By Oscar Ocampo*
International trade relies on principles that parties agree to respect and promote. Predictability is, hence, an indispensable condition for free trade agreements to be effective. The great success of the North American Free Trade Agreement (NAFTA) 27 years ago was that, for the first time in its history, Mexico committed to the rule of law in the exporting sector of the economy and in foreign investment. Luis Rubio underlines that NAFTA represented the equivalent of a “straightjacket” for the Mexican government by limiting the margin for discretion in economic affairs.
President Andrés Manuel López Obrador’s bill to reform the Electric Industry Law currently under discussion in Mexico’s Lower House threatens more than investment in the electricity market. It is not an understatement to argue that the competitiveness of Mexico is at stake if the government insists on passing a bill that shamelessly violates the United States-Mexico-Canada Agreement (USMCA).
Mexican government officials have insisted that the energy sector is not part of the USMCA. This is false. The new electricity bill violates the USMCA by changing regulatory conditions. It represents an indirect expropriation. It makes it very difficult to operate assets and significantly changes the conditions in which investments were made. It aims to alter the energy dispatch mechanism from an economic merit order to an ownership merit that benefits the state-owned utility -the Federal Electricity Commission (CFE)- over private firms. It further discourages investment by eliminating the obligation of CFE’s retail division to buy energy through auctions or competitive processes and incentives to install new renewable capacity (Clean Energy Certificates).
The bill also aims to eliminate self-supply permits. Before the sector’s liberalization, this mechanism allowed privates to partner and to produce their own electricity and supply their partners. After Mexico’s landmark 2013 energy sector reform, self-supply permits became vested contracts for the reminder of their lifespan. Accelerating the death of self-supply permits would bring no benefit to CFE and would instead further reduce trust in Mexico’s commitment to the rule of law by making a legal amendment retroactive.
Additionally, the new electricity bill violates USMCA’s provisions regarding state-owned enterprises by benefiting a state participant over other participants in the market. The proposed changes violate the treaty’s investment provisions, given that the electricity sector is covered by the deal’s investor-state dispute settlement mechanism between Mexico and the United States, together with six other sectors. If the bill is enacted, Mexico will likely have to defend its energy policy before international arbitration panels.
It took long for Mexico to ascertain that only by playing by the rules the country could compete and succeed in global markets. The results are visible in the regions that were able to become “North American” in the economic sense. President López Obrador has been clear in his goal of developing Mexico’s worse-off regions, especially in the country’s south-southeast. The electricity bill would undermine this objective by discouraging investment, not only in the electricity sector but overall in the Mexican economy. A better approach would be to harness the competitiveness of North American energy markets to catalyze development of these states by promoting investment in energy infrastructure. Without reliable access to electricity, these regions will not be able to insert themselves into the North American supply chain.
The success in renegotiating NAFTA and saving the North American trade partnership with the USMCA would turn meaningless if the Mexican government does not understand the value of a predictable environment where investors have the certainty that their lawful rights will not be threatened by the political fluctuations of the time.
*Oscar Ocampo is is energy coordinator at the Mexican Institute for Competitiveness (IMCO), an independent think tank that produces research and public policy analysis to improve Mexico’s standing in the global economy. Twitter: @OscarOcampo & Twitter: @IMCOmx