Mexico’s electric power reform seen as undoing free trade consensus

Mexico’s decision to undo the liberalization of the electric power market through legislative changes suggests the country is abandoning commitments to international consensus and trade rules, according to a report.

The report, published by the Wilson Center’s Mexico Institute, details that beyond any practical consequence derived from the new rules, the economy will suffer because of investors’ perception that the state is willing to break with its commitments.

The electric power reform, promulgated earlier this month and now the subject of an intense legal and political battle, is widely perceived as violating commitments in several free trade agreements, including Nafta, USMCA, the Trans-Pacific Partnership and the Mexico-EU Free Trade agreement, as BNamericas reported previously.

“The success in renegotiating Nafta and saving the North American trade partnership through USMCA will 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,” the report said.

According to the report, Mexico has a history of drastic policy changes when the government changes. But different parties have remained committed to free trade since the country joined Nafta in 1994. This started a trend of predictability.

“The electricity reform is arguably the most significant challenge to this predictable environment from which Mexico has benefited greatly during the last three decades. This is not an overstatement. It is the first time that both the executive and legislative branches of government have endorsed legal amendments that shamelessly violate the country’s FTA commitments (and Mexico’s constitution),” the report said.

The law, which has sent the electric power sector and public discussion into a frenzy, alters the order of dispatch by placing public electricity generation at the top regardless of cost, rewrites the rules for clean energy licenses and for self-supply contracts, and allows the government to review legacy "basic supply" contracts, among other changes, all of which have drawn heavy criticism from the private sector and analysts.

For now, the law is suspended while legal appeals remain pending. Experts agree that ultimately, the issue of the law’s constitutionality is likely to be resolved by the supreme court. The government has said it will pursue constitutional changes if the law is struck down.