Amendment To The Electricity Industry Law. Ruling Issued By The Second Chamber Of The Supreme Court Of Justice Of Mexico In The Amparo Appeal 164/2023

I. Background

On March 9, 2021, the Executive Order reforming the Electricity Industry Law ("LIE Reform") was published in the mexican Official Gazette of the Federation. As a result of the Executive Order: i) Article 3, sections V, XII and XIV, Article 4, sections I and VI, Article 12, section I, Articles 26, 35 paragraph one, Articles 53, 101, 108, sections V and VI, and Article 126 section II were modified; ii) Section XII Bis was added to Article 3; and iii) a transitory legal framework was established for issuing the secondary regulation that would allow implementation of the LIE Reform, revoking power self-supply permits granted in violation of the law, and reviewing the legality of IPP Contracts.¹

Among other matters, the LIE Reform:

a) Changed the definition of Legacy Power Plants, eliminating the requirements that they had to have been operating on the date the LIE took effect, and that their type of financing had to have been direct investment included in the Federal Expense Budget, thus allowing all Comisión Federal de Electricidad ("CFE") power generation plants to qualify as Legacy Power Plants (Article 3(V)).

b) Included power purchase agreements with physical delivery obligations, which could only be entered into by basic service suppliers, being CFE the only active participant in this market (Article 3(XII) and (XII Bis)).

c) Established that legacy contracts for basic supply could only be entered into when there is a commitment for physical delivery (Article 3(XIV).

d) Broadened CENACE's ability to deny open access to transport and distribution networks when it "is not technically feasible," without establishing any parameters for that decision, and it granted priority access to plants connected to the grid that have contracts with a commitment for physical delivery, thus favoring CFE (Article 4(I) and Article 26).

e) Eliminated the economic criteria for dispatch, granting preference to plants with contracts that commit to physical delivery, favoring CFE with respect to private operators whose plants operate with more economical and cleaner sources of generation (Article 4(VI).

f) Eliminated the obligation that basic service suppliers must acquire energy from auctions (Article 53).

g) Allowed Renewable Energy Certificates ("CEL", for its acronym in Spanish) to be granted to any plant, without considering ownership of the plant or its commercial operation date, thus benefiting CFE (Article 126(II).

As a result, several power generation permit holders filed actions for constitutional protection challenging the scope and constitutionality of the LIE Reform. In Indirect Amparo Action 113/2021 and its joined lawsuits, heard in the First District Court in Specialized Administrative Matters in Antitrust, Broadcasting, and Telecommunications, the judge granted the requested amparo ("Amparo LIE Reform"), so that the articles considered to be unconstitutional would not be applied to the complainants or to any other market participant without considering that those impacts violate the principle of relativity of the amparo rulings.

The Amparo LIE Reform was challenged by the Executive Power, the Federal Attorney General's Office, the Senate, and the House of Representatives ("Appeal"), and the matter was forwarded to the Second Chamber of the Mexican Supreme Court of Justice ("SCJN"), where it was assigned number 164/2023, and Judge Alberto Pérez Dayán was appointed to hear the case.

In a session held on January 31, 2023, with a tie of two votes in favor and two votes against, the decision was made by the tie-breaking vote of the President of the Chamber, and the SCJN granted the amparo with respect to Article 4(V)(XII)(XII bis) and (XIV), Article 4(VI), Articles 26, 53, 101, 108(VI), and Article 126(II) of the LIE Reform.

II. SCJN Ruling

It is assumed that the ruling will reflect what is provided for in the draft filed for discussion,² from which it is taken that the SCJN recognizes that the Amparo Judge analyzed the LIE Reform as a normative system, which as a whole violates the principles of fair competition established in Article 28 of the Mexican Constitution, as well as the principle of sustainable development in Article 25 of the Constitution, thus it is unconstitutional. The ruling is based on a series of precedents related to those principles, as well as the scope of the regulatory powers of the State.

Significantly, the SCJN concluded that although the State has constitutional powers in matters of economic governance, this does not mean that such power can be exercised indiscriminately; rather, the State's limits and avenues for conducting its activities are established in the constitutional framework, and consequently the State must exercise its authority in compliance with the Constitution. That is, the fact that the Constitution grants such powers exclusively to the State does not mean that the State can exercise that authority without any limitations whatsoever on their scope.

"106. However, as stated in the precedent itself,³ the fact that it is the State that spearheads the economic process according to Article 25 of the Constitution, and that said article does not allow a "subjective right" for private parties, this does not mean the State has the qualification to establish any policy or scope regarding the issued rules, or that private parties are barred from filing challenges against it. [...]

107. 107. In summary, the State must comply with the various matters (and rights) established in the Constitution, because otherwise, individuals who believe their rights have been violated may sue the State through amparo lawsuits.

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143. Therefore, compliance with constitutional fundamental rights means that economic stewardship of the State is not understood to be an all-encompassing power allowing validation, of itself and ex ante, any content or normative decision that is adopted. [...]"

The SCJN additionally stated that the fact that power transport and distribution activities are to be performed exclusively by the State neither does mean that these activities can be developed in such a way that would violate the constitutional principles indicated in the preceding paragraph.

"151. As seen, the discussion is not whether the constitutional reform completely opened up the electricity industry to the participation of private parties: [...] Also not under discussion is whether the Constitution expressly assigned the Ministry of Energy the authority to establish, conduct, and coordinate the energy policy of our country. Both pillars are indisputable. However, this recognition does not mean —as incorrectly stated by the appellants— that it is admissible to establish barriers that limit competition, such as a preferred connection to the National Electricity System, or for energy dispatch, as stated in the challenged articles.

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162. The fact that it is the State that must make the main decisions about the mentioned strategic areas does not mean it can take any stance it wishes, because this power must be exercised in compliance with the general framework of freedoms, restrictions, and antitrust established in the Constitution. This is to say that the definition in the organization and management of strategic areas is also not absolute, rather, as with the function of stewardship, it must be in compliance with the other provisions in the Constitution.

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164. [...], as concluded, the challenged normative system as a whole is thought to decrease competition in power generation and/or to favor a given group of companies, to the detriment of the other participants in the power generation market, in summary due to the following:

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165. Therefore, although defining the criteria for electricity dispatch is part of the decisions for which the State is responsible, the reforms to the Electricity Industry Law violate the central pillars of the new electricity industry system. Specifically, deciding that dispatch will favor a certain group of plants distorts the process of free competition in the power generation sector, hindering the formation of a new market as ordered by the Constitutional Reforming Power, it discourages the participation of new agents in that market, and it violates the mandate of neutrality ordered by the National Energy Control Center. Consequently, as the district court judge stated, this system also violates the principle of sustainable development of the energy industry, according to the mandates also established by the authority itself."

It is therefore concluded that the unconstitutionality of the challenged rules, although they were issued as part of the State's governing power, and in relation to reserved and strategic areas, results in an impact to competition in power generation, favoring the CFE to the detriment of the other market participants, and violating the principle of sustainable development.

The SCJN also ruled that it is not tenable to introduce a barrier to competition with the objective of strengthening the CFE, because a dispatch order based on unit costs and prioritized dispatch in favor of companies that sign power purchase agreements with physical delivery obligations may only be entered into by the CFE. Therefore, without any merit whatsoever, they are given priority dispatch, even in the event of excess renewable energy.

Although it is recognized that fortifying the States' productive companies (Empresas Productivas del Estado) is commendable, it is unconstitutional that such a purpose be sought through mechanisms that impact competition, and specifically the constitutional mandate that the CFE must compete under equal market conditions, which was created with the Energy Reform of 2013, including power generation, since such competition is also a constitutionally protected objective.

Regarding the participation of Legacy Power Plants in the CEL market, the ruling states that the LIE Reform violates the principle of sustainable development by allowing old plants to acquire CEL, which creates a higher supply of those certificates, thus reducing their cost, and consequently discouraging investment in clean energy, and ultimately the goal of the Constitution in establishing CEL:

"215. That is, if generators do not meet the minimum quota of clean energy generation, they must purchase the number of certificates that will allow them to fulfill this obligation, because otherwise they will be subject to fines.

216. Note that this mechanism is developed in order to encourage energy generators to adopt clean energy measures, and furthermore, renewable energy plants can obtain greater resources by selling two assets: energy and certificates.
217. It has already been stated that, due to the challenged reform, recognition of legacy contracts was maintained, and furthermore, recognition of the legacy power plants [...] but it considered that, to acquire this capacity of legacy power plants – due to the fact of having signed a legacy contract – it is not necessary for them to have already been in operating condition or already included in the revenues budget, when the new energy system took effect.
218. Therefore, any plant owned by the State (CFE), whether or not it is new, may be considered a legacy plant.

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220. The reform thus causes not only market participants according to the new system, but also legacy plants, that is, those that are governed in accordance with the previous rules, may acquire CEL. So it is that Article 126(II) of the Electricity Industry Law was also modified to establish that "Granting Renewable Energy Certificates to Power Plants will not depend on the ownership or when was the commercial operation date of those plants."

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222. But furthermore, this modification means that more renewable energy certificates must necessarily be issued in order to meet the demand of all participants, which means the elimination of the finality and functionality of those certificates, because there will be more in the market, which thus facilitates their acquisition but not the factual generation of more clean energy.
223. [...] if there are more certificates in the market, it will be easier to acquire them and easier for companies to fulfill this commitment, but there will be no incentive for effective production of this clean energy, which is the purspuse that was sought by the Constitutional rule."

Finally, the SCJN determined that Transitory Provisions Four and Five of the LIE Reform, referring to the mandates that i) the CRE (Energy Regulatory Commission) revoke power self-supply permits; and ii) IPP Contracts be revised as a whole, are not provisions that take effect immediately, therefore, the impacts that permit holders that have filed the LIE Amparo lawsuit might suffer, are conditioned on a first application, which did not occur, thus dismissal of the lawsuit with respect to the indicated Transitory Provisions was ordered.

III. Impacts of the SCJN's Ruling

As mentioned, the SCJN's ruling confirms the effects of the appealed ruling, both those that benefit the complainants, as well as every economic participant in the Wholesale Electricity Market.

Indeed, it declares the arguments of the Executive Power unfounded, which had stated that broad application of the ruling violates the principle of relativity (the amparo should only benefit the party that files the suit). This consideration is supported by Article 78 of the Law of Amparo, which allows judges to issue additional measures in the event that a general rule considered to be unconstitutional is not applied, when the effects of the amparo impacts third parties. The following is specifically established:

"249. [...] Thus the judge hearing the case, when laying out the impacts of constitutional protection, stated the following:

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1. b) So as not to create a normative gap, as an additional measure the provisions that were in effect prior to the issuance of the demanded precepts must remain in effect, that is, the original text of Article 3(V)(XII)(XIV), Article 4(VI), Articles 26, 53, 101, 108(VI) and 126(II) of the Electricity Industry Law, and the regulation that governs them.
2. c) Also as an additional measure, it was stated that even when a constitutional ruling does not protect anyone other than the complainant, the indicated impacts could have repercussions on third parties, because regulation of the wholesale electricity market is not tied to the isolated situation of one party to the exclusion of the rest, rather, even if the particular situation of one party were to be analyzed, it would necessarily have repercussions on the entire market; therefore, by virtue of the amparo, there will of course be general consequences with respect to all economic agents that participate in the market; especially because, if the collateral results of constitutional protection are not recognized, this could create a different distortion in that market, because it would place complainant companies in a precise position of specificity in the competition's plan.
3. d) Especially because the normative system against which complaints have been filed was considered to have violated the principle of sustainability —given that it does not progress in promoting the use of clean energy— which restitution requires effects throughout the entire electricity market.

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254. Otherwise, that is, restraining the impacts exclusively to the companies seeking constitutional protection, including when they participate in the Wholesale Electricity Market, when competing to win electricity contracts and network access, as well as participating in acquiring renewable energy certificates, this would have the result of certain rules being applied to some, and other rules being applied to other market participants, which would not only cause differentiated treatment, which is not suitable for restoring the complete enjoyment of the violated constitutional principles and rights, rather, it would be materially impossible, because this industry cannot operate unequally. That is, in the same market, the behavior of the State (as the steward of the industry and as a parastate company) cannot be placed on one plane in certain cases, and on another plane in other cases.
255. Therefore, it must be concluded that the impacts listed in the amparo ruling are not excessive, rather they are fitting with the nature of the acts against which suits were filed, and the manner in which the specific situation of those involved materialized."

In practice, the ruling on Amparo Appeal 164/2023 means that the articles declared to be unconstitutional to the benefit of all electricity industry participants will not be applied as a general rule, even though there is not a General Declaration of Unconstitutionality, denying the practical impacts of the LIE Reform.

IV. Amparo suit under review 106/2023

In addition to the foregoing, listed in the same session was the intention to issue a ruling on the Amparo Appeal 106/2023, which is being heard by Judge Javier Laynez Potisek. However, this case has been withdrawn from the agenda in several occasions so that, at the moment, the date of its resolution is unknown.

As the current public project, this case also confirms the decisions in the ruling issued by the corresponding amparo judge, who granted amparo against application of the same articles that were the subject of the matter that was recently resolved, with the only exceptions being that i) Articles 4(I) and 108(V) also are to be declared unconstitutional; and ii) in this case, the effects of the ruling only benefit the complainants, nevertheless, in no way does this affects the general effects recently stated by the SCJN to the benefit of all economic participants in the market.

Footnotes

1. Power Purchase Agreements signed with private operators which, prior to the Energy Reform of 2013, acquired the capacity of Independent Power Producers, and in some cases, External Power Producers.

2. It has not been sufficiently fleshed out.

3. Amparo Appeal 1642/1995.

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