Since 2020 Mexican government has implemented a set of measures to benefit national companies, PEMEX and CFE. Those measures include legal reforms, mainly to the Electric Power Industry Law, the denial of permits to private companies and closing of private energy plants. Such measures have been challenged by companies, and in some cases its application was halted.
On July 20, 2022, United States requested consultations pursuant to articles 31.2 and 31.4 of the USMCA regarding various measures adopted by Mexico to favor its state- owned companies, PEMEX and CFE. The American government alleged that such measures were in violation of the commitments acquired under the treaty. Canada joined United States request for consultations.
The main contested measures that gave rise to the consultation are described below, as well as the articles that are considered violated.
The measures that the Mexican government has implemented and that give rise to the consultations are related to electricity, permits issuance, diesel sulfur content, import, storage, and transportation of fuels (gasoline, diesel and jet fuel).
It should be noted that in no case the measures subject to consultation are related to the exploration and production of hydrocarbons or to the content of Chapter 8. The monopoly for the distribution of electricity provided for in the Constitution is not under discussion either.
Additionally, it is worth bearing in mind that in its initial brief, United States stated the measures that were allegedly in violation of the USMCA without going into detail on the specific cases in which said measures materialized. Please note that the consultation proceedings do not affect the right of private companies to request arbitration proceedings.
1. The reforms to the Electric Power Industry Law that required Cenace to privilege the energy produced by CFE over the one produced by private companies.
This measure is considered a violation of articles 2.3 and 14.4 of the USMCA, for not complying with the principle of national treatment and for granting less favorable treatment to American investments, compared to Mexican ones.
• Article 2.3 establishes the principle of national treatment, obliging the States Parties to grant “treatment no less favorable than the most favorable treatment that the regional level of government grants to any similar goods”.
• Article 14.4, which obliges the States Parties to grant “a treatment no less favorable than that which it grants, in similar circumstances, to investments in its territory by its own investors with regard to the establishment, acquisition, expansion, management, conduction, operation and sale or other form of disposition of investments”.
It should be noted that the same article states that the term ” in like circumstances” must be interpreted to include all circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives. The foregoing means that it is not possible to differentiate the treatment granted to foreign investments, with respect to national ones, arguing “legitimate objectives of public welfare”, because doing so is discriminating against and affecting private investments by companies from the United States and Canada.
2. Inactivity, delays, refusals, suspensions by regulators in permits for the operation of private plants.
Among the measures identified as violating the USMCA are suspensions and revocations of permits to operate renewable energy plants, including solar; import of gasoline and electricity; fuel storage and gas station construction.
The measures are considered in violation of articles 2.3 and 14.4, for not complying with the principle of national treatment and for granting less favorable treatment to American investments, compared to Mexican ones.
Additionally, such measures are considered in violation of article 2.11 because they imply a restriction on the import/export of goods; to 22.5.2 because the actions of the regulators have been biased against private companies; to 29.3 because the application of the law is not consistent, it is partial, and it is not reasonable.
• Article 2.11 establishes that the parties may not impose prohibitions or restrictions on the importation of goods, other than those agreed upon in the treaty. This violation occurs especially in permits to import gasoline and other fuels that harm American companies that have invested in Mexico for the construction and operation of service stations (gas stations).
• Article 22.5.2 states that “Each Party shall ensure that any administrative body that the Party establishes or maintains that regulates a State-owned company, exercises its regulatory discretionary powers impartially with respect to the companies it regulates, including companies that they are not state-owned companies.”
3. Delay in the entry into force of the NOM that forced PEMEX to sell low-sulfur diesel.
In 2019, the CRE issued a resolution to delay the entry into force of NOM-016-CRE- 2016, which established the maximum sulfur content that fuels could have.
The measure is considered a violation of articles 2.3 and 22.5.2, for not complying with the principle of national treatment and for exercising its regulatory functions in a partial manner, with respect to the regulated, with respect to PEMEX as a State company.
4. Measures related to the transportation of natural gas.
Among the measures denounced are the various communications issued by the authorities of the Mexican energy sector, related to the supply guarantee strategy issued by SENER, which requires natural gas transportation users to acquire gas from CFE or PEMEX. Additionally, SENER asked CENAGAS to privilege the transportation of gas for the CFE when there is a capacity reserve in the transportation systems (pipelines). SENER requested the CRE to modify the contracting terms and conditions of CENAGAS, which is also considered a violation of the USMCA.
The measures are considered in violation of Articles 2.3 and 2.11, for granting less favorable treatment to imported products than to national products and for requiring the contracting of the transport service to the CFE.
Eight years after the energy reform, those of us who work on its implementation, whether in the public or private sector, know that not everything was perfect, it was a big step to promote competition and improve the capacities of the sector, including PEMEX and CFE. However, it is necessary to reflect on whether the expected results were obtained, recognize the abuses that occurred and accept that there are areas for improvement.
Not everything is black and white, and Mexico cannot erase the reform by implementing measures against its prior commitments.
Today the government can recognize the successes of the 2013 reform and correct the existing errors to make the energy sector serve to guarantee the people needs for electricity at the best price, always guaranteeing compliance with Mexico’s obligations under USMCA.