Under the notion that Mexico’s state-owned utility (CFE per its Spanish acronym) needs to be “rescued”, that electricity has been “stolen by the private sector” and that it must be “returned to the people”, President Andrés Manuel López Obrador submitted to Congress a constitutional bill to reform the Mexican electric sector. The bill not only reverses the landmark 2014 energy reform that opened open the Mexican electricity market to private participation, but it grants the CFE a 1970s-type control over the sector’s future. If approved, the changes would severely limit private participation in electricity and would force independent energy regulators to be absorbed by the central government. Additionally, the bill creates a state monopoly over mining deposits of lithium –a key element for rechargeable batteries and other industries. The proposal follows previous attempts by the López Obrador administration to overhaul the electricity sector –through new regulations and changes to secondary laws– which have basically stalled in the Mexican courts after being declared unconstitutional. The fate of the bill is uncertain. With the President and his party lacking the supermajority needed to amend the Constitution, his coalition in Congress and the opposition parties are counting and whipping up votes. Moreover, the proposed reform reflects quite well the current state of Mexico’s overall political landscape and showcases the divergent development paths that the country could take in the future.
To start with, as a common trademark of the López Obrador administration, this new constitutional bill has been framed as part of epic battle of historic proportions, rather than a serious policy debate about what is convenient for the country. The President and his surrogates will often refer to former president Adolfo López Mateos who during Mexico’s one-party rule era nationalized the electricity industry in 1960. López Mateos did so, however, in a completely different context, when getting electric power to far away and impoverished regions of Mexico was absolutely necessary and could only be achieved with government’s heavy investment. Today, over 98 percent of Mexican households have electricity and the main challenge is to produce enough power at competitive prices to meet a growing demand. This can only be accomplished with robust participation of the private sector. Trying to make a mark in history is undoubtedly part of the job description of any President, but the way the debate has been framed is not conducive of a productive discussion on how the electricity sector can actually help improve the livelihoods of the average Mexican.
President López Obrador’s position on the power industry is hardly surprising. An ill-conceived commitment to energy sovereignty and self-sufficiency, and the idea that a government-controlled energy sector can be de spearhead of economic development and social equalization has been at the heart of his political philosophy for decades. What it is surprising –at least to me– is that someone who had managed to gain the reputation of a pragmatic leader with respect to business and capital during his time as Mayor of Mexico City, has offered very little room for compromise with the private sector and picked up a personal fight with companies that have either invested to provide electric power as their business, or that have benefit from buying cheaper electricity provided by private generators. The President often cites the figure that 8 of every 10 Mexican pesos of investment must come from private capital if the Mexican economy is to grow at the moderate rate of 4 percent. His approach towards the private sector will not only alienate investment from the energy sector, but from the whole economy. In two important areas -labor outsourcing and the pension system- the López Obrador administration achieved important reforms trough compromise with opposition parties and the business sector, but in energy it seems that ideology and political power are what drives policy.
In a recent interview, Mexico’s Energy Secretary stated that “nobody from abroad will tell us if the reform is good or bad”. The quote might serve well to rally up López Obrador’s nationalist base, but I think the Secretary misses the point. The Mexican government can certainly decide how to manage energy policy and propose constitutional changes accordingly. It must do so, however, in a way that is consistent with its international obligations and without prejudice to the rights and remedies that its partners have under different trade and investment agreements. As the saying goes: you can’t have your cake and eat it too. For example, President López Obrador had an important win by bringing to fruition the renewed North American trade agreement (USMCA). But he seems far less content in understanding that the deal comes with strings attached. Even as the Biden administration has shown willingness to work and engage constructively with López Obrador, investment disputes and international litigation could soon become the only road for foreign investors in the energy sector, including those from the United States.
At the same time, Mexico which was recently viewed as an up-and-coming global leader in renewables has all but halted investment in these sources of energy since the beginning of President López Obrador’s term. The explanation offered by the administration to impose roadblocks to private investment in renewables has been twofold: that renewables affect grid reliability and that they only benefit greedy firms as a result of contracts obtained through corruption in previous administrations. The argument seems to be a hard sell for at least three reasons. First, grid reliability problems have been not been solved worldwide by creating a state monopoly. Second, the lowest price at which CFE actually buys power in Mexico is precisely from renewables. And third, prosecution of cases of corruption is the electricity sector is still forthcoming. Oddly enough, a green agenda that pushes hard for renewables usually sits well among parties that are left of the aisle, where purportedly the president’s Morena party and his coalition place themselves.
Improving the electricity sector of a country like Mexico -with 127 million people and the worlds’s 15th largest economy- can perhaps only be achieved through a lengthy reform process which will naturally be subject to political currents. In the case of Mexico, it might be necessary to muddle trough changes that get us to the right type of regulation and private sector participation. Nevertheless, a constitutional change in the direction as the one proposed by the President would make this process much harder if not impossible. Those within his own party who aspire to succeed Mr. López Obrador would do well in thinking about this. The consequences of what is being proposed might not be fully materialize in the remaining three years of this administration, but they will surely hamper Mexico’s future development.
* Gerónimo Gutiérrez Fernández is senior advisor at Covington and Burling, LLP and partner at BEEL Infrastructure. Twitter: @GERONIMO_GF