The signs seem to have gone unnoticed in the eyes of the Mexican government, but not by lawyers, companies and investors. Everyone expected the start of a formal dispute from the government of one of the countries that had complained about the changes in Mexico’s energy policy.
The deadline was met yesterday, when it was announced that the government of President Joe Biden requested the start of dispute resolution consultations with the Mexican administration. In an act that gives the impression of having been coordinated and not spontaneous, Canada announced that it will initiate a similar process.
“The diplomatic efforts, which were too many, have already been exhausted, now all the efforts will be between the competent bodies,” says David Enriquez, a lawyer for Goodrich, Riquelme y Asociados. “It was already very difficult for the United States to contain the pressure of the business community, after much Washington opened the door to Houston.”
The Mexican government accumulated a large number of letters. The European Union, Canada and the United States had sent letters to the Mexican government to show their discontent. But it is the latter, the one who has taken the first formal step, the one who had shown the most displeasure.
The requests of the US and Canada on AMLO’s energy policy
The complaints began at the beginning of 2020, before the Ministry of Energy published the reliability policy, the first major change that sought to stop the start-up of private plants, arguing that the electrical system needed to be safer amid the start of the health emergency due to the pandemic, but which was stopped in courts and in the Supreme Court, and before the Energy Regulatory Commission raised a transport rate paid by some renewable plants to the state-owned CFE to 800%.
The embassies of Canada and the European Union sent a couple of documents in which they expressed their concerns about the modifications made to that date, arguing a brake on the generation of renewable energy.
But until then, the changes only included the cancellation of the oil rounds and long-term auctions, an agreement by the National Center for Energy Control (Cenace) that sought to pause the tests for the start-up of some private plants and a Five-year extension granted by the regulator to Pemex so that the state company complies with some requirements of sulfur content in the diesel it sells. Companies and some union organizations, such as the influential American Petroleum Institute (API), were already complaining about an environment of uncertainty for their investments, but the big changes had not yet arrived.
The first phase of the unrest occurred when Donald Trump was still president. At that time the attention was not yet focused on the energy market. The Republican had an agenda similar to that of López Obrador in terms of promoting fossil fuels and maintained the focus against Mexico on the immigration issue, his discursive priority before the elections he lost to Biden in November of that year.
Near the end of the tycoon’s term, 40 legislators urged the then president to find a solution to protect investments, but the issue did not escalate and the Trump administration did not make public a search for opening negotiations with its Mexican counterpart. At that time, the congressmen were already accusing a slowdown in permits and favoritism towards the state-owned Pemex and CFE .
The Mexican president had already made public his intentions to present a constitutional reform if his strategy of favoring Pemex and CFE through market regulators did not work.
With the arrival of the Biden administration, industry specialists predicted a change in the Mexican narrative and possibly a modification to President López Obrador’s strategy regarding the energy market. The Democratic president brought, and still has as a priority, the fight against climate change, through a boost to renewable energies. But the estimates were wrong. The Mexican president began to make room in his speeches for some measures such as ending the use of fuel oil and reducing the oil production goal, but at the same time he did not take away from the table his priority to return CFE and Pemex to the center of the market. .
The reform of the Electricity Industry Law and the Hydrocarbons Law came almost at the same time as Joe Biden’s first months as head of the US executive. But the issue had not yet escalated, the Democratic agenda had the labor issue as a priority – another critical issue within the Treaty between Mexico, the United States and Canada – and the immigration agenda. Disagreements over energy issues were kept away from public discussions.
In the document sent to the Mexican government, the US administration cites the reform of the LIE as one of its main concerns because it proposes prioritizing electricity generation from the CFE plants over the rest of private industry plants, regardless the generation method. The reform remains in judicial limbo, after a ruling by the Supreme Court, but the Obrador administration has stated that it will start its content. “Mexico’s actions include, but are not limited to, amendments to Mexico’s electricity law that would prioritize the distribution of power generated by CFE over cleaner power sources provided by private sector providers, such as wind and solar.” , says in the statement that became official yesterday Wednesday.
Already with the secondary reforms approved by Congress, but paused in court, the United States opted for a diplomatic communication and without great declarations. The Democratic administration left Ken Salazar, the US ambassador to Mexico, as the main channel of communication. In the first exchanges, Salazar did not show great confusion and rather gave the impression of collaboration with the Mexican government. The first big declarations would come later, already at the beginning of this year, when President López Obrador fulfilled the threat of presenting a constitutional reform, which practically ends the participation of the private sector in the electricity market: it included the cancellation of contracts, the prioritization of CFE power plants and ended autonomous regulators.
By that time, the tone of the demands was beginning to change. But the Democratic administration opted for the defense of renewable energies and the region’s cooperation against climate change as the main arguments against the reform sent from the National Palace. Visits from John Kerry, the US climate envoy, became more and more frequent. But still the argument was similar and the main statement was based on the fact that the United States wanted to strengthen an open and competitive market in the region.
The Democratic administration decided to continue opting for the diplomacy card. Months after the reform was voted on – which was finally rejected – Jennifer Granholm, the Secretary of Energy of the United States, visited the country and continued with the friendly speech and far from confrontation. The US official replied to the cooperation speech and urged the country to promote joint investment. “We are here, the United States government, with two messages: the first is that we see a great opportunity to partner with Mexico (…). And we also hope that the questions regarding the energy reform can be resolved so that we can reach this great opportunity, and we know that this is being debated right now, ”he said at a press conference last January.
The progress of the discussions for the approval of the reform was not clear during the following months. The US embassy was already beginning to raise the tone of the statements and put the T-MEC as the main argument to encourage the rejection of the constitutional change. At the beginning of April -shortly before the vote on the reform- the United States estimated at 10,000 million dollars the investments that the change proposed by the president would put at risk. It was Katherine Tai, to the US Secretary of Economy and the same one who gave statements after requesting consultations with Mexico, who gave the figure in a letter to her counterpart Tatiana Clouthier.
In the first few months, visits by John Kerry and other US officials did not change the position of the Mexican president. López Obrador has said that in a couple of paragraphs, added at the last moment during the negotiation of the treaty, Mexico reserved its right to change the constitution in the sector. The reform did not pass Congress. And the president did not take seriously the warnings that his quest to change the constitution and favor Pemex and CFE could open an international front, which could reach courts outside the country.
The warning has already become tangible, but the president has continued to minimize the conflict and yesterday at the morning conference his response was summed up in a song by Chico Che.
