The Future Shape of Mexico’s Energy Sector Litigation Landscape
The Mexican government’s energy policy has led to a string of ongoing disputes in recent years. Galicia’s Daniel Amézquita and Iván Valdespino outline various constitutional challenges to the current administration’s reforms and what it will mean if they succeed.
Iván Valdespino
The past three years have set the standard for energy litigation in Mexico. Since the end of 2019, both litigants and judges have delved into highly complex technical and legal disputes arising from the current federal administration’s energy policy.
The first widespread measures – for example, the cancellation of power auctions and the modifications to the Clean Energy Certificates regime – occurred between 2018 and 2019. However, the larger disputes coincided with the start of the COVID-19 pandemic in Mexico. In fact, at the time, the pandemic was used by:
- the National Center for Energy Control to justify suspending the pre-operational tests of dozens of private clean energy projects – under the guise of guaranteeing the “reliability” and “security” of the National Electric System; and
- the Energy Regulatory Commission (Comisión Reguladora de Energía, or CRE) to avoid resolving permit applications or their modifications.
Further Measures to Reform the Mexican Electricity and Hydrocarbons Markets
These measures were followed by a public policy whereby the Ministry of Energy sought to limit the operation of private renewable energy projects, owing to their “intermittent” nature. Resolutions were introduced by which the CRE restricted “grandfathered” permit-holders from adding new partners to their power supply scheme or by which said body disproportionately increased the wheeling tariffs of power transmission and distribution services.
On the hydrocarbons side, Congress approved legal reforms that threatened the permits held by private companies and eliminated the asymmetrical regulation imposed on PEMEX (Petróleos Mexicanos, the Mexican state-owned petroleum company managed and operated by the Mexican government). The government also recently approved policies that allowed the transportation of natural gas through the national integrated system only to those companies that acquired their gas exclusively from state companies.
What is the LIE Reform?
Disputes escalated in March 2021, when Congress endorsed a Presidential initiative and approved reforms (the “LIE Reform”) to the Power Industry Law (Ley de la Industria Eléctrica, or LIE) for the express purpose of strengthening the government power company, the Federal Electricity Commission (Comisión Federal de Electricidad,or CFE).
Among other things, the LIE Reform granted the CFE’s power plants priority in terms of power dispatch and access to the national grid in order to cover the national demand – regardless of higher generation costs and more polluting technology. Any remaining demand was covered by relegating the dispatch to the rest of the private power plants.
“The Mexican government has been unable to implement all the measures, owing to industry participants, civil associations, consumers and citizens bringing hundreds of constitutional actions.”
As of February 2023, the government has been unable to implement all the above-mentioned measures, despite the strong political pressure behind them. This is down to industry participants, civil associations, consumers and citizens bringing hundreds of constitutional actions, resulting in injunctions granted by a Federal Judiciary that – as well as working tirelessly under strict sanitary conditions – has proved to be truly independent. Measures that have not already been invalidated continue to be suspended with full effect, thanks to innovative and even courageous judicial decisions.
In light of such judicial rulings, at the end of 2021 the Mexican President proposed a constitutional reform that – in addition to avoiding more constitutional challenges – sought to:
- reinstate the state monopoly in the power industry and limit private participation;
- cancel existing power permits and contracts; and
- eliminate autonomous regulatory bodies and the independent operation of the electricity system.
Fortunately, in April 2022, the initiative was rejected by the House of Representatives after the government failed to obtain the required qualified majority.
Is the LIE Reform constitutional?
That same month, the Mexican Supreme Court of Justice (Suprema Corte de Justicia de la Nación, or SCJN) resolved the constitutional actions filed against the LIE Reform by members of the Senate, the Federal Antitrust Commission, and a local government. However, following a hearing that was blatantly manipulated by the then-President of the SCJN, the eight votes required to invalidate the LIE Reform were not received.
“Relying on the view held by the majority of Supreme Court Justices, the district courts declared the LIE Reform unconstitutional.”
Although the government viewed this dismissal as a success, the result did not imply a recognition of the constitutionality of the LIE Reform – much less a guideline for the lower courts that would resolve the hundreds of amparos (writs of protection) filed against it. In fact, relying on the view held by the simple majority of the Supreme Court Justices, the district courts subsequently issued first-instance rulings declaring the LIE Reform unconstitutional.
The SCJN, under Justice Norma Lucía Piña’s new Presidency assumed at the beginning of 2023, recently chose to resume its jurisdiction to resolve the appeals filed by the government against said rulings. In so doing, the SCJN aims to set a precedent for the remaining amparos against the LIE Reform that are in process.
What will it take to invalidate the LIE Reform?
What follows in the SCJN will be interesting, given that there are two possible ways to finally invalidate the LIE Reform.
- The first – and most difficult – would be through the issuance of a binding precedent for the lower courts, which requires a qualified majority of the Justices hearing the case.
- The second – and most likely – would be through a judgment in the plaintiffs’ favour, whereby the SCJN also acknowledges and grants erga omnes effects. In such a scenario, a simple majority of the Supreme Court Justices would suffice.
Although amparo proceedings are governed by the “relativity principle” (ie, the judgment only protects the plaintiff who requested the amparo), the SCJN itself has recognised that amparo judgments may benefit third parties and even have general effects when the rights at stake involve collective interests. In this case, such interests include:
- the fundamental right to a healthy environment; and
- the free competition principles enshrined in the Mexican constitution for the benefit of consumers.
The invalidation of the LIE Reform by the SCJN could be the perfect – and legal – excuse for the Mexican government to unravel the consultations initiated by the USA and Canada against Mexico’s energy policies under the Agreement between the United States of America, the United Mexican States, and Canada (USMCA).
Repealing the LIE Reform would also diminish the political impact that could put pressure on the Mexican President to unilaterally “withdraw” his current position in the face of his voters. Thus, the Mexican President could “dissociate” from the SCJN’s decision while avoiding the devastating economic consequences that would result from losing in arbitration panels.
The Outlook
If Mexican courts keep ruling against measures that openly contradict the current constitutional framework, the country will display a solid Rule of Law that could regain the confidence of the energy industry. As a result, the flow of investments needed to meet the new national and global challenges presented by decarbonisation, “green” products, the use of alternative energies, and nearshoring would likely continue.
“Mexico could regain the confidence of the energy industry.”
Energy disputes relating to technical setbacks imposed on specific private projects look set to persist in the foreseeable future. However, disputes concerning generalised measures will probably decrease. This is partly a result of the growing judicial precedents, but mostly because the constitutional and legal framework in force since 2013 and 2014 remains unchanged – thanks to its ironclad defence by litigants, experts, and organised civil society.
Galicia Abogados
