Mexico’S Energy Reform Could Come At A High Cost In USMCA Negotiations

10/18/2024 3:53:33 AM

(MENAFN- The Rio Times) Mexico's recent constitutional reform in strategic sectors, which favors state-owned energy companies over private investors, may prove costly during the 2026 United States-Mexico-Canada Agreement (USMCA) review.

The changes could lead to demands for concessions in other sectors from the U.S. and Canada. The reform, approved by the Mexican Senate, partially reverses the 2013 market opening.

It allows private participation in electricity generation and commercialization but limits their role. The new constitutional text states that private entities "will not have prevalence over the state's public company."

This shift contradicts Mexico's initial USMCA commitments to fully open the electricity generation, transmission, distribution, and supply markets. The treaty also guaranteed non-discriminatory treatment for investors compared to state-owned enterprises.

César Hernández, managing partner at Publius law firm, suggests that if Mexico wants its new energy framework accepted within USMCA , it may need to yield in other areas.

This would be necessary to address the interests of its partners. He questions which industry might bear the cost of compensating the U.S. for perceived losses in the energy sector.
Concerns Over Regulatory Discrimination in Energy Reform
The reform also raises concerns about regulatory discrimination. The amended Article 28 assigns control of the national electricity system to "the state's public company."

If this refers to the Federal Electricity Commission (CFE), it could create a conflict of interest, as CFE would be both a market competitor and a system operator.

According to an analysis by the Mexican Institute for Competitiveness (IMCO ), the energy reform conflicts with at least five USMCA chapters.

These include Chapter 14 on Investment, which contains a "ratchet clause" preventing countries from reversing economic openings.

Chapter 22, regulating state-owned enterprises, requires them to operate under commercial criteria. The constitutional changes exempt public companies from antitrust legislation, giving them an advantage over private firms.

IMCO emphasizes that respecting treaty commitments is crucial for Mexico's competitiveness and credibility in expanding trade and investment. The upcoming USMCA review in 2026 will likely bring these issues to the forefront of negotiations.

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