This week, Mexico’s Supreme Court of Justice is facing an enormous challenge as guardian of the Constitution and watchdog over the other branches of Mexico’s government, with historic implications for the country’s electricity sector. The Court is meeting in plenary session to discuss and rule on the legal action of unconstitutionality 64/2021, as well as constitutional controversies 44/2021 and 45/2021, which challenge the amendments to the Electricity Industry Law (“LIE”) published in the Official Journal of the Federation on March 9, 2021. These lawsuits were filed by 48 members of the Mexican Senate, the Federal Economic Competition Commission (“COFECE”), and the Government of the State of Colima, respectively. Some days ago, Supreme Court Justice Loretta Ortiz Ahlf submitted draft resolutions stating that the arguments of the plaintiffs have no merits and ruling on the constitutionality of the amendments.
The challenge for the Court is even greater given the context of the electricity sector in the past few years. Since the cancellation of the fourth electricity auction in 2019, the government has advanced a series of operational, administrative, and regulatory measures to favor the Federal Electricity Commission (“CFE”). Such measures include the resolution of the Department of Energy (“SENER”) to modify the criteria for granting clean energy certificates (“CELs”); the reliability policy for the National Electric System, issued also by SENER; and, most recently, a bill submitted by the President to amend the Constitution in order to restructure the electricity sector, which is currently under discussion in the Chamber of Deputies.
The core issue of the LIE amendments is that they modify the order of dispatch (i.e., the order in which electricity from different power plants is delivered to the grid). The amended LIE would implement a new order of dispatch through a new legal instrument called an “electricity hedge contract with obligation to deliver physical energy”, which can only be executed as buyer by the supplier of basic services. In other words, CFE as supplier, without the duty to conduct any tender, would have discretion to award these contracts and decide which generators would benefit from priority dispatch, preferential access to transmission and distribution grids, and fixed cost offers. According to the statement of purpose of the LIE amendments, the objective of all this is to first favor CFE's hydroelectric plants, then dispatch other power plants also owned by CFE, then solar and wind facilities and, finally, combined cycle plants owned by private companies.
The draft resolutions submitted by Justice Ortiz Ahlf dismiss the argument that this new dispatch mechanism violates the principles of free economic competition and concurrence by arguing, in a simplistic manner, that there are generators other than CFE that could have access to these contracts and that CFE is not the only supplier of basic services. The Justice concludes that there is no undue advantage because the new contract is not exclusive to CFE as seller or buyer. However, the draft resolutions overlook the fact that a key actor with monopolistic power, to date the only provider of basic supply, would freely choose with which generators to sign these contracts, in addition to the fact that the purpose of these contracts, as explicitly recognized, would be to benefit CFE.
Other issues addressed in these cases are the change in the criteria for granting CELs; the orders to revoke self-supply permits granted under “fraud to the law”, and to review contracts with independent producers; the obligation of the Energy Regulatory Commission (“CRE”) to consider SENER's planning criteria when granting generation permits, as well as the impact on electric supply tariffs paid by end users.
Although it is not possible to predict how the discussion will develop in the Court, it is very likely that at least six justices will vote against these draft resolutions and hold that the LIE amendments are unconstitutional, while two or three votes would almost certainly be in favor of the proposed ruling, leaving a couple of “swing votes”. Thus, a simple majority that would deem the LIE amendments as unconstitutional appears likely, but it will not be easy to obtain the eight votes required to fully vacate the law. If only a simple majority is obtained, lower federal courts would have the authority to rule under their own criteria on dozens of amparo lawsuits that were also filed against the LIE amendments.
From a legal standpoint, the draft resolutions that will be voted on this week are not compatible with the constitutional rule of law because they ignore rights, principles, and other provisions established in the Mexican Constitution. We can only expect that the Supreme Court will demonstrate its legitimacy as a constitutional court and its independence from political influence, by categorically rejecting the LIE amendments.
This text is a brief version of the article published by the authors on April 4, 2022 in the blog “El Juego de la Suprema Corte” of Nexos magazine; you can read the full article in Spanish by pressing here
Contact Information:
José María Lujambio | jmlujambio@ccn-law.com
Antonio Riojas | ariojas@ccn-law.com.mx
