Mexico Energy Reform Shifting Landscape for LIE Projects under the Proposed Energy Reform

Mexico has announced a proposed series of reforms to its energy sector. The reforms include new laws and amendments to existing laws, significantly reshaping the country’s energy sector. Our analysis has confirmed that certain previously identified risks will materialize: (i) Priority for the State Utility, (ii) the Lack of an Independent Energy Regulator, (iii) Judicial Reform, and (iv) New Regulatory Framework. In this Legal Update, we summarize the current regulatory framework and the rules that will apply once the Reform is approved, as well as the impacts on international and domestic investors with certain projects.

THE CHANGES

The following changes represent a substantial departure of the current system:

Mexico has announced a proposed series of reforms to its energy sector (the “Reform”). The Reform introduces a new Power Sector Law (Ley del Sector Eléctrico, “LESE”), which replaces the existing Energy Industry Law (Ley de la Industria Eléctrica, “LIE”), and changes the regulatory framework applicable to the Mexican power sector. Once the Reform is approved by Congress and published in the Official Gazette, it will reshape market rules, re-establish state control over electricity generation, and limit private sector participation, significantly impacting existing projects under the LIE regime.

This note summarizes: I. the current regulatory framework, and II. the applicable rules once the Reform is approved, as well as the impacts on international and domestic investors with projects under LIE. Understanding the potential changes is important for planning and safeguarding interests across ongoing LIE energy projects.

REGULATORY FRAMEWORK

The LIE projects operate under a Wholesale Electricity Market, which fosters free and fair competition between public (through the Federal Electricity Commission, “CFE”) and private power projects.
The market rules prioritize cost-efficient generation through an economic dispatch model that gives priority to power plants with lower generation costs and that is applicable to both private and public generators.
CFE, its subsidiaries, and its affiliates must participate in open-market transactions under the same rules as private companies.

LACK OF AN INDEPENDENT ENERGY REGULATOR

Mexico will no longer have an independent energy regulator, as the Energy Regulatory Commission (CRE) will be absorbed by the Ministry of Energy. Key legislative changes in the Reform include:

Transfer of CRE´s Regulatory Powers: The powers of the CRE will be transferred to the newly established National Energy Commission (CNE).
CNE as a Ministry-Controlled Regulator: The CNE will operate as an entity within the Ministry of Energy, responsible for regulating, supervising, and enforcing sanctions in the energy sector. Its functions will include setting transmission tariffs and compensation rates within the industry.
Presidential Power to Appoint and Remove CNE Director: The CNE will be led and managed by a Director General, appointed by the President, and confirmed by the Senate. The President has the authority to remove the Director General at will.

The CNE, which will be under direct control of the President, will wield broad regulatory powers with direct implications for private energy generators. These powers include: (i) issuing regulations related to energy activities and ensuring its compliance; (ii) imposing and executing sanctions for non-compliance with energy laws; (iii) granting, modifying, revoking, and supervising permits in the energy sector; and (iv) requesting information from power generators—and their business partners—to provide relevant data on permits and agreements.