Mexico’s electricity sector rankled by doubt and legal chaos

MEXICO CITY — President Andrés Manuel López Obrador’s efforts to reshape Mexico’s electricity sector to favor the state-owned power company have spurred hundreds of lawsuits and sown a level of uncertainty that businesspeople say is costing jobs and private investment.

The level of uncertainty is such that a solar panel company had to agree to a clause in a contract requiring it to buy back some 3,000 panels from a client if laws changed affecting their viability.

Manuel Vegara, whose company Pireos Power installs solar panels for everything from homes to major commercial projects, hasn’t had to buy back the panels — the law change last year didn’t affect his client. But he says he lost projects last year with two other clients worth a combined $3 million because they were unsure where things were headed. He has had to cut his workforce from 90 to 35.

“We have had to survive with small installations at homes or with clients who were braver and who despite the uncertainty have had the courage to invest,” Vegara said.

The president’s party succeeded in reforming the electrical industry law last year, but this week the lower chamber of Mexico’s congress infuriated López Obrador when lawmakers voted down a constitutional reform of the sector pushed by the president. The uncertainty has become a nightmare for companies large and small.

In May 2019, the Spanish energy giant Iberdrola said in a statement: “Mexico generates confidence: Iberdrola will invest up to $5 billion during the present federal administration.” None of that investment came and the company has given no public explanation.

When the opposition parties blocked the constitutional reform Sunday, “the initial feeling was relief,” Vegara said. “But we know the president won’t leave it that way and the uncertainty isn’t resolved even though the big storm has passed.”

The big power companies have remained silent, unwilling to risk their investments. Not even Iberdrola, the most frequently attacked by López Obrador, or the American Chamber of Commerce of Mexico, representing some of the United States’ most important energy companies, would comment.

Mexico’s Business Coordinating Council called again this week for “a clear, transparent and trustworthy legal framework.”

Instead, there is legal chaos.

“Mexico has right now two contradictory systems working simultaneously,” said Miriam Grunstein, an academic with the James Baker Institute at Rice University.

There is the Constitution, which since 2013 reforms is oriented toward market openness. And then there is the electricity law reformed last year to favor state-owned power plants over private ones. The changes allow for revising and cancelling contracts retroactively.

The government argues those changes tried to fix past abuses and excessive advantages for foreign companies, for example, being exempt from certain payments. The companies say the government is restricting free competition by changing the rules in the middle of the game and violating their rights.

Hundreds of lawsuits have followed, and in most cases companies have won injunctions to protect their interests, at least temporarily.

In practice, the reality is that “in the same industry you’re giving white to some and black to others and the difference is who has injunctions and who doesn’t,” Grunstein said. “It’s a system that favors companies that can resist more.” Many companies are tired and weighing the possibility of international arbitration.

Adding to the confusion, the Supreme Court has weighed in, but only opaquely. The majority of the justices found the law unconstitutional, but not enough voted to overturn it. U.S. Ambassador to Mexico Ken Salazar said more lawsuits would follow.

With a divided congress solutions will not come easily.

An engineer with 20 years of experience in the state-owned Federal Electricity Commission, who requested anonymity because he feared retaliation, said the only way out was through dialogue. “The businesses will be willing to negotiate as long as they give them guarantees that there is going to be free competition and they will be able to continue investing in other projects in the future,” he said.

Meanwhile, the private sector just repeats that it wants certainty about how, when and in what to invest. But that would require reforming the law yet again.

“The United States is increasingly irritated,” but has so far not taken more weighty action, so Grunstein believes the pressure will have to come from international markets.

“It’s a fight between two models and two visions of the country,” Vegara said. On one side is the neoliberal approach, where there may have been abuses, and on the other the state-led approach that is slowing investment and putting economic growth, the environment and job creation at risk. In between are citizens who don’t know if it means they will have to pay more for electricity.

Vegara believes the solution lies somewhere in the middle: achieve a model that guarantees free competition and promotes clean energy so Mexico can meet its climate commitments, but assuring that Mexicans — especially the poorest — have good electrical service at reasonable prices.

Currently, the two visions in Mexico appear “irreconcilable,” Vegara said, at least while López Obrador remains president.