“Following prior attempts to preclude private investor participation in the energy sector through Congressional legislation … President Andrés Manuel López Obrador, submitted to the Mexican Congress a Bill to … undo the Constitutional changes that opened the market for private investment and intend to limit/preclude private sector participation.” (Foley & Lardner, below)
“There is a general economic maxim: public (government) resources are really private, owned and exploited by a political elite, while private resources are really public, owned and managed by a multitude. Government-owned resources do not ‘belong to all of the people’ and allow ‘self determination;’ they belong to none or a very few.” (RLB, below)
The independence of Texas from Mexico after the Battle of San Jacinto in 1836 inaugurated the era of private property rights to the subsoil. Little was thought to be beneath the sands of the new nation, and soon to be the 28th member of the United States, so Texas legislators thought, why not?
Mineral rights to oil, gas, and other subsoil bounty began with the surface owners and split off into royalty rights. Great fortunes and philanthropy resulted, creating great wealth for individuals and civil society.
“The wildcatters showed their gratitude to their city [of Houston] through their philanthropy,” stated historian Joseph Pratt. “They were not the only ones who supported good causes in our region, but many of the foundations in Houston had their beginning in the oil and gas industries.”
Oil exceptionalism … Houston exceptionalism … Texas Exceptionalism … U.S. Exceptionalism: Private Oil and Gas for the Social Good
Private oil and gas has accrued to the general good in a way that socialized oil and gas throughout the world has not. Guillermo Yeatts has stressed the general benefits of private mineral ownership, as have other posts at MasterResource.
Yeatts’ primary takeaway was summarized by the present writer in the the foreword for what became Subsurface Wealth: The Struggle for Privatization in Argentina (FEE: 1997). Slightly edited, it read:
There is a general economic maxim: public (government) resources are really private, owned and exploited by a political elite, while private resources are really public, owned and managed by a multitude. Government-owned resources do not ‘belong to all of the people’ and allow ‘self determination;’ they belong to none or a very few.
Mexico: More Energy Socialism
When desperate, the sleeping hydrocarbon giant Mexico flirts with foreign investment for its woefully undercapitalized oil and gas sector. The Mexican energy reforms of 2013-14, associated with the current president’s “Pact for Mexico,” allows foreign companies greater participation in Mexican oilfields.
Since Mexico’s nationalization of oil and gas deposits in 1938, only service contracts were allowed with foreign companies, and state-controlled PEMEX had the monopoly over all oil resources. Some reform toward private participation was made, but the socialist/Marxist influence has, once again, reared its ugly head.
Following prior attempts to preclude private investor participation in the energy sector through Congressional legislation (i.e. Electric Industry Law and Hydrocarbons Law), President Andrés Manuel López Obrador, submitted to the Mexican Congress a Bill to amend Articles 25, 27 and 28 of the Mexican Constitution related to energy matters (the “Bill”). As stated in the Bill’s legislative intent, the same seeks to undo the Constitutional changes that opened the market for private investment and intend to limit/preclude private sector participation. The Bill also affects the hydrocarbons and the mining industries.
Key changes of the Bill include the following:
A. Private Sector – Cancellation of Prerogatives
- Cancellation of all power generation permits and power purchase agreements entered into with the private sector.
- Cancellation of all Clean Energy Certificates.
- Power generation originating from (i) Self-Supply Generation Permits granted under the former Electric Energy Public Service Law (Ley del Servicio Público de Energía Eléctrica), also known as the “old regime”, will be allowed only to the extent that the Federal Electricity Commission (Comisión Federal de Electricidad, or CFE) deems the operation of such permits as “authentic”1; and (ii) the excess power generation from Independent Power Producers (IPPs) shall not be recognized nor purchased by CFE under the new regime.
- Private sector participation would be limited to a maximum of 46% of total power market generation (IPPs and “authentic” self-supply regimes are included within this percentage). Currently, the Bill acknowledges that the private sector generates 62% of all available power. The Bill is unclear on the parameters to measure private sector power generation (e.g., month, peak hours, etc.).
- The 46% of the power generation capacity required to satisfy Mexico’s demands will be produced by the following entities:
- IPPs (without the surpluses);
- generators awarded production contracts through auctions held by the National Center for Energy Control (Centro Nacional de Control de Energía, or CENACE) under the Energy Reform of 2013;
- power projects developed under the Electricity Industry Law; and
- “authentic” self-supply power stations (defined as those that do not sell electricity to third parties).
- CFE will define the new contract models for the purchase of capacity and electricity from the private sector, which will be awarded under a special regime different to the one regulated by Article 134 of the Mexican Constitution (the Mexican government procurement principles – “level playing field rules”).
B. Strengthening of CFE
- CFE will again be integrated vertically and horizontally. Current CFE subsidiary companies (CFE Generación, CFE Transmisión, CFE Distribución, CFE Suministrador de Servicios Básicos and CFE Calificados) will merge into one vertical and horizontal entity. CFE will control the generation, transmission, distribution and supply of electricity.
- CFE will be in charge of the planning and control of the National Electric System.
- The National Center for the Control of Energy (Centro Nacional de Control de Energía, or CENACE) as the independent system operator will be reintegrated into CFE. Moving forward, the dispatch of power stations will be controlled by CFE, as well as the wheeling rates for the use of the transmission and distribution lines and electricity rates.
- CFE will also be in charge of the energy transition, considered as a State’s priority.
C. Dissolution of Regulators
The Energy Regulatory Commission (Comisión Reguladora de Energía, or CRE) and the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, or CNH) will be dissolved. Their authority and structure will now be integrated into the Ministry of Energy. This means that there will be no independent and autonomous regulator for the electricity and the hydrocarbons industries.
The Bill intends to nationalize lithium deposits by disallowing further concessions to explore and mine this mineral by private parties. Concessions granted and exploited prior to the Bill will not be affected. The Bill also opens the door to block “Other Strategic Minerals” from being mined by private parties.
For approval to occur, the Bill requires a two-thirds majority of both houses of Congress and the majority of the State Congresses (32 Mexican states). Currently, the President does not have the necessary support to reach the required majority, making approval of the Bill uncertain.
If approved, private investors will need to determine which legal remedy provides the most expeditious defense to protect their investment. A party can opt to file a claim with the Mexican federal courts, or initiate international arbitration proceedings as afforded within the provisions of the USMCA, the CPTPP and other bilateral investment treaties signed by the Mexican government, as the Bill is a direct breach to these provisions. In the event of a dispute, the legal method for resolution will need to be analyzed on a case-by-case basis considering the nature of the investment.
1 The Mexican government has made public its position that the supply of power by the generation entity to its self-supply partners should be deemed as fraudulent. This is because the original self-supply scheme was developed in order for a company to build its own power generation facility and not to supply power to third parties different to this original company.
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October 20, 2021 at 01:03AM