EconomyFinancialThe paralysis of the electricity market: how we arrived...

The paralysis of the electricity market: how we arrived at a constitutional reform

Morena, the president’s party, yesterday paused the march for a bit to discuss the constitutional reform that seeks to once again change the course of the electricity sector. The frenetic pace that the debate had taken in recent days ran into a ‘no’ almost in unison from the opposition. A defeat in the plenary was practically announced. The discussion has been postponed for next Sunday and there are two versions of why: one from Morena, who points out that the change of date is intended to make the document fully known, and the other that affirms that the congressmen of the same parliamentary faction need a little more time to negotiate with the PRI legislators and thus get the 57 votes they need and that they seem to not have for now.

However, many of the changes in the market are already practically established. The protections of the companies and some organizations have made the path a little more tortuous for the president, who has affirmed on different occasions that the initiative that reforms the Constitution would not have been necessary, if the first changes had been accepted. On the other hand, the judiciary has given the only shred of certainty to private initiative, although the latter seemed to falter a few days ago when the Court decided not to declare the reform of the Electricity Industry Law unconstitutional, the movement that preceded the constitutional initiative that today has the sector in suspense.

“It could be said that the constitutional reform is the pinnacle of the encounter between the current energy policy against the opening postulate established in the 2013 reform, ” says Bernardo Cortés, of the Cortés Quesada law firm, who has advised several companies during this transition.

2019 and the first signs

Although they are still pending, the market seems to be used to sudden movements since the presidency. The accusations against private companies – such as the Spanish Iberdrola – have been a constant in the morning conferences and the issuance of documents and initiatives have become the other equation of the turbulence. The relationship has become “weary and even very personal,” says an industry consultant.

The changes began from the initial weeks of the six-year term. The first two signs: the suspension of long-term auctions and the cancellation of two tenders for the construction of two transmission lines, from Oaxaca to Mexico City and to interconnect Baja California with the rest of the national electricity system. For both, there were already companies with their hands raised. That was the first bewilderment of the private.

But until then, the oil market seemed to be the most marked, with constant accusations of irregularities in the bids – which were never proven – and indications of low oil production. Until the first months of the presidency, the electricity market companies remained in alarm, but until then there had been no sign that would make one think that important changes would come in the market, which today would lead to a constitutional reform.

Almost in the second half of 2019, the resignation of senior officials from the Energy Regulatory Commission (CRE) , including its then head Guillermo García Alcocer, and the publication in October of an agreement to try to modify the methodology for granting Energy Certificates Clean –which would be canceled with the reform under discussion– marked the beginning of regulatory changes and uncertainty in the sector. A petition from Manuel Bartlett , the director of the CFE, to the market regulator, released at the end of the same year, would mark, without the industry noticing it at the time, the path of changes that were to come. But either the market turmoil had yet to kick in or the industry’s disbelief was still being tested.

The petition statement from Bartlett, who as a legislator voted against the 2013 reform, contains 14 issues. Among them: give reliability to the National Electric System by limiting the use of renewable or intermittent energies; modify transmission or portage costs; cancel the self-supply companies that they consider to be simulation or do not work as the proposed scheme; and give the state-owned CFE a leading role in planning the system. All these issues are included in the electrical reform.

2020 and the wave of amparos

But the turning point in the market came in the midst of the pandemic, say the analysts interviewed. Barely a month after the health emergency was declared and economic activities were interrupted, in April an official letter from the National Center for Energy Control (Cenace) would mark the beginning of a streak that has been divided between the publication of documents and injunctions in the competition courts: the judicialization of the sector, as they refer to it among the industry.

The Cenace document – which in theory maintains its autonomy, but would lose it if the constitutional reform is approved – marked a fence on renewable energies . It proposed pausing the start of the pre-operational tests needed by the renewable plants that were about to start activities. The argument of the agreement was based on the fact that these movements made the electrical system vulnerable at a time when –derived from the pandemic– consumers should be given security. The document had in its title the recognition of the disease as the cause of the measures, but the text had already been prepared previously, according to sources at the time.

“The Cenace agreement was the turning point where energy policies were openly against private investment in the sector. From then on, in a period of less than 18 months, various instruments were issued openly aimed at strengthening the CFE, and to the detriment of private participation in the sector”, says Cortés.

After that, and when the sector was barely digesting what to do with the Cenace agreement, the Secretary of Energy published the reliability policy in a hasty and fast-track manner, which focused on limiting access to the transmission and distribution networks. The document was published without going through the regulatory improvement processes, something that became a constant during the following changes to the rules. But at that time, it ended with the resignation of César Hernández, the head of the National Commission for Regulatory Improvement (Conamer), announced just one hour after the publication of the document.

From that moment on, the changes did not yield and with it the protections did not either. Until last December, the Ministry of Energy had received 1,300 requests for these legal instruments against one of the measures that it previously promoted.

The courts specialized in competition began to receive and accept the legal measures. Neither the Cenace agreement nor the reliability policy managed to be put into operation. Private individuals and organizations received provisional suspensions, which later became definitive, and from there the scale of the measures began to increase.

And in the midst of it, the Energy Regulatory Commission also played an important role. The regulator has approved a series of measures that have also put the market in check: it paused the permits for new generators, increased the transmission rates paid by private companies and approved the restriction to join new partners to the supply companies. Some of the measures have also not been implemented due to the injunctions filed by private parties.

The president has accused specialized judges, mainly Juan Pablo Gómez Fierro , of favoring companies and private interests. The protections granted have set the foot for the modifications that were attempted to be made without touching the secondary reforms or the constitution. But the current administration has made it clear that it is willing to make major changes to Mexican law if necessary.

2021 and the unexpected reform to the LIE

In March last year, two secondary reforms shook the market again. The first to the Electricity Industry Law (LIE) , the second to the Hydrocarbons Law. Neither of the two has been launched, but the first has taken center stage. The reform that was sent from the presidency intended to give more market power to the state-owned CFE, giving it a role in the planning of the electrical system and favoring the use of electricity that is built in its plants, it also proposed the review and cancellation of some of the private contracts. Nor could it be started, the measure –which was then positioned as the most aggressive undertaken by the president– was also stopped in the courts. The opposition, the government of Colima and the Federal Competition Commission also raised a series of instruments in the Supreme Court to prevent his execution.

The Court discussed the first last week. It did not obtain the necessary votes for it to be declared unconstitutional, but the majority of the magistrates leaned that way. This step of the Court only remains as a precedent for the actions of the judges and courts, who will decide whether or not to grant favorable sentences to private individuals, already individually.

In the changes there has been a constant: the closure to dialogue, say the specialists. The representatives of the federal government accuse of a prejudice against all their movements, the private ones and the organizations of a closedness to the discussions. “There was never an intention to discuss the free market and competition, more than a technical issue, the electricity market is a political banner. Starting from that principle, there are no arguments and there is no valid argument because what you are looking for is to have the political control that having control of the national electricity system gives you,” says Susana Cazorla, a former sector official.

Just when the amparos to the secondary reforms were being announced, the president sent a constitutional reform initiative to amend articles 25, 27 and 28. All the changes that were not put into effect have been compiled in the document. The purpose: to return the CFE to the place it lost with the 2013 reform.

2022 and a constitutional reform

The federal government has already taken the strongest step. The original proposal sent by the president cancels all private contracts and eliminates the figure of self-supply, a type of generation that is used by a large part of companies that consume electricity from plants built with private investments based on permits granted before the reform of 2013, but with which the current government does not agree.

The industrialists have assured that the CFE will not have sufficient capacity to offer all the electricity that some sectors need to continue growing or to comply with their plans to increase their energy consumption from clean sources, since the Mexican state-owned company has few plants. solar or wind and has not shown enough capital to grow its investments.

The opposition legislators prepared their own proposal and this Tuesday it is expected that the opinion that the United Energy Commissions and Constitutional Points of the Chamber of Deputies approved yesterday in general and in particular will begin to circulate, and that supposedly incorporates some of the the proposals of the opposition coalition Va por México .

This week, the eyes will be on the hitherto unknown opinion, which will go up to the plenary session on Sunday, April 17 to be voted on.

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