Request for consultations – Certain measures in the electricity sector

July 20, 2022

Her Excellency Tatiana Clouthier Carrillo
Secretary of Economy
United Mexican States
MEXICO CITY

Excellency:

The Government of Canada hereby requests consultations with the Government of Mexico pursuant to Articles 31.2 and 31.4 of the Canada-United States-Mexico Agreement (CUSMA) with respect to various measures of Mexico that favour its state-owned Comisión Federal de Electricidad (CFE), and negatively impact Canadian companies operating in Mexico and with investments in Mexico's electricity sector. These measures appear to breach Mexico's commitments under CUSMA.

I. Amendments to the Electricity Industry Law

On March 9, 2021, the Decreto por el que se reforman y adicionan diversas disposiciones de la Ley de la Industria Eléctrica (Decree Amending and Adding Various Provisions of the Electricity Industry Law) was published in Mexico's Federal Official Gazette and entered into force on March 10, 2021.

The Decree introduced several amendments to the Electricity Industry Law (Ley de Industria Eléctrica or LIE) to prioritize electricity produced by CFE over electricity produced by private producers in the dispatch of electricity to Mexico's electricity grid. These reforms constituted a reversal of the 2013 regulatory framework in Mexico, which sought to attract private investment in the Mexican electricity sector.

The amendments include, among others: (1) Article 26, which requires that CENACE prioritize dispatch of power generated by plants "owned by State agencies, entities, or enterprises," (2) Article 4(VI), which "guarantee[s], in the first instance" electricity contracts of a type that only CFE can hold or enter into; and (3) Articles 101 and 108(V), which call on CENACE to "determine the allocation and dispatch" of electricity based on undefined, broad criteria.

In addition to the above amendments that prioritize the dispatch of electricity of CFE over private competitors, the amendments to the LIE included Article 126(II), which adjusted the requirements for Clean Energy Certificates such that the issuance of Clean Energy Certificates no longer depend on the ownership or the commencement date of commercial operations of power generation facilities. This amendment allows CFE to use its own plants to satisfy the requirement to purchase clean energy, thereby reducing the value of Clean Energy Certificates held by renewable energy private producers to the advantage of CFE.

Transitory Article 4 obligates the Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) to revoke the privately held self-supply contracts. Transitory Article 5 requires a review, based on broad, undefined criteria, of all Power Purchase Agreements signed between CFE and independent power producers. These provisions appear to be designed to favour CFE to the detriment of private producers.

The Electricity Industry Law, as amended, is reflected in legal instruments that include the following, operating separately or collectively:

1. The Electricity Industry Law;^{Footnote 1}
2. Draft decree initiative by which several provisions of the Electricity Industry Law are reformed and others are appended;^{Footnote 2}
3. Decree amending and adding various provisions of the Electricity Industry Law^{Footnote 3} and any implementing regulations;
4. Decision of the Mexican Supreme Court announced April 7, 2022, in Unconstitutionality Action 64/2021 and all votes.^{Footnote 4}

These amendments appear to be inconsistent with Article 14.4 of CUSMA because Mexico has failed to accord to Canadian investors and their investments treatment that is no less favourable than that it accords, in like circumstances, to Mexican investors and their investments.^{Footnote 5}

II. Inaction, delays, denials and revocations of private companies' abilities to operate in Mexico's energy sector

While the decree to reform the LIE is currently suspended due to various amparos issued by Mexican courts, the Mexican government has continued to pursue the objectives of the LIE to increase CFE's market share to the detriment of private producers through several administrative measures. The actions and inactions of various Mexican government bodies and regulatory entities, including but not limited to the Energy Department (Secretaría de Energía or SENER), the Electricity Regulatory Commission (Comisión Reguladora de Energía or CRE), the National Center for Energy Control (Centro Nacional de Control de Energía or CENACE) and CFE, have negatively impacted the ability of Canadian investors and investments to participate in Mexico's electricity sector.

These measures include: delaying, denying or failing to respond to, or act on, applications for new permits or permit modifications; revoking or suspending existing permits; or otherwise blocking the ability of private companies to build or operate electricity generation facilities, including wind and solar operations, or continue participation in the electricity market. Mexico's actions and inactions have distorted and created significant uncertainty in the market, denying Canadian investors' access to the Mexican electricity market and leading to an erosion, and in some cases a destruction, of the value of Canadian investments in the sector by effectively shutting them out from participating in Mexico's electricity market.

The Government of Canada considers that these measures appear to be inconsistent with the following provisions of CUSMA:

1. Article 14.4 of CUSMA because Mexico has failed to accord to Canadian investors and their investments treatment that is no less favourable than that it accords, in like circumstances, to Mexican investors and their investments;
2. Article 15.8 of CUSMA because Mexico is not administering its laws affecting trade in services in a reasonable, objective and impartial manner and because the authorizations for the supply of services do not meet the required standards;
3. Article 22.5.2 of CUSMA as the relevant administrative body is not exercising its regulatory discretion in an impartial manner with respect to enterprises that it regulates, including enterprises that are not state-owned;
4. Article 29.3 of CUSMA because Mexico is not administering its laws in a consistent, impartial and reasonable manner.

The Government of Canada reserves the right to address additional measures, factual and legal claims in the course of consultations and in any future request for panel proceedings.

We look forward to receiving Mexico's reply to this request and to determining a mutually convenient date for consultations.

Sincerely,

The Honourable Mary Ng, P.C., M.P.

c.c.  Álvaro Castro Espinosa, Mexican Secretary
TMEC Secretariat, Mexican Section

Vidya Desai, United States Secretary
USMCA Secretariat, United States Section

Sean Clark, Canadian Secretary
CUSMA Secretariat, Canadian Section (TCT)