Economics: Electricity sector reform proposal entails major risks for the Mexican economy

MEXICO - Report 12 Oct 2021 by Mauricio Gonzalez and Francisco González

In the latest chapter of the current administration’s efforts to roll back the energy sector reform that was fully adopted in 2014, on the final day of September it presented Congress a constitutional reform proposal focused on the electrical power industry. Well before we have gotten a clear look at the complements of the proposal (secondary laws) or an idea of how likely passage might be at this point, it has generated considerable uncertainty due to the profound negative economic implications it would entail. Nevertheless, it seems clear at this point that implementation of the administration’s reform could have direct adverse consequences on energy sector competition and efficiency and violate multiple treaty clauses, including those of the USMCA, as well as contracts that until now have been protected by laws adopted seven years ago.

Numerous analysts have argued that the unilateral cancellation of permits and contracts would essentially imply an indirect expropriation of investments that arose out of the 2014 constitutional reform of the energy sector and related secondary legislation. Furthermore, it would generate enormous uncertainty, not only in the energy sector but rather throughout the entire economy. Blocking competition and strengthening the governmental monopoly could impose the CFE’s cost inefficiencies on the entire Mexican economy, as well as imposing obstacles to allowing electric power supply to keep pace with economic growth.

One of the most direct consequences could be a rise in rates and fees or a government decision to disregard the debilitated state of public finance limits and expand subsidies to keep prices artificially low. Key sectors of the economy could feel the impact both directly in the form of higher electricity costs and insufficient supply, and indirectly from rising input costs for electric-power-intensive sectors.

In the context of rising electricity costs globally, this week we begin our analysis of the reform proposal by focusing on which branches of economic activity stand to suffer the greatest cost impacts. Those effects will pressure their product costs to the detriment of households, erode the competitiveness of businesses, and disincentivize them from investing to scale up production.

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