Mexico's electricity sector is plagued by legal chaos and doubt

The efforts of President Andres Manuel Lopez Obrador to reform Mexico's electricity sector in favor of the state-owned power firm have sparked hundreds of lawsuits. Businesspeople claim that this uncertainty is costing them jobs and hindering private investment.

21 April 2022 Thursday 12:01
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Mexico's electricity sector is plagued by legal chaos and doubt

Because of this uncertainty, a solar panel company was required to agree to a clause in its contract that it would buy back 3,000 panels from a customer if there were any changes to laws that could affect their viability.

Manuel Vegara's company Pireos Power, which installs solar panels for homes and commercial projects, doesn't have to purchase back the panels. The law change of last year has not affected his client. He claims he lost projects last yea with two clients, each worth $3 million. They were uncertain about the future. His workforce has been reduced from 90 to 35.

Vegara stated, "We have had to live with small installations at home or with clients who were more brave and who despite uncertainty have been able to invest."

Although the president's party was able to reform the electrical industry law last summer, Lopez Obrador was furious when the lower chamber of Mexico’s congress voted down a constitutional overhaul of the sector that the president had proposed. Companies large and small have found it difficult to cope with the uncertainty.

Iberdrola, the Spanish energy giant, stated in May 2019: "Mexico generates trust: Iberdrola will make up to $5 billion under the current federal administration." The company did not disclose any details.

Vegara stated that when the opposition parties blocked constitutional reform Sunday, the initial feeling was relief. "But, we know that the president will not leave it that way, and the uncertainty won't be resolved even though the storm is over."

The big power companies are silent and unwilling to take on risk with their investments. Lopez Obrador has made Iberdrola the most frequent target. The American Chamber of Commerce of Mexico represents some of the largest energy companies in the United States.

Mexico's Business Coordinating Council urged again this week "a clear and transparent legal framework."

Instead, we have legal chaos.

Miriam Grunstein of Rice University's James Baker Institute said that Mexico has two contradictory systems at the moment.

The Constitution is an open-market document that has been reformed since 2013. The electricity law was also reformed last year in order to favor state-owned power stations over private. These changes permit retroactive revision and cancellation of contracts.

These changes were made to correct past abuses and provide foreign companies with excessive benefits, such as being exempted from certain payments. Companies claim that the government restricts free competition by changing rules mid-game and violating their rights.

There have been hundreds of lawsuits that followed. In most cases, companies have obtained injunctions to protect themselves, at least temporarily.

Grunstein stated that in practice, "in the same sector you're giving black to some and white to others and the distinction is who has injunctions" It's a system that favors companies who can resist more," Grunstein said. Many companies are tired and considering international arbitration.

The Supreme Court has also weighed in on the matter, but it is not clear. While the majority of justices deemed the law unconstitutional and did not vote to repeal it, they were unanimous in their decision. U.S. U.S. Ambassador to Mexico Ken Salazar stated that more lawsuits would follow.

Solutions will not be easy for a divided Congress. While some in the electricity sector believe that negotiations with companies are the only way to get out of this mess, others think that it is not possible.

The private sector is adamant that they want certainty in terms of when, how and where to invest. This would mean that the law needs to be reformed.

Grunstein says that the United States is becoming more irritable, but has not yet taken any significant action. He believes that international markets will put pressure on America.

Vegara stated, "It's an argument between two models and two visions for the country." There is one side, which may have had abuses, and the other, which is the neoliberal model. On the other, there is the state-led approach, which slows investment and puts economic growth, the environment, and job creation at stake. Between are the citizens who don’t know if they will be paying more for electricity.

Vegara believes that the solution lies somewhere between the two extremes: a model that promotes free competition, encourages clean energy and allows Mexico to meet its climate commitments while ensuring that all Mexicans, especially the poorest, have access to good electricity service at affordable prices.

Vegara stated that the visions of Mexico currently seem "irreconcilable", at least for Lopez Obrador's presidency.


 

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