly, in addition to analyzing their substantive rights under the applicable treaties, investors seeking to bring claims in connection with the LIE Amendment or LH Amendments by way of arbitration under an investment treaty will need to carefully navigate these and other procedural requirements before bringing any such claims.
Special thanks to visiting attorney Pedro Lladó for his valuable assistance with this note.
 See “Amendments to Mexican Oil & Gas Midstream and Downstream Regulations,” SHEARMAN & STERLING, May 18, 2021.
 In the original Spanish, the “DECRETO por el que se reforman y adicionan diversas disposiciones de la Ley de la Industria Eléctrica,” Official Gazette website, March 9, 2021.
 supra note 1.
 Cristobal Riego, “Mexico’s electric power reform bill: Who will be most affected,” BNAMERICAS, Feb 26. 2021.
 Kirk Semple et al, “Mexico Set to Reshape Power Sector to Favor the State,”THE NEW YORK TIMES, March 7, 2021.
 Article 121 et. Seq. of the LIE and Article 7 et. seq. of the Ley de Translación Energética.
 Cristobal Riego, “Mexico power sector law will dampen investor appetite – experts,” BNAMERICAS, March 11, 2021.
 Ignacio Fariza, “México generará la electricidad más barata del mundo,” EL PAIS, Dec 8, 2017.
 In the original Spanish, the “Iniciativa con Proyecto de Decreto por el que se reforman y adicionan diversas disposiciones de la Ley de la Industria Eléctrica,” CAMARA DE DIPUTADOS, Feb 1, 2021.
 Article 12, 17 and 129 of the LIE.
 Article 33 et. Seq. of the LIE.
 Article 36 et Seq. of the Ley del Servicio Público de Energía Eléctrica (now derogated by the LIE).
 Andrew Baker, “Mexico’s CFE To Seek Renegotiation Of Natural Gas Supply Contracts,” Feb 11, 2019.
 David Saul, “Juez otorga suspensión definitiva a reforma eléctrica de AMLO,” March 19, 2021.
 Karol Garcia, “AMLO propondrá reforma constitucional si la justicia frena la reforma eléctrica,” March 17, 2021.
 See Article 14.6 of the USMCA which provides that “the mere fact that a Party takes or fails to take an action that may be inconsistent with an investor’s expectations does not constitute a breach of [the right to fair and equitable treatment] even if there is loss or damage to the covered investment as a result.” By comparison, Article 2(3) of the Mexico-Germany bilateral investment treaty provides that “[e]ach Contracting State shall in any case accord investments of the other Contracting State fair and equitable treatment” and that “[n]either Contracting State shall in any way impair by arbitrary or discriminatory measures the operation, management, maintenance, use, enjoyment or disposal of such investments.”
 See e.g. Article 9(3) of the Mexico-France bilateral investment treaty; Article 14.D.5 of the USMCA; Article 2(3) of the Schedule to the Mexico-Netherlands bilateral investment treaty.
 See e.g. Article 12 of the Mexico-China bilateral investment treaty; Article 10 of the Mexico-UAE bilateral investment treaty; Annex 1, Section 2 of the Mexico-Italy bilateral investment treaty.