Jul 20, 2022

US files USMCA dispute over Mexico’s energy policies

The U.S. is objecting to policies in Mexico that exclude energy from U.S. companies in favor of electricity and fuel from government-owned entities in Mexico, a violation of the United-States-Mexico-Canada Agreement (USMCA), according to U.S. Trade Representative Katherine Tai.

Tai announced July 20 that the U.S. has asked for dispute settlement consultations with Mexico under provisions of the USMCA, claiming Mexico has undermined U.S. companies and the energy they produce to favor Mexico’s state-owned electrical utility, the Comisión Federal de Electricidad (CFE), and state-owned oil and gas company, Petróleos Mexicanos (PEMEX).

“We have repeatedly expressed serious concerns about a series of changes in Mexico’s energy policies and their consistency with Mexico’s commitments under the USMCA,” USTR Tai said in a statement. “These policy changes impact U.S. economic interests in multiple sectors and disincentivize investment by clean-energy suppliers and by companies that seek to purchase clean, reliable energy.

“We have tried to work constructively with the Mexican government to address these concerns, but, unfortunately, U.S. companies continue to face unfair treatment in Mexico,” according to her statement. “We will seek to work with the Mexican government through these consultations to resolve these concerns to advance North American competitiveness.”

Mexico’s actions include, but are not limited to, amendments to its electricity law that would prioritize the distribution of CFE-generated power over cleaner sources of energy provided by private sector suppliers, such as wind and solar. They also include Mexico’s delays, denials, and revocations of U.S. companies’ abilities to operate in Mexico’s energy sector, including with regard to renewable energy projects, according to the Office of the U.S. Trade Representative.

Mexico’s policies have largely cut off U.S. and other investment in the country’s clean energy infrastructure, including significant steps to roll back reforms Mexico previously made to meet its climate goals under the Paris Agreement. Mexico’s policy changes threaten to push private sector innovation out of the Mexican energy market, according to the USTR. To reach shared regional economic and development goals and climate goals, current and future supply chains need clean, reliable, and affordable energy.

The USTR Office’s specific challenges include a 2021 amendment to Mexico’s Electric Power Industry Law that prioritizes CFE-produced electricity over electricity generated by all private competitors; Mexico’s inaction, delays, denials, and revocations of private companies’ abilities to operate in Mexico’s energy sector; a December 2019 regulation granting only PEMEX an extension to comply with the maximum sulfur content requirements under Mexico’s applicable automotive diesel fuel standard; and a June 2022 action that advantages PEMEX, CFE, and their products in the use of Mexico’s natural gas transportation network. These measures appear to be inconsistent with several of Mexico’s USMCA obligations, including under the Market Access, Investment, and State-Owned Enterprises chapters, according to Tai.

Background

In 2013, Mexico pursued various energy reforms, in response to which U.S. companies invested in Mexico’s energy sector. U.S. companies have:

• Established and operated wind and solar energy farms and cogeneration and combined cycle facilities in Mexico that would contribute electricity to Mexico’s grid;
• Strengthened interconnection contracts that bring U.S. electricity to Mexico across the border through wires; and
• Imported U.S.-origin fuels to Mexico for sale at gas stations.

Since December 2018, however, Mexico has pursued an energy policy centered on reinstating the primacy of its state-owned electrical utility, CFE, and oil and gas company, PEMEX.  Mexico has undertaken various measures to achieve this aim, according to Tai’s statement.  For example, in March 2021, Mexico amended its Electric Power Industry Law so that its grid operator will prioritize for dispatch to Mexico’s grid CFE-generated electricity over electricity generated by all private competitors, irrespective of cost or environmental impact.

Mexico has also taken, or is taking, actions or inactions, which are curtailing the ability of private companies to participate effectively, if at all, in Mexico’s energy sector.  These actions include, but are not limited to, delaying, denying or failing to act on applications for new permits or permit modifications; suspending or revoking existing permits; or otherwise blocking private companies’ ability to operate renewable energy facilities, such as wind and solar installations, to import and export electricity and fuel, to store or transload fuel, and to build or operate retail fuel stations.

In addition, in December 2019, Mexico’s energy regulator granted PEMEX – but not other companies, including U.S. companies – a five-year extension to comply with maximum sulfur content requirements under its fuel standard in certain parts of Mexico, which otherwise require the sale of ultra-low sulfur diesel fuel throughout the country.  Without the extension, PEMEX would have to purchase ultra-low sulfur diesel imported from the United States and/or upgrade its facilities to produce ultra-low sulfur diesel in sufficient quantities.

More recently, in June 2022, Mexico’s Secretary of Energy notified the Energy Regulatory Commission (CRE) and the National Natural Gas System Operator (CENAGAS) of a change in policy that would require, among other things, that users of Mexico’s gas transportation network demonstrate that they source natural gas from PEMEX or CFE.