Relevant developments in the electricity sector: Bill to reform the Electricity Industry Law and resolution of the Constitutional Controversy by the Supreme Court

We believe these developments should not be analyzed in isolation, as they are related and could generate/will generate a significant impact on the national electricity industry. Accordingly, below we present a brief analysis of them, as well as a specific analysis of the legal alternatives that could be implemented in the event that any of the developments infringes a right or affects the fulfillment of obligations of any of the players in the electricity industry. (i) LIE Reform Bill On February 1, 2021, the President of the Republic submitted the bill to the Chamber of Deputies under the “preferential” category. This category means that the legislative process is carried out on a priority basis, so that its discussion and, where applicable, approval in both chambers of the Congress of the Union will take place within a maximum period of thirty calendar days, respectively. The core aspects of this bill are the following: • Modification of the economic dispatch order of power plants, to favor dispatch by physical delivery, benefiting conventional generation plants: (i) the hydroelectric plants of the Federal Electricity Commission, (ii) followed by the other CFE plants (nuclear, geothermal, combined cycle, and thermoelectric), (iii) Combined Cycle Plants of Independent Producers, (iv) private wind and solar plants and, lastly, (v) private combined cycle plants. • Establishing the granting of Clean Energy Certificates (“CELs”) to clean energy generation plants, regardless of their operation start date. This facilitates CFE’s compliance with its obligations to acquire such CELs. • Eliminating the obligation of CFE Basic Services Supplier to acquire energy and products through auctions of the National Energy Control Center (“CENACE”). This is intended to allow said company to acquire energy (from fossil/conventional sources) from CFE’s generation subsidiaries. • The transitory provisions of the Bill establish the authority of the Energy Regulatory Commission (“CRE”) to revoke self-supply permits “obtained through acts constituting fraud against the law.” • Establishing the obligation of the CRE that the permits set forth in the LIE be granted subject to the planning criteria of the National Electric System that SENER issues. • Modification of the eminently financial/virtual scheme of the Wholesale Electricity Market to a hybrid scheme that allows the execution of Electricity Coverage Contracts with Physical Delivery Commitments, to be entered into exclusively by Basic Services Suppliers, favoring the dispatch of this type of contracts. • Review of the Electricity Purchase and Sale Contracts with Independent Power Producers (“IPPs”) regulated under the Electricity Public Service Law with the purpose of “guaranteeing” profitability in favor of the Federal Government. • Eliminating the “free competition” component in generation matters, evidently to strengthen CFE in energy generation, contrary to the provisions of Article 28 of the Federal Constitution, Article 4 of the LIE, and the SCJN’s own ruling in Constitutional Controversy 89/2020. It is important to note that, at present, the Bill does not produce legal effects to the detriment of any person, since it must first be approved, enacted, and published in the Official Gazette of the Federation, and subsequently, in terms of the Second Transitory Article of the Bill, SENER, CRE, and CENACE would have a period of 6 months from the entry into force of said reform to modify the administrative provisions necessary to implement and give effect to the reform. As a result of the foregoing, at the appropriate time and depending on the particular case, the legal strategy that the affected parties could implement against said reform must be analyzed. Based on a preliminary analysis, the reform would affect developers, generators, end users (Basic Service and Qualified), permit holders (self-supply/cogeneration) and their self-supplied partners, permit holders/contractors (independent production) and, in general, various sectors of society, the environment, and the national economy. Considering the type of measures and their potential consequences, legal actions may be appropriate before the CRE, the Federal Court of Administrative Justice, District Courts, and the Federal Economic Competition Commission; as well as investment arbitrations. (ii) Ruling on Constitutional Controversy 89/2020 On February 3, 2021, the Second Chamber of the SCJN issued the ruling corresponding to Constitutional Controversy 89/2020, which COFECE brought against various aspects of the Reliability Policy issued by SENER in May of last year. In the current context, the SCJN ruling is of significant importance in the event that the Bill is approved. What the SCJN determined will be the basis for what is resolved when challenging the changes resulting from the reform. Through the ruling issued, the SCJN declared various aspects of the Reliability Policy valid and invalid, among which the following stand out: VALID INVALID • CFE will have proactive participation in the planning proposal for the Expansion and Modernization programs of the National Transmission Grid (“RNT”) and General Distribution Grids (“RGD”). • Obtaining an interconnection viability opinion issued by CENACE for the interconnection of power plants. It may reject Interconnection Study requests, without this representing a breach of open and not unduly discriminatory access. • Inclusion of new ancillary services to guarantee the quality, reliability, continuity, and security of the National Electric System. • CENACE will assess the viability of Interconnection Study requests based on: (i) the demand and consumption of the zone, (ii) the geographic dispersion of Power Plants with Clean Energy; among other aspects. • Generators representing power plants with intermittent clean energy, whose characteristics cause an increase in ancillary services, must cover the cost associated with such increase. • In granting generation permits, the CRE must take into account the information of the Expansion and Modernization Programs of the RNT and the RGD (“PRODESEN”). The SCJN based its determination on the following main arguments: • Any provision in favor of CFE cannot, under the justification of fulfilling the purpose of its strengthening, disregard the other objectives of the electricity industry sector, among which is making effective the competitiveness in the generation and supply links of energy. • The Reliability Policy argues that SENER’s strategic projects should have preferential priority in interconnection, which is incompatible with open access under conditions that are not unduly discriminatory to the grids. • It is necessary to recognize and comprehensively include the objectives and obligations regarding greenhouse gas reductions contemplated in both the Federal Constitution and the secondary laws and regulations. • The Reliability Policy constitutes a barrier to competition and free concurrence, as it cancels the possibility of market entry for power plants operating with clean energy —specifically wind and photovoltaic plants. • Mexico has assumed various commitments, at the national and international level, to provide for a gradual increase in clean energies and, under economic viability criteria, to increasingly reduce dependence on fossil fuels. While clean energies present certain disadvantages, the truth is that precisely in view of them and with the announced purpose, the Energy Transition Law provides for the need to incentivize investment for generation with Clean Energies and, in turn, meet the country’s goals for this purpose. • If merit is entirely disregarded, the dispatch of Units of Power Plants with Intermittent Clean Energy would be limited. In light of this, conventional energy plants would be benefited, regardless of the fact that they represent higher production costs, a scenario in which such costs would subsequently be reflected in the price that consumers must pay for electricity supply. The foregoing is contrary to the mandate contained in Article 25 of the Constitution, insofar as the stewardship of national development must guarantee, among other aspects, that it be sustainable. To obtain additional information about our firm and our team, click here. Likewise, you may contact our experts of the Energy and Natural Resources Industry Group: Edmond Grieger, Partner: +52 (55) 5258 1048 | egrieger@vwys.com.mx Adrián Magallanes, Partner: +52 (55) 5258 1077 | amagallanes@vwys.com.mx Fernando Carreño, Partner: +52 (55) 5258 1042 | fcarreno@vwys.com.mx