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Thursday, December 01, 2022

Explainer: why is America upset with Mexico’s electricity law?

MEXICO CITY ( Associated Press) — Mexico’s Congress is set to vote on a constitutional reform promoted by President Andres Manuel López Obrador that would undo much of the market opening up in electric power made by his predecessor. It is unclear whether López Obrador has the votes to pursue reform. But the US and other countries have raised concerns that the move would affect foreign investors and violate trade agreements.

Why did Mexico invite foreign companies?

Before the 2013 energy reform, Mexico faced a number of problems: high electricity rates, scarce generation capacity and dirty power plants that often burned fuel oil to produce electricity. So the government built pipelines to import clean American natural gas, allowed companies to buy power from independent generators, and encouraged foreign and private firms to install clean wind-powered turbines or gas-powered plants.

Why does the president of Mexico want to undo the reform?

Mexico would have given a lot of incentives to private and foreign firms. They received preferential treatment in pricing and procurement, and did not have to pay fees for power distribution through transmission lines owned by the state-owned utility, the Federal Electricity Commission, and government-owned.

The state-owned utility lost market share and income, but still had to maintain transmission lines. Worse, with some government plants inactive, fuel oil—a dirty byproduct of Mexico’s ancient oil refineries—began to build up until there was no place to store it.

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What is the goal of the current reform?

López Obrador prefers state-owned companies and does not want the Federal Electricity Commission to go bankrupt or lose much market share. He therefore proposes to guarantee the Commission at least 54% market share of the electricity market, with private firms “up to 46%”. The commission would prioritize, purchasing power from its own plants first, while clean power from private generators often would be last in the line.

For example, the reform puts private natural gas plants almost last in line – ahead only of government coal-fired plants – for the rights to sell electricity to the grid, despite the fact that they generate electricity about 24% more cheaply. produce.

What are the objections to the proposal?

Private companies, mainly from Spain and the United States, invested billions of dollars in Mexico to build wind, solar and gas-powered plants under the terms of the 2013 reform. Now suddenly the government wants to change those rules.

And companies with plants, factories and shops in Mexico needed to plan how much their energy would cost and how green the energy would be, so they often signed long-term power supply contracts with private generators. These contracts can now be declared invalid.

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Mexican laws require free competition in the electricity industry. And the US-Mexico-Canada Free Trade Agreement, or USMCA, prevents member countries from passing laws in favor of domestic producers or state-owned firms.

What is likely to happen?

Lots of lawsuits and possibly trade disputes. Critics say the reform will hurt investors and their confidence in Mexico. The companies are likely to file for a court injunction, and the US government may file a USMCA complaint, which could result in compensatory charges on Mexican products.

López Obrador has already passed a law giving state utilities more discretion in deciding whose electricity to buy, but it has been stalled by court challenges. The president cannot get the two-thirds majority in Congress, which is needed to pass the constitutional reforms he wants.

Critics say the reforms could force Mexicans and US retail and auto companies operating in Mexico to buy more expensive, dirty electricity.

Will only electricity be affected?

Number López Obrador also includes a clause declaring lithium – a key component of batteries for electric cars and other equipment – a strategic mineral that only the government can mine. A Chinese company has just invested in an open Mexican mine. Even if the electrical reforms fail, López Obrador has vowed to send another bill separately to Congress on the lithium issue.

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