Mexican Lawmakers Pass Bill to Favor State Power Utility

MEXICO CITY—Mexico’s lower house of congress passed a controversial bill that gives priority to the state-owned power utility over private generators, threatening to overturn the electricity market and putting billions of dollars of private investments in jeopardy.

Lower house lawmakers voted 304-179 to pass the bill that cancels key parts of the 2013 energy overhaul giving private and foreign investors a greater role in the electricity sector.

The ruling Morena Party backed the legislation, which was submitted early this month by President

Andrés Manuel López Obrador,

a fervent opponent of the energy opening made under his predecessor.

Mexico’s main opposition party, the conservative National Action Party, said the changes would push up generation costs and electricity rates, prove detrimental to the environment and unleash international arbitration and constitutional challenges.

Opposition lawmakers objected to a number of articles in the bill, although the objections were expected to be overruled by the majority. The bill will then go to the Senate, where approval is almost guaranteed, said Senate Majority Leader Ricardo Monreal.

“The majority is going to back the president on this. I don’t think there will be any changes to what the lower house approves,” Mr. Monreal said.

But even if it passes the Senate and is signed into law, the legislation will likely face legal challenges.

A policy published last year by the executive branch giving the state-owned electric utility CFE similar advantages over competitors was recently ruled unconstitutional by the Supreme Court, following a challenge by the country’s antitrust commission. The antitrust commission has also said the electricity bill violates competition and market access by artificially benefiting the CFE.

Under the bill, instead of using the cheapest energy first, power-grid operator Cenace would have to take hydroelectricity first, then any power generated by CFE or by independent power producers under contract to CFE, followed by private solar and wind power, and finally other privately owned power plants.

“During the night, no one else would need to generate, and all the wind that blows in the night will be wasted. The combined-cycle plants that could be operating more efficiently will also be tossed out,” said Julio Valle, director of the Mexican wind power association.

CFE has large hydroelectricity stations, a nuclear power station, and plants that run on natural gas, coal and fuel oil, but little in the way of solar and wind power.

Regulators would also be required to cancel permits for private generators that built plants under a 1992 law allowing companies to generate electricity for their own use in some cases. New permits for those generators would be subject to the current administration’s state-oriented energy policy.

A number of energy experts expect the nation’s top court to overturn the legislation.

“It clearly violates the constitution and international treaties signed by Mexico. You cannot give preferential treatment to a state firm,” said César Hernández, an energy consultant and former deputy minister for electricity. He said no power market in the world gives priority to the state utility at the expense of low-cost, green energy.

Mr. Valle of the wind power association said private generators should win in international arbitration because the contracts and conditions under which they invested in Mexico were drawn up by the government. “This is going to be a big fight between the CFE and any private generator,” he said.

Mr. López Obrador, who railed for years against the oil and power sector changes made under his predecessor, has so far stopped short of proposing a constitutional change to reverse the energy-sector opening. His party and its allies don’t have the two-thirds majority needed to change the constitution, making it improbable such a proposal would pass, Mr. Monreal said.

Mr. López Obrador argues that the 2013 energy overhaul and regulations were designed to decimate the CFE and state oil company Petróleos Mexicanos in favor of private and foreign companies, and wants to restore an integrated energy sector with the state companies at the forefront.

“We need legislators to have the people in mind, not the companies, which have been dedicated to plundering Mexico,” Mr. López Obrador said at an event Sunday.

His arguments for CFE were fueled last week by disruptions in natural gas supplies from Texas, where demand soared and prices skyrocketed amid the severe winter storm. That led to several days of rolling outages in Mexico, which depends on natural gas for around 60% of its electricity generation, most of it from Texas.

The state utility responded by increasing generation with hydroelectricity, coal and fuel oil acquired from Pemex.

The electricity bill could lead to friction with the administration of President Biden as the free-trade agreement between the U.S., Mexico and Canada forbids governments giving preferential treatment to state companies. The U.S. could bring a claim against Mexico through a state-to-state dispute settlement panel, which if successful could lead to tariffs being slapped on Mexican goods, Mr. Hernández said.

There are also environmental concerns as CFE’s older plants, such as those fired by coal or fuel oil, would end up being dispatched before solar and wind.

México Evalúa, a Mexican think tank, estimated that aside from causing a significant increase in polluting emissions, the changes would raise overall generation costs and require the government to raise electricity rates or spend more on residential electricity subsidies. Those subsidies amounted to around $3.7 billion in 2020.

Write to Anthony Harrup at [email protected] and Juan Montes at [email protected]

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