Mexican energy measures impacting foreign investment: an update and potential investor-state dispute remedies

Introduction

In 2013, Mexico pursued reforms that facilitated and encouraged foreign investment in Mexico’s energy sector. These foreign investments included the establishment and operation of wind and solar energy farms in Mexico, the implementation of interconnection contracts to bring U.S. electricity to Mexico and the importation of U.S.-origin fuels to Mexico, among others.

Then, in December of 2018, Mexico shifted toward a more insular energy policy as a result of the election of a new president who has publicly urged the Mexican energy regulatory sector to strengthen domestic energy policies to favor the Mexican Federal Energy Commission (CFE), and petroleum company, Petróleos Mexicanos (Pemex). As a result, the United States has estimated that as of June 2022, current Mexican energy policies have negatively impacted over US$30 billion of investments from United States investors and investments. This article provides an update on state-to-state consultations between the United States, Canada and Mexico and explores potential remedies for international investors whose investments may be impacted by Mexican energy policy.

State-to-state consultations under the USMCA

The United States-Mexico-Canada Agreement (USMCA) entered into force on July 1, 2020, effectively replacing the North American Free Trade Agreement (NAFTA) and providing a sunset period for certain NAFTA provisions. The United States initiated consultations with Mexico under USMCA on July 20, 2022 to address its key concerns, namely that Mexican energy policy favors the CFE and Pemex and disadvantages foreign investors. The United States asserts that:

1. Mexico’s Electric Power Industry Law prioritizes electricity produced by CFE over private competitors in dispatching electricity into Mexico’s grid;
2. there have been inactions, delays, denials and revocations of private companies’ abilities to operate in Mexico’s energy sector; and
3. the following are objectionable:

a) a regulation issued by Mexico’s Energy Regulatory Commission granting only Pemex a five-year extension to comply with maximum sulfur content requirements under the applicable automotive diesel fuel standard; and

b) a letter sent by Mexico’s Secretary of Energy to the heads of Mexico’s Energy Regulatory Commission and National Natural Gas Control Center announcing a policy that would incentivize or require users of Mexico’s natural gas transportation service to source natural gas from CFE or Pemex, and would impose restrictions on the importation of U.S. natural gas.

Canada has since joined as a party in these consultations.

The USMCA provides that a state party may request the establishment of a tribunal if the states do not resolve the matter under consultation within 75 days after the request for consultations was made. If established, the USMCA provides a tribunal with the power to determine whether measures at issue are inconsistent with the USMCA’s obligations, and, if requested by the disputing states, to issue recommendations for the dispute’s resolution.

The United States has been able to request the establishment of a tribunal since October 3, 2022. To date, however, it has refrained from doing so as the parties have continued to engage in discussions. For example, the United States Trade Representative (USTR) has noted that the parties met virtually on November 3, 2022, in person on December 1, 2022, and in San Diego, California on January 25, 2023 to discuss the Mexican energy policies at issue.

While not announced in official channels, it was reported in March 2023, that the United States plans to make a “final offer” to Mexican negotiators to open Mexican markets or agree to some increased oversight. If a tribunal is ultimately established and goes on to determine that Mexico’s measures breach its USMCA obligations, serious economic consequences could follow. For example, if the parties are unable to agree on a resolution to the dispute within 45 days from receipt of a Panel’s final report, the USMCA authorizes the United States and Canada to issue sanctions against Mexico in the amount of the impact caused by the nonconforming measures.

Investment remedies for United States investors under USMCA

United States investors in Mexico may be able to pursue claims under the USMCA for investments impacted by the Mexican energy policies. While the deadline to submit a legacy investment claim under NAFTA may have passed, the USMCA provides that an investor may submit a claim to arbitration under two Annexes of the USMCA.

• Annex 14-D allows United States investors to bring claims for national treatment, most-favored-nation treatment, and direct expropriation. However, investors must first exhaust local remedies in Mexico, which would involve filing a complaint with a competent court or administrative tribunal and obtaining a final decision from a court of last resort. Alternatively, an investor must wait for 30 months to elapse, or demonstrate that recourse to domestic remedies is “obviously futile.”
• Alternatively, Annex 14-E sets out a special regime for resolving disputes for “covered government contracts” in “covered sectors.” In this context, a “covered government contract” means (a) a written agreement between a Mexican national authority; and (b) a covered United States investment or United States investor; where (c) the covered investment or investor relies in establishing or acquiring a covered investment other than the written agreement itself; and (d) where that contract grants rights to the covered investment or investor in a covered sector. “Covered sectors” include oil and gas, power generation, telecommunications, transportation and infrastructure. Annex 14-E provides a forum for United States investors to resolve the contractual disputes that may arise in the aforementioned industries. Notably, Annex 14-E does not require United States investors to exhaust local remedies in Mexico.

Investment remedies under other multilateral agreements and bilateral investment treaties (BITs)

Investors may have recourse under other multilateral agreements with investment protections, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Pacific Alliance Additional Protocol and the MERCOSUR-Mexico Complementation Agreement. Notably, Canadian investors may be able to seek protections under the CPTPP.

Mexico is also party to 36 bilateral investment treaties (BITs) including with Argentina, France, Italy, Spain, Switzerland, the United Kingdom and Uruguay. Investors originating from states that have BITs with Mexico should review the availability of investor-state dispute resolution under those treaties.

Final considerations for investors

Investors should continue to monitor developments in the US, Canada and Mexico state-to-state consultations regarding Mexico’s 2018 energy-related measures and consider the various dispute resolution options they may have in respect of investments impacted by the these policies. Investment planning for current and future investments that may be affected by Mexican energy policies is key, including careful review of applicable investor-state protections, which depend on nationality of the investor and differ from treaty to treaty.