Last year, King & Spalding released an informative statement Remark concerning a new bill (“lie bill”) in the electricity sector presented by Mexican President Andrés Manuel López Obrador (“AMLO”) which, after an expedited vote by Congress, took effect in March 2021. Among multiple amendments, the LIE bill effectively revoked several important rights previously granted to private companies during the historic energy reform of 2012-2013 in Mexico, while seeking to guarantee the dominant position of the Mexican national company: Comisión Federal de Electricidad (generally called “CFE”). In summary, the LIE Bill:
- changes grid dispatch rules to give priority to electricity produced by the Mexican utility CFE, despite its higher cost and higher polluting emissions compared to other sources;
- grants clean energy certificates to CFE power plants, even if they were not initially eligible to receive such certificates, diluting the value of certificates that have been granted to clean energy producers to incentivize investment;
- review or revoke existing self-supply authorizations, in response to AMLO’s allegation that such arrangements were obtained through fraud and are detrimental to CFE; and
- invites to review the long-term power purchase agreements signed with investors, among other changes. These changes seriously undermine the economic viability of private energy projects and significantly alter the previous regime that investors relied on to invest in Mexico’s electricity sector.
Following its entry into force, several parties challenged the LIE bill on different fronts. Many private companies in the electricity sector have filed constitutional challenges (known in Mexico as amparos) against the bill. At the same time, an opposition legislative group, a Mexican federal state and the Mexican Antitrust Agency (COFECE), filed their own legal challenges arguing among others that the LIE bill contravened the principles of competition and the environment enshrined in the constitution.
The AMLO administration vigorously resisted these legal challenges to the LIE bill. In 2021, however, approximately 200 companies affected by the LIE bill have obtained effective stays in these constitutional challenges in various district courts. Consequently, the AMLO administration was prevented from enforcing the contested provisions of the LIE bill and, in practice, the LIE bill had little or no effect in the electricity sector at this day.
Against this contentious backdrop, last week Mexico’s Supreme Court heard the first constitutional challenge to the LIE bill in a much-anticipated session.
THE SUPREME COURT’S VOTE
On April 7, 2022, the Supreme Court ruled on the constitutionality challenge filed by the legislative group. Under Mexican law, a supermajority vote of eight out of eleven justices was required for the Supreme Court to declare the LIE bill unconstitutional. After a long session, only seven justices ruled that the LIE bill was unconstitutional, while the other four justices voted to uphold the central amendments contained in the LIE bill.
In particular, the Supreme Court’s decision does not bind the district courts presiding over the amparo actions, which means that these courts may still find the LIE bill unconstitutional. Irrespective of the decisions of the district courts, the amparo suits brought by private companies should eventually reach the Supreme Court. Such appeals, however, would be heard by specific chambers of the Supreme Court and would not be subject to the supermajority vote requirement to bar the application of the law as unconstitutional. Because of these different rules governing private and public challenges to the constitutionality of the LIE bill, the Supreme Court is expected to disallow the application of the LIE bill as unconstitutional in many private sectors. amparo actions, even though the entire Supreme Court declined to declare the LIE bill unconstitutional on its face because of the supermajority requirement.
Notwithstanding that the majority of justices sided with the position of unconstitutionality and that other constitutional challenges (including amparos) are still pending, AMLO considered the recent court decision a political victory and announced that the LIE bill would come into effect immediately, starting with the revocation of self-supply permits and the revision of agreements long-term power purchase agreements with investors.
RELEVANT CONSTITUTIONAL REFORM
Partly in response to previous court rulings declaring the LIE bill unconstitutional, the AMLO administration launched a separate bill to amend certain constitutional provisions affecting the energy industry (the “Constitutional reform”), which is currently being discussed in the Mexican Congress. In summary, the constitutional reform seeks to revoke power generation licenses and green energy incentives, limit power generation by private energy companies to 46%, and nationalize Mexico’s lithium minerals. Although the LIE Bill and the Constitutional Reform overlap in their objective of favoring the CFE over private companies establishing a new legal regime, the Constitutional Reform is stand-alone legislation that, if enacted, would not be challenged as unconstitutional by amparo or other proceedings brought before the Mexican courts.
The lower house of Congress will vote on constitutional reform in the coming week. Then the reform will go to the Senate for an additional voting session. To pass, AMLO and his party, MORENA, need a two-thirds majority in both chambers, which they do not have by default. The fate of constitutional reform ultimately lies with opposition parties who have sent mixed signals. We will closely monitor the Congressional vote and continue to provide updates.
To date, the Mexican judiciary has effectively blocked the AMLO administration’s ambitions to change the private energy investment regime that Mexico introduced in 2012-2013, but the recent Supreme Court decision on the constitutionality of the LIE bill and the upcoming vote on constitutional reform call into question whether Mexico’s judiciary can prevent these regulatory changes from taking effect in the long term.
If the AMLO administration succeeds in overcoming judicial opposition to the regulatory changes or decides to implement them in defiance of amparo injunctions issued in particular stocks, investors harmed by the measures may have no further legal recourse. mexican. However, foreign investors may continue to have recourse under international investment treaties. Mexico has investment treaties and trade agreements with approximately 45 countries. These treaties and agreements protect foreign investors from, among other things, discriminatory, arbitrary, unjust and inequitable treatment by the Mexican government, as well as direct and indirect expropriation of their investments. Like other countries that have changed their energy regulatory frameworks in ways that have harmed investments made relying on the previous regime, Mexico could see a number of investment treaty arbitrations initiated. by foreign investors.
However, it is important to note that some of these investment treaties contain statutes of limitations or provisions aimed at curbing “forum shopping”, which could complicate the ability of investors to seek redress for treaty violations before a independent arbitral tribunal. We therefore urge any investor considering filing or pursuing domestic actions in Mexican courts, such as amparos, to consider their potential remedies under applicable investment treaties in parallel, as part of a legal strategy overall.