Mexico to Reshape Energy Market and Limit Private Sector’s Role
Mexican President Claudia Sheinbaum plans to reshape the country’s energy markets by prioritizing state control of the sector and reducing the role played by the private companies.
Sheinbaum and her ruling Morena party in October approved sweeping changes to Mexico’s electricity and hydrocarbons industries by reclassifying state-owned enterprises Pemex and CFE from productive to public companies.
Market sources and observers said the change marks a partial reversal of energy reform implemented in 2013 by then-President Enrique Peña Nieto that was designed to foster greater competition between private and state-owned energy companies.
The new law also put the state in charge of designing and planning electric markets, while granting CFE preference over private competitors in electricity dispatch.
Valeria Vázquez, lead energy and resources partner at global consulting firm Deloitte, said that while it remains unclear how private companies will participate in hydrocarbons, statements from government officials suggest both CFE and Pemex will be given preference over private operators.
“The law now establishes Pemex and CFE as the main operators in the market with specific rules for private participation [that are] different from what we have today,” Vázquez said.
Sheinbaum in November released her energy plan giving Pemex and CFE a preeminent role and offering some clues about the potential role of the private sector, she said.
“This does not mean that private investment will be prohibited or canceled, rather the rules of the game have changed,” she said. Bernardo Cortés, a partner with the Cortes and Quesada law firm, said he believes Sheinbaum’s energy reform will result in substantial changes to current energy sector rules.
He said the plan laid out the strategic energy areas under state control, increasing uncertainty about which operations will be carried out exclusively by Pemex and CFE.
The reform also imposes similar conditions on operations in Mexican states, which will be responsible for enacting implementing policies, Cortés added. He said he believes the changes mean private companies will no longer have the same level of investment opportunities as they had when the 2013 reform was enacted.
Cortés added that private investments aligned with the government’s energy policies are more likely to thrive under the Sheinbaum administration.
Sheinbaum and her allies also recently enacted a law eliminating the country’s independent regulatory agencies, including antitrust watchdog Cofece and energy agency CRE, by folding them into federal ministries.
Vázquez said that this move represents a major shift from the 2013 energy reform, which was designed to clearly delineate the roles of the state, regulators, and state-owned companies in the market.
Alain Duthoy, partner at DMG law firm and co-founder of the Clúster Energético de Nuevo León, said the federal energy secretariat Sener will take on a “judge and party” role by regulating all permits handled by CRE and overseeing market participants.
According to Duthoy, Sener’s new role is likely to focus on overseeing existing contracts and granting new permits, while CRE will remain responsible for technical administration and supervision.
He added that while Cofece will likely continue monitoring monopolistic practices in the markets, it probably won’t have authority over the state-owned companies.
Duthoy said the government’s decision to redefine Pemex as a public company will likely exempt it from complying with market rules, including the cross-participation laws designed to regulate a company’s ownership stakes in the energy supply chain and anti-monopoly measures.
Most sources, however, said Sheinbaum’s energy reform has provided the benefit of establishing clear rules for operating in the market.
“The uncertainty is over … in the last administration we had rules, but others were enforced, forcing us to go to court,” Vázquez said, adding that under the new market framework, fewer players are likely to participate as they navigate the complexities of operating under the new regime.
Sources also said Mexico’s judicial and energy reforms, along with the elimination of regulatory bodies, have increased uncertainty for companies looking to invest in the country.
Legal sources said the energy sector will have to adapt to Mexico’s new judicial system, with private companies focusing on navigating how to comply with current regulations and requirements before bringing legal challenges before the court system.
During former president Andres Manuel López Obrador’s administration, the energy sector was marked by widespread “judicialization,” as many companies filed court challenges to federal energy policies. Some of these legal challenges succeeded in halting reforms.
But Cortés said he expects the new federal judiciary, in which judges will be elected rather than appointed, will become less favorable for private companies seeking to challenge reforms.
“The entire legal framework has been undermined with the law requiring all federal judges to be elected by popular vote … suggesting that litigation against the government may not be very successful,” he said.
The industry is now waiting for the publication of secondary legislation in February that will detail how private companies may participate in the energy markets.
Lawyers said that designing and implementing secondary laws will be a monumental challenge for the different agencies and will likely take months or even years to be completed.
This will pose a significant challenge for the government, as some investments and new project opportunities could be put on hold until there is greater clarity on the new rules for specific markets, Alicia Zazueta, president of the Association of Retail Equipment Suppliers, said.
“There is still uncertainty about what secondary laws may bring and the roles CRE and Sener will assume to identify new areas of growth,” she explained.