Renewable energy investors in Mexico have recently faced a series of governmental measures that strengthened the market position of Mexico’s state-owned utility company, Comisión Federal de Electricidad (CFE), to the detriment of private utilities.
These measures culminated in the March 2021 legislative changes to Mexico’s Power Industry Law (the Amendments) that entered into force on March 10, 2021. For the time being, a federal court granted a temporary injunction against the Amendments. However, it is unclear whether that injunction will become permanent in the upcoming days as the administration of President Andres Manuel Lopez Obrador is exerting significant pressure on the judicial and legislative branches to allow the Amendments to go forward.
This LawFlash summarizes how the March 2021 Amendments are likely to negatively affect investors in renewable energy projects in Mexico, and how investors can effectively protect their investments in international arbitration.
On March 2, 2021, Mexico’s Senate approved the Amendments to Mexico’s Power Industry Law. The Amendments were directly sponsored by President Lopez Obrador. The Amendments aim to improve the market position and ultimately the profitability of the state-owned CFE to the detriment of private energy producers, including foreign investors in renewable energy.
In summary, the Amendments implement the following changes that will likely impair the profitability of renewable energy investments in Mexico:
Foreign investors have two options to protect their rights and investments against the Amendments: to either pursue domestic remedies before Mexican courts or seek recourse to international arbitral tribunals outside of Mexico. These remedies are usually mutually exclusive as many investment treaties contain so-called “fork in the road” clauses that do not allow an investor to bring a claim in arbitration if he has already challenged the measures in a domestic court.
Access to international arbitration is available to all foreign investors from a home state that has concluded an investment treaty with Mexico. At present, Mexico is party to 29 Bilateral Investment Treaties (BITs) with 30 countries that allow for investor-state arbitration. The BITs afford substantive investment protection to investors (individuals or legal entities) from countries such as Spain, Italy, Denmark, United Kingdom, Korea, France, Germany, Netherlands, Switzerland, and China.
Additionally, US investors can bring arbitration claims under the United States-Mexico-Canada Agreement (USMCA) that entered into force on July 1, 2020, and replaced the North American Free Trade Agreement (NAFTA). For US investors that invested in Mexico before July 1, 2020 (so-called “legacy investment claims”), the USMCA establishes that such investors can still initiate an arbitration under the protection provisions of NAFTA until the final cutoff date of June 30, 2023.
Finally, Mexico is also party to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that protects investors from Australia, Canada, Japan, New Zealand, Singapore, and Vietnam.
Under the majority of these investment treaties, Mexico is obliged to (1) treat foreign investors’ investments fairly and equitably, including in line with investors’ legitimate expectations; (2) treat foreign investors no less favorably than its own nationals and the nationals of other states; (3) compensate, at fair market value, for any direct or indirect expropriation of investment; and (4) comply with contractual obligations assumed with regard to investments.
A violation of such investment protection obligations by Mexico allows a foreign investor to seek recourse to international arbitration. Given the likely negative impact of the changes introduced with the Amendments, there is a strong case to be made that Mexico has violated such obligations vis-á-vis its foreign renewable energy investors.
Sharing insights and resources that help our clients prepare for and address evolving issues is a hallmark of Morgan Lewis. To that end, we maintain a resource center with access to tools and perspectives on timely topics driven by current events such as the global public health crisis, economic uncertainty, and geopolitical dynamics. Find resources on how to cope with the globe’s ever-changing business, social, and political landscape at Navigating the NEXT. and Coronavirus COVID-19 to stay up to date on developments as they unfold. Subscribe now if you would like to receive a digest of new updates to these resources.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Humberto Padilla Gonzalez