EXPLAINER: Why is US upset about Mexico's electricity law?

Mexico's Congress is poised to vote on a constitutional reform that would undo much of a 2013 market opening in electrical power and guarantee a majority market share for the state-owned power utility company

Mexico’s Congress is set to vote on a constitutional reform promoted by President Andrés Manuel López Obrador that would undo much of the market opening in electrical power carried out by his predecessor. It is unclear if López Obrador has the votes to push the reform through. But the U.S. and other countries have raised concerns the move will affect foreign investors and violate trade agreements.

WHY DID MEXICO INVITE FOREIGN COMPANIES IN?

Prior the 2013 energy reform, Mexico faced several problems: high electricity rates, scarce generating capacity and dirty power plants that often burned fuel oil to produce electricity. So the government built pipelines to import cleaner U.S. natural gas, allowed companies to buy electricity from independent generators and gave foreign and private firms incentives to install cleaner wind-power turbines or gas-fired plants.

WHY DOES MEXICO'S PRESIDENT WANT TO UNDO REFORM?

Mexico may have given private and foreign firms too many incentives. They received preferential treatment in pricing and purchasing, and didn't have to pay the state-owned utility, the Federal Electricity Commission, fees for distributing power through government-owned transmission lines.

The state-owned utility lost market share and income, but still had to maintain transmission lines. Worse, with some government plants idle, fuel oil — a dirty byproduct of Mexico's antiquated oil refineries — began building up, until there was no place to store it.

WHAT DOES THE CURRENT REFORM AIM TO DO?

López Obrador likes state-owned companies and doesn't want the Federal Electricity Commission to go bankrupt or lose more market share. So he has proposed guaranteeing the commission a market share of at least 54% of the electrical power market, with private firms given “as much as 46%." The commission would be given preference, buying power from its own plants first, while often cleaner energy from private generators would be last in line.

For example, the reform puts private natural gas plants almost last in line — ahead of only government coal-fired plants — for rights to sell electricity into the grid, despite the fact they produce power about 24% more cheaply.

WHAT ARE THE OBJECTIONS TO THE PROPOSAL?

Private companies, mainly from Spain and the United States, invested billions of dollars in Mexico to build wind, solar and gas-fired plants under the terms of the 2013 reform. Now, suddenly, the government wants to change those rules.

And companies with plants, factories and stores in Mexico need to plan how much their energy costs will be and how green the energy will be, so they often signed long-term power supply contracts with private generators. These contracts could now be declared illegal.

Mexican laws require free competition in the power industry. And the U.S.-Mexico-Canada free trade agreement, or USMCA, prohibits member nations from passing laws that favor domestic producers or state-owned firms.

WHAT IS LIKELY TO HAPPEN?

A lot of lawsuits and possibly trade disputes. Critics say the reform will hurt investors and their confidence in Mexico. The companies are likely to file for court injunctions, and the U.S. government may file a USMCA complaint, which could eventually result in compensatory tariffs on Mexican products.

López Obrador has already passed a law giving the state utility more discretion in deciding whose electricity to buy, but it remains stalled by court challenges. The president may not get the two-thirds majority in Congress needed to pass the constitutional reforms he seeks.

Critics say the reforms may end up forcing Mexicans — and the U.S. retail and auto companies that work in Mexico — to buy more expensive, dirtier electricity.

IS IT ONLY ELECTRICITY THAT WOULD BE AFFECTED?

No. López Obrador also included a clause declaring lithium — a key component of batteries for electric cars and other devices — a strategic mineral that only the government can mine. A Chinese company has invested in a yet-unopened Mexican mine. Even if the electrical reforms fails, López Obrador has vowed to send another bill on the lithium issue to Congress separately.