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EXPLAINER: Why is the United States upset with Mexico’s Electricity Law? | business news

MEXICO CITY (AP) — Mexico’s Congress will vote on a constitutional reform promoted by President Andrés Manuel López Obrador that would undo much of the opening of the electricity market carried out by his predecessor. It is unclear whether López Obrador has the votes to push through the reform. But the US and other countries have raised concerns that the move will hurt foreign investors and violate trade agreements.

WHY DID MEXICO INVITE FOREIGN COMPANIES?

Before the 2013 energy reform, Mexico faced several problems: high electricity rates, low generation capacity, and dirty power plants that often burned fuel oil to produce electricity. So the government built pipelines to import cleaner US natural gas, allowed companies to buy electricity from independent generators, and gave foreign and private companies incentives to install cleaner wind turbines or gas-fired plants.

WHY DOES THE PRESIDENT OF MEXICO WANT TO UNDO THE REFORM?

Mexico may have given too many incentives to private and foreign companies. They received preferential pricing and purchasing treatment, and did not have to pay fees to the state utility, the Federal Electricity Commission, for distributing power through government-owned transmission lines.

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The state-owned utility company lost market share and revenue, but still had to maintain transmission lines. Worse yet, with some government plants sitting idle, fuel oil, a dirty byproduct of Mexico’s antiquated oil refineries, began to accumulate, until there was no place to store it.

WHAT DOES THE CURRENT REFORM INTEND TO DO?

López Obrador likes state companies and does not want the Federal Electricity Commission to go bankrupt or lose more market share. Therefore, he has proposed to guarantee the commission a market share of at least 54% of the electricity market, with private companies granting “up to 46%”. He would give himself preference to the commission, buying power from his own plants first, while cleaner power from private generators would often be last in line.

For example, the reform puts private natural gas plants almost last — ahead only of government coal-fired plants — for the rights to sell electricity to the grid, even though they produce power 24% cheaper.

WHAT ARE THE OBJECTIONS TO THE PROPOSAL?

Private companies, mainly from Spain and the United States, invested billions of dollars in Mexico to build wind, solar and gas plants under the terms of the 2013 reform. Now, suddenly, the government wants to change those rules.

And companies with plants, factories and stores in Mexico need to plan how much their power costs will be and how green the power will be, so they often sign long-term power supply contracts with private generators. These contracts could now be declared illegal.

Mexican laws require free competition in the electricity industry. And the United States-Mexico-Canada Free Trade Agreement, or USMCA, prohibits member nations from passing laws that favor domestic producers or state-owned companies.

WHAT IS LIKELY TO HAPPEN?

Many lawsuits and possibly business disputes. Critics say the reform will hurt investors and their confidence in Mexico. The companies are likely to file court injunctions and the US government will file suit under the USMCA, which could eventually result in countervailing duties on Mexican products.

López Obrador has already approved a law that gives the state utility company more discretion in deciding who to buy electricity from, but it remains stalled by court challenges. The president may not win the two-thirds majority in Congress needed to pass the constitutional reforms he seeks.

Critics say the reforms could end up forcing Mexicans, and US auto and retail companies that work in Mexico, to buy more expensive and dirty electricity.

IS IT ONLY ELECTRICITY THAT WOULD BE AFFECTED?

No. López Obrador also included a clause declaring lithium, a key component of batteries for electric cars and other devices, a strategic mineral that only the government can exploit. A Chinese company has invested in a still unopened Mexican mine. Even if the electricity reforms fail, López Obrador promised to send another separate bill on the lithium issue to Congress.

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