Chihuahua, Chih., October 4th, 2021.

Dear Clients and Friends,

On October 1st, 2021, the President of Mexico, Andres Manuel López Obrador, announced  the submission of a bill of constitutional reform on energy matters (mainly focused on the electricity industry) before the House of Representatives (the “Bill”).

The Bill (which content is already included in the Parliamentary Gazette of the House of Representatives) seeks to amend Articles 25, 27 and 28 of the Political Constitution of the United Mexican States (“CPEUM”), with 9 saving provisions that regulate its transitory regime.

The Bill aspires to thwart the effects of the participation of the private sector in the power industry, not only since the 2013 energy reform, but from the beginning of the opening of the sector in 1992.

Likewise, notwithstanding that the Bill is mainly focused in the power industry, its scope would also encroach other industries, such as hydrocarbons and mining.

In a nutshell, the Bill resonates in the following relevant aspects:

• ‘Nationalization’ of the electricity industry: The Bill proposes that the activities inherent to the electricity (including generation, transmission, distribution, and supply) are considered as a strategic area of the Mexican State. For such purposes, the following is introduced:
  • • The overhaul of the Comisión Federal de Electricidad (“CFE”) as an “organism of the State” (with budget and administrative autonomy), entrusted with all the activities of the Mexican electricity industry, including the planning of the National Electric Grid).
    • The revocation of all permits and power purchase agreements of the private sector.
    • The vertical and horizontal merger of all current productive companies (of generation, transmission and distribution, supply, et al) of CFE in a single entity, disappearing all of its subsidiary and affiliate productive companies (except certain telecommunications and fuel marketing companies).
    • The reintegration of the National Center of Energy Control (“CENACE”) -current independent operator of the National Electric Grid- to CFE’s structure.
    • New power dispatch model, in the CFE’s purview, which considers (at least) 54% of the electricity being dispatched by CFE’s power stations, leaving the remaining 46% in the hands of private generators recognized by CFE, by being Independent Power Producers (without surpluses), with projects developed under the Electricity Industry Law regimen and/or “truly” self-supply power stations, meaning, which have not sold electricity to third parties.
      The production of these power stations would be acquired by CFE (through CENACE) considering the most efficient production costs and new financial hedges.
      In principle, it is excluded from these structures the generation stemming from self-supply partnerships and the surpluses of Independent Power Producers.
    • Determination of the transmission and distribution rates directly by CFE.

• Abolition of regulators: The Bill also entails the elimination of the Energy Regulatory Commission (“CRE”) and the National Hydrocarbons Commission (“CNH”), which structures and authority will integrate to the Ministry of Energy.
  The foregoing affects (perhaps unintentionally) the totality of the value chain of the energy sector, considering that the CNH and CRE regulate the activities of exploration and production, just as transportation, storage, distribution, and marketing of hydrocarbons as well, respectively.
• Makeover of Pemex: As collateral effect and notwithstanding that the Bill does not explicitly mention Petróleos Mexicanos (“Pemex”), from the proposed language it is also inferred the change of Pemex into an “organism of the State”. In this vein, it is not clear inter alia if Pemex will be subject to the same administrative restructuring mutatis mutandis to the CFE (as mentioned in item (i) above).
• Energy Transition: The Bill proposes the creation of a new “Energy Transition” concept, which is defined as a priority area of the State, by means of which an industry policy shall be established for electricity, manufacturing of equipment and the creation of national, social, and private companies with domestic capital.
  However, the Bill proposes to eliminate the Clean Energy Certificates as an instrument of the Mexican energy transition.
• Strategic minerals: In addition to energy matters, the Bill also includes amendments to the mining industry, through the designation of “strategic” minerals (including but not limited to lithium), which may be exclusively tapped by the Nation. The current mining concessions over such minerals shall only be maintained to the extent it is evidenced that the exploration activities have been undertaken.

The Bill is intended to become effective as of the following day of its publication of the Federal Register, and its implementing legislation shall be approved by Congress within the following 180 days.

The Bill was submitted yesterday to the House of Representative, which shall act as origin Chamber for discussion and approval of the Bill, while the Senate shall act as reviewing Chamber. It is important to note that since the Bill entails a reform of the CPEUN, its approval requires a super-majority vote (2/3rds of the members of each Chamber) and the approval of the majority of the state legislatures.

Moreover, notwithstanding its constitutional nature, the Bill (if approved) may usher multiple international claims; specially in regards of investor-State protection and dispute resolution mechanisms, provided in several bilateral investment protection treaties entered into by the Mexican State (including the recently ratified United States-Mexico-Canada Agreement).