CFE, the state-run utility, will receive priority in dispatching electricity to the national grid under the new law
CFE, the state-run utility, will receive priority in dispatching electricity to the national grid under the new law © Bloomberg

Mexico’s president Andrés Manuel López Obrador has dismissed suggestions that a law overhauling the country’s electricity market to favour a state-owned utility is unconstitutional, hours after it was passed by the Senate.

“There is nothing in it that violates constitutional rights, nothing, nothing, nothing,” López Obrador told his morning news conference on Wednesday.

Legal experts and trade lawyers have said the bill violates the constitution, USMCA and international trade treaties, and opposition politicians have vowed to pursue legal challenges. Investor unease pushed the peso down 1.4 per cent in morning trade.

The law, passed early on Wednesday, rolls back key parts of an energy reform passed in 2013-14 that created the country’s electricity market.

López Obrador, a populist nationalist who believes the state should be in control and that energy is the motor of national development, said the previous reform was an effort to squeeze CFE, the former state monopoly, out of the market.

Nicknamed the “fuel oil law” by critics, the legislation passed Wednesday changes the order in which electricity is dispatched into the national grid, relegating cheap renewables behind all power generated by CFE, including from coal and fuel oil.

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Hydropower from CFE will now be at the front of the queue for dispatch into the national grid. López Obrador said he would announce a plan to modernise the company’s hydroelectric plants “to produce clean energy more cheaply”.

CFE’s average generating costs for hydropower in 2020 were 1,400 pesos/MWh ($67) versus 650 pesos for electricity contracts under long-term supply auctions, which López Obrador has now scrapped, according to the Mexican Association of Wind Power.

Washington has already admonished Mexico over abrupt rule changes in the energy sector. López Obrador said the issue did not come up at a virtual summit with US president Joe Biden on Monday.

The peso’s fall to around 20.88 to the dollar in part reflected investors’ higher perceptions of risk in a country where López Obrador has already scrapped prominent infrastructure projects and renegotiated contracts he considers to have allowed private companies to profit at the expense of CFE and Pemex, the state oil company.

Gabriela Siller, head of economic and financial research at Banco Base, said “we do not rule out reaching levels close to 21 to the dollar again”.

Senators from the opposition PRI, PAN and PRD parties, which have teamed up to fight López Obrador in midterm legislative elections on June 6, said they would take action to the Supreme Court.

The legislation is similar to electricity rules favouring CFE that were proposed by the energy ministry last year. Those changes were ruled unconstitutional by the Supreme Court this month.

Ana Laura Magaloni, a lawyer who was among three candidates for a Supreme Court seat submitted by López Obrador in 2019, told the Financial Times it was “very shameless to send a bill [to Congress] that is unconstitutional”.

Analysts expect a flood of injunctions from renewable power companies, many of them from Europe and the US, to stop the law being applied to them.

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