Member Article

I. Introduction Mexico’s power generation sector is facing a possible crisis in the near future. The Federal Government has estimated that over 27,000 megawatts of additional power generation capacity will be needed by 2009 to avoid a power crisis in the country. Since 1960, the electricity sector has been reserved to the State. Private participation in generation activities is limited by law and the funds to increase the Country’s generation capacity will have to come from the federal budget. Despite several efforts to amend the Constitution to allow private participation in power generation activities, opposition from different political parties has prevented the initiatives from being discussed in Congress. The highly politicized energy reform is not the only problem that the Fox’s administration is currently facing to modernize the industry. Congressmen opposing to any type of privatization of the energy industry filed a complaint with the “Auditoría Superiror de la Federación” (“ASF”) asking it to review the legality of the generation permits granted by the “Comisión Reguladora de Energá” (“CRE”) to private parties. The ASF found that the generation permits granted by the CRE were illegal and contrary to the Constitution. The Energy Ministry filed a constitutional challenge before the Supreme Court alleging that the ASF does not have authority to decide on the legality of the generation permits granted to private parties by the CRE. The Supreme Court admitted the constitutional challenge and a final resolution is pending. President Fox’s administration has not been able to obtain a consensus towards an energy reform, and now it is facing a legal battle to maintain the already damaged confidence and certainty of private investors in this area. II. Legal Framework of the Electricity Industry The Mexican Constitution reserves to the state the generation, transmission, and distribution of electricity as a public service. The concept of “public service” means that only the State, through the state-owned “Comisión Federal de Electricidad” (“CFE”) and “Luz y Fuerza del Centro” (“LyFC”) may sell the electricity to the general public. The law that regulates the electricity industry is the “Ley del Servicio Público de Energía Eléctrica” (“Electricity Law”), which allows for private participation in power generation activities, as long as such activities do not fall within the concept of “public service”. Private parties may obtain a permit from the CRE to perform the following activities: • Generation and cogeneration plants for self supply of electricity, • Generation plants to sell the electricity to the state owned CFE, • Generation plants for exports, and • Facilities to import electricity for self supply purposes. These permits are normally granted upon fulfillment of the technical requisites established in the Electricity Law. Today, private generation activities amount for a total of 20% of the generation capacity in the Country. In practice, these investments have softened the burden of the Federal Government to use federal funds in this area. Nevertheless, the Federal Government would like to pass on this burden completely to private generation companies which eager to invest in generation infrastructure in Mexico, but a Constitutional reform would be needed, which under the actual political scenario, it has not been an easy task for the Federal Government. III. Current Situation of the Electricity Industry Privatization Efforts In 1999, President Ernesto Zedillo announced that the federal government would have to spend over US$59 billion in power generation infrastructure to meet the estimated demand for electricity by 2009. Zedillo realized that the investment needs were so great that the only logical solution would be to amend the Constitution to allow private participation and sell the state-owned assets. Unfortunately, this initiative was dismissed by Congress. When President Vicente Fox took office in 2000, he announced that one of his priorities would be to modernize the energy sector through private investment. Despite several initiatives to reform the energy sector no consensus has been reached. The issue has not been discussed by Congress yet and it is doubtful that it be discussed during the remainder of this administration, since political parties will concentrate its efforts in populist activities towards the 2006 presidential elections. Constitutional Challenge by Congress Against President Fox In an effort to increase private participation in the power generation industry without the need to amend the Constitution, President Fox, in 2001, issued reforms to the regulations to the Electricity Law to increase the amount of excess power that private generators could sell to the state-owned utilities. A group of Congressmen filed a constitutional challenge before the Supreme Court, accusing Fox of exceeding his presidential authority. The Supreme Court, in an unprecedented decision, ruled that the amendments were unconstitutional. Moreover, the Supreme Court, in its discussions and deliberations, considered that power generation by private parties destined to the public service could be against the Constitution, without making a final ruling on this issue since it was not the subject matter of the case. IV. Legal Controversy Review of Generation Permits Granted to Private Parties by the “Auditoría Superiror de la Federación” (“ASF”) Last year, Congressmen Manuel Bartlett and Salvador Rocha filed a request to the ASF to review the procedures under which the CRE granted generation permits to private parties. The ASF is the House of Representatives’ auditing entity, empowered to review the Government’s use of the federal budget. After a detailed review, the ASF determined that the generation permits granted by the CRE to private parties from 1996 through 2002, were illegal and contrary to the Constitution. The ASF not only reviewed the use of federal funds by the CRE, but decided to look into the legality of the procedures under which the permits were granted. The ASF found several reasons to consider the generation permits illegal, ranging from procedural to substantive issues, but most importantly the ASF relied on a study by the “Instituto de Investigaciones Jurídicas de la UNAM,” a highly recognized academic legal research institution, which concluded that the legal framework under which private parties generate electricity is against the constitutional principle that reserves all electricity activities to the State. The ASF recommended the CRE to take immediate action to correct the irregularities found the review. The ASF also found that the public officials who participated in granting the generation permits had violated the law and were subject to sanctions and penalties. The audit performed by the ASF to private power generation activities caused a great deal of turmoil among all participants in the sector. However, CRE officials and other private investors are certain that the ASF does not have legal authority to determine the legality of the generation permits granted to private parties. Last May President Fox, through the Energy Ministry and the CRE, filed a constitutional challenge before the Supreme Court against the ASF resolution. Constitutional Challenge by the Energy Ministry Against the ASF The constitutional challenge submitted by the Energy Ministry against the resolution by the ASF on the legality of the generation permits granted by CRE was admitted for review by the Supreme Court. The Energy Ministry is asking the Supreme Court to declare the ASF audit on the generation permits illegal. The Energy Ministry is alleging that: • The ASF does not have authority to determine the legality of the generation permits granted to private parties by CRE; • The ASF scope of authority is limited to review the adequate use of federal funds; • Any resolution on the Constitutionality of the legal framework under which private parties may generate electricity is the exclusive authority of the judiciary power; • The generation permits granted by CRE are in strict compliance with the laws and regulations that govern power generation activities by private parties. The Supreme Court is in the process of reviewing the challenge and will take several months before it makes a final decision. From a legal standpoint, the Constitution clearly establishes the division of powers and it is likely that the Supreme Court will rule in favor of the Federal Government. The Supreme Court will not let the authority of Congress take over matters which are strictly reserved to the Mexican Courts. V. Conclusion The need for investment in power generation activities in Mexico has raised political and legal debate on the legal framework. The Federal Government has tried to open the sector to private investment, but opposing political parties are against any type of privatization, not only by denying any type of reform, but also by accusing the Federal Government of violating the constitutional principles that reserve the electric sector to the State. The issue of the constitutionality of the legal framework of the electric sector in Mexico has brought an unprecedented interaction among the Executive, Legislative and Judiciary Powers. Hopefully, the Supreme Court will issue a resolution free from political bias, which will bring legal certainty to the participants in this industry. Contact Information: Marcelo Páramo Partner Haynes and Boone, S.C. Blvd Manuel Avila Camacho 40-1801 Lomas de Chapultepec 11000 México D.F. Tel. (52-55) 5540-5558 Fax (52-55) 5540-0630 [email protected]