In Short

The Situation: In 2021, Mexican President Lopez Obrador proposed a Reform Initiative to transform the electricity sector in Mexico by transferring control of the sector to the state and imposing onerous restrictions on private investment.

The Result: President Lopez Obrador's initial plan was to amend both the existing Electric Industry Law and Mexico's Constitution. Lately, the Reform Initiative has suffered legislative setbacks in Mexico's district courts and the House of Representatives. In response, President Lopez Obrador has shifted his strategy to targeting the lithium mining sector, which he is attempting through a proposal to modify Mexico's Mining Law so that lithium remains the absolute property of Mexico. Such changes will likely have a harmful effect on foreign investors involved in lithium concessions in Mexico.

Looking Ahead: Foreign investors negatively affected by the Reform Initiative may be able to pursue remedies under Mexican law through amparo actions and/or under international law through applicable investment treaty protections.

Last year, Mexico's President Andrés Manuel López Obrador ("AMLO") began a series of efforts aimed at reforming Mexico's electricity sector in a manner that would reverse the rights granted to private investors in 2013 (the "Reform Initiative"). The President's Reform Initiative, which aims to shift control of Mexico's electricity sector to the State and will impose several onerous restrictions on private investment, was met with strong criticism domestically and internationally, as reported in our previous Jones Day Commentary. To increase its chances of successfully implementing the Reform Initiative, the AMLO Administration has sought to pass it via amendments to: (i) the existing Electric Industry Law ("EIL"); and (ii) the Constitution. In recent weeks, the Reform Initiative has suffered setbacks, in both Mexico's courts and before the legislature, but because it remains a priority of the AMLO administration, it merits continued attention, especially by those involved in the lithium sector, which appears to be AMLO's next target.

Electric Industry Law Reform Bill

In January 2021, AMLO sponsored a bill aimed at modifying Mexico's EIL (the "Reform Bill"). Some of the most drastic changes included amending the grid dispatch rules to prioritize electricity generated by Mexico's State-owned utility ("CFE" for Comisión Federal de Electricidad), granting clean-energy certificates ("CELs") to CFE's power plants without any verification, thereby diluting the value of certificates granted to clean energy generators to incentivize investment in that sector, entitling the Energy Regulatory Commission to revoke power generation permits granted to electric companies, and prompting a review of long-term power purchase agreements executed with investors. On March 2, 2021, the Mexican Federal Senate approved the Reform Bill, effectively reversing rights granted to private investors by the 2013 Energy Reform.

Shortly after the Reform Bill entered into force, numerous foreign and domestic investors filed constitutional challenges (known as amparos in Mexico) in local courts against the Reform Bill. Thus far, Mexico's district courts have granted approximately 200 general-effect stay requests, which have temporarily suspended application of the Reform Bill while the amparo challenges work their way through the courts.

Separately, in April 2021, both the Federal Economic Competition Commission , an opposition legislative group in the Senate, and the State of Colima, filed three constitutional challenges before Mexico's Supreme Court arguing that the Reform Bill is unconstitutional as it contradicts established competition and free market access principles (the "Senate Challenge"). On April 7, 2022, the Supreme Court ruled on the Senate Challenge. Seven justices held the Reform Bill to be unconstitutional, with the remaining four justices voting to uphold it. Under Mexican law, for the Reform Bill to have been declared unconstitutional, with general effect, a supermajority of eight out of the Supreme Court's eleven justices needed to have held it unconstitutional.

Notably, the manner in which the justices' votes were counted was questionable. In particular, instead of counting the number of votes based solely on whether each justice considered the Reform Bill constitutional or unconstitutional to consider whether the eight-vote requirement was met (as is customary and, importantly, which would have meant a supermajority had been achieved), the votes were counted based on the specific human right that each justice argued was violated by the Reform Bill. In this case, seven of the justices considered that the Reform Bill was unconstitutional for: (i) violating economic competition; and (ii) negatively affecting the environment, while another justice only considered that the reform was unconstitutional for negatively affecting the environment. Because one justice did not find the Reform Bill unconstitutional on both grounds, a supermajority was not achieved and the Reform Bill survived intact.

The details and effect of the Supreme Court's ruling will become available when it is published in the coming weeks.

Efforts Aimed at Constitutional Reform

The second prong of the Reform Initiative was AMLO's separate legislative proposal to amend Mexico's Constitution, namely by amending articles 25, 27, and 28 and including a number of additional temporary articles (the "Constitutional Reform Initiative"). As explained in Jones Day's previous Commentary, the Constitutional Reform Initiative included drastic changes to the electricity sector with potentially devastating effects on foreign investors, including:

  • The Mexican state-owned utility, CFE, would become the only entity allowed to commercialize electric energy in Mexico;
  • The Wholesale Electric Market would no longer exist;
  • All existing and pending permits for electric energy generation, as well as all agreements for the purchase of electricity executed /by the public sector, would be cancelled;
  • CELs would be cancelled;
  • The private sector would be limited to generating 46% or less of Mexico's energy requirements and would be required to sell to CFE exclusively under an unclear and contradictory sales scheme; and
  • Lithium would be classified as a "strategic mineral" for the energy transition, meaning that no concessions would be granted for its exploitation.

Most troubling for foreign (and domestic) investors was the fact that, as stand-alone legislation, if enacted, the Constitutional Reform Initiative will not be subject to challenge as unconstitutional through the filing of amparos or any other domestic proceedings. For the Constitutional Reform Initiative to be successfully enacted, approval is needed from a two-thirds majority vote of Mexico's House of Representatives, and then approval from two-thirds of the Mexico Senate. If approved by both Chambers of Congress, the Constitutional Reform Initiative will then require approval from 17 out of the 31 Mexican Federal States before the President can sign it.

The first of these steps occurred on April 17, 2022, when Mexico's House of Representatives voted on the Constitutional Reform Initiative. AMLO's party, the National Regeneration Movement ("MORENA"), fell short of the required two-thirds majority by at least 60 votes. During the session, which lasted more than 12 hours, only 275 lawmakers from the 500-seat House of Representatives voted in favor of the Constitutional Reform. Jorge Alvarez Maynez, member of the opposition party Citizens' Movement, noted while voting against the Reform that "[t]here isn't a specialist, academic, environmentalist or activist with a smidgen of doubt – this bill would increase electricity prices, slow the transition to (clean) energy in our country and violate international agreements." Having failed to secure the required votes, the Constitutional Reform Initiative was unsuccessful.

Lithium AMLO's Target Achieved

Despite the Constitutional Reform Initiative's failure, the President is resolved to push through with his Reform Initiative, at least as far as lithium is concerned. He had previously noted on numerous occasions that if Congress blocked the Constitutional Reform Initiative (as it did), he would send an initiative to modify Mexico's Mining Law so that lithium can only be exploited by the Mexican State and would thus remain the absolute property of the people and the nation. Lithium is a strategically important metal used in electric vehicles and green fuel technologies. And there are currently at least 17 lithium concessions involving foreign investors in Mexico.

As AMLO promised, by the end of the vote on the Constitutional Reform Initiative on April 17, 2022, he had already sent his draft initiative to modify Mexico's Mining Law to Congress, where it was approved in a "fast-track" manner the following day (on April 18) in the House of Representatives and on April 19 in the Senate. On April 20, 2022, after virtually no legislative analysis and a fast-track approval, the amendments to the Mining Law were published in Mexico's Official Gazette. The amendments entered into force on April 21, 2022, and contain three main changes affecting lithium production in Mexico:

  • Granting concessions, permits, contracts, or any applicable licenses to explore and produce lithium is now prohibited;
  • A State-Owned Enterprise called the "Organismo Descentralizado" (translated as "Decentralized Agency") that will have an exclusive right to carry out lithium exploration and production activities was created; and
  • The Decentralized Agency was granted full control over lithium "value chains."

These changes will likely have a harmful effect on foreign investors involved in at least 17 lithium concessions in Mexico.

What Can Foreign Investors Do to Protect Their Investments?

Foreign investors may be able to pursue remedies under Mexican law through amparo actions and/or under international law through applicable investment treaty protections. However, how a particular investor seeks protection is an important strategic decision that involves a case-by-case analysis to ensure, among other things, that domestic actions do not inadvertently and permanently foreclose the foreign investor from exercising its international law rights.

Potential Remedies Under Mexican Law

A Supreme Court decision dated February 22, 2022, held that all circuit and collegiate courts must suspend any amparo proceedings related to the Reform Bill until the Supreme Court had resolved the Challenges. Thus, all the ongoing amparo claims filed by foreign and domestic investors have been put on hold since that date. In order for investors to proceed with their amparo actions, the Supreme Court must issue a separate resolution lifting its suspension order. Therefore, companies that have filed amparo claims have no option but to wait until that happens.

Other possible remedies under Mexican law might include a nullity claim challenging the validity of the law or the filing of a new amparo claim against a particular act taken by the Energy Authorities. Such remedies, however, would become available only when the Reform Bill is applied to a particular energy company. As of now, since there are general-effect stay requests in force, the only remedy for investors is to continue with their ongoing amparo actions.

International Law Relief

Mexico is a party to more than 45 international investment treaties and free trade agreements that include investment protection. Under Mexican law, international treaties are on par with rights granted under Mexico's Constitution. Therefore, while considering legal options to challenge the Reform Initiative or AMLO's new proposed amendments to Mexico's Mining Law, foreign investors should consider a combined international and domestic approach.

The first step in any international law approach is to analyze the investment's corporate structure to determine whether there is an applicable international treaty providing investment protections. These include the various bilateral investment promotion and protection treaties ("BITs") in force between Mexico and other countries (e.g., those with Spain, the Netherlands, Germany, and France, among others), as well as multilateral treaties such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP") between Mexico, Australia, Canada, Japan, New Zealand, Peru, Singapore, and Vietnam, and the Agreement between Mexico, the United States, and Canada ("USMCA"). USMCA is of particular relevance to U.S. investors, though its international law protections may be more limited than those found in other treaties. Moreover, while the North American Free Trade Agreement ("NAFTA") was terminated and replaced by USMCA in 2020, until July 1, 2023, some foreign investors can still rely on Chapter Eleven of NAFTA for investments made while NAFTA was in effect (so-called "legacy investments"). It is worth noting, however, that NAFTA's applicability may be limited as it contains broad exceptions for the energy sector.

Once the applicable treaty or treaties are identified, investors should carefully examine each treaty as the availability of international law protections and the strength of these protections can vary widely, with some treaties providing more stringent procedural requirements and/or more robust international law protections to foreign investors. One such procedural restriction is a temporal limitation for bringing an investor-state arbitration claim. For example, investors seeking to initiate arbitration against Mexico under USMCA's Annex 14-D are required to exhaust local remedies until they receive a final ruling from a court of last resort or spend at least 30 months in local proceedings, but they also must bring their claims within four years.

Another limitation is a so-called "fork-in-the-road" provision, which requires an investor to choose between initiating a domestic proceeding or an international arbitration. While not all fork-in-the-road provisions are created equal, some are so stringent that investors could be foreclosed from all international law rights under the applicable treaty if an amparo action is filed and decided in Mexican courts. But even where the applicable treaty does not contain a "fork-in-the-road" provision, and domestic actions can be filed without jeopardizing international law protection, it is important to have local and international counsel working together to ensure that the arguments made in local courts are compatible with those that may be made under international law at a later time.

Accordingly, foreign investors negatively affected by the Reform Initiative would benefit from consulting with international counsel before additional domestic actions are filed to preserve and maximize potential international law claims and remedies.

Three Key Takeaways

  1. Foreign investors should analyze the investment's corporate structure to determine whether there is an applicable international treaty providing investment protections.
  1. Foreign investors should carefully examine each treaty as the availability of international law protections and the strength of these protections vary widely.
  1. Before initiating any domestic legal actions, foreign investors should ensure that such actions do not inadvertently foreclose potential international law claims and remedies.