Mexico President's Plan to Keep Power Grid in Hands of Nation May Violate USMCA

Mexican President Andrés Manuel López Obrador's constitutional reform would cancel contracts that allow 24 private plants to sell power into the national grid—a plan that also labels 239 private plants that sell energy straight to corporate clients in Mexico as illegal.

The plan would nix multiple long-term energy supply contracts and clean-energy preferential buying schemes, which typically affects foreign companies. Under the reform, government-operated plants that burn dirty fuel oil would have priority over private green energy suppliers.

Foreign investors built many of the private plants under a 2013 energy reform that Obrador now wants to scale back, but analysts said those operators could file complaints under USMCA stipulations promising equal treatment to foreigners, as well as provisions banning giving preference to local or government firms.

The private BBVA Research firm said the president's plan "will generate complaints under the USMCA," and that "Regarding the USMCA, the proposed reform violate at least Chapter 14 [investment], and Chapter 21 [Competition policy]," the firm wrote in an analysis of the plan.

For more reporting from the Associated Press, see below:

Mexico Power Grid
A constitutional reform presented by President Andrés Manuel López Obrador would cancel contracts under which some private power generating plants plants sell power into the national grid, declares “illegal” other private plants that sell energy direct to corporate clients in Mexico and would cancel many long-term energy supply contracts and clean-energy preferential buying schemes. In this February 22, 2020 file photo, a power generation plant stands idle near Huexca, Morelos state, Mexico. /Eduardo Verdugo, File/AP Photo

It puts private natural gas plants almost last in line—ahead of only government coal-fired plants—for rights to sell electricity into the grid, despite the fact they produce power about 24 percent more cheaply.

It guarantees the government utility a market share of "at least" 54 percent, contradicting promises to reserve 46 percent for private companies.

But Nahle didn't explain what the difference is between effectively shuttering a private power plant and nationalizing it. Both would have zero value for the owner and would be impossible to move.

Moreover, it would apparently be up to the state-owned utility, the Federal Electricity Commission, to determine whether it wanted to go over the "at least" 54 percent market share.

The president's bill—which needs a two-thirds majority to pass in Congress—is meant to shore up the finances of the federal utility, which currently produces only about 38 percent of the country's electricity because its plants are older, more expensive to run and more polluting.

López Obrador idolizes state-owned companies; in addition, he needs the government utility to burn all the excess fuel oil produced by Mexico's oil refineries, which he has expanded. A by-product of refining gasoline and diesel, nobody else wants fuel oil, which is dirty when burned.

So the president was eager to pressure the old ruling Institutional Revolutionary Party—which has the swing votes he needs to pass the reform—to support it. It is a long-shot bid: it was the Institutional Revolutionary Party that pushed through the 2013 privatization reform, and several leading members say they won't vote for a return to a government-dominated power sector.

"If this Constitutional reform isn't passed, these [private] companies will wind up taking over all of the electricity market and we will get what is happening in Spain right now, where electrical rates are going through the roof," López Obrador said.

Ironically, Nahle displayed a graph showing that, so far this year, Mexico's electricity prices have increased very little under the current, partially privatized scheme.

Oddly, the president's plan doesn't appear to focus on what many observers said is one of the real deficiencies of the current electrical system: the fact that private firms don't have to pay much of the cost of transmission for the power they produce.

But it would abolish all the regulatory, competition and oversight agencies in the power sector and fold them into the Federal Electricity Commission, allowing it to judge whether its own practices are fair.

The Federation of Mexican Employers, a business group, said: "This plan closes the door to competition and it is clear that if it is approved, in the short term it will lead to shortages, blackouts and ever higher rates for Mexican families."

The bill, which López Obrador sent to Congress earlier this month, also declares lithium a "strategic mineral" and reserves any future exploration and mining for the government, despite the fact Mexico has no state-owned company capable of producing lithium.

The move is likely to leave Mexico's only privately exploited mine, expected to start production in 2023, in the hands of a Chinese lithium company.