On February 3rd, 2021, during the ordinary session of the Second Chamber of the Supreme Court of Justice (the “Supreme Court” or «SCJN», for its acronym in Spanish), the court resolved on the constitutional controversy (the «Controversy») presented by the Federal Commission of Economic Competition («COFECE», for its acronym in Spanish) in connection with the Policy for the Reliability, Safety, Continuity, and Quality of the National Electric System (the «Policy»).

The Supreme Court resolved that the following concepts of the Policy are invalid:

• The feasibility report and the inclusion of intermittent renewable energies1;

• The economic dispatch in order to restrict the entry of certain participants into the electric market,2 and

• Certain exclusive benefits and fortifying measures on the Comisión Federal de Electricidad (“CFE”, for its acronym in Spanish)3.

The Supreme Court resolved that the following provisions of the Policy are valid:

• Certain strengthening measures on CFE that are not regarded to violate principles of open market and economic competition,4 and

• New ancillary services and capacity balance of intermittent renewable energies5.

Invalid Provisions

Feasibility and inclusion of renewables

• SCJN resolved that the National Energy Control Center («CENACE», for its acronym in Spanish) is not empowered to decline applications for interconnection studies, nor issue a feasibility report to be taken into consideration by the Energy Regulatory Commission («CRE», for its acronym in Spanish) when assessing the granting of generation permits, and that CRE is in any case entitled to request such a report from CENACE if deemed necessary.

The Supreme Court also resolved that it is necessary to encourage investment in the renewable sector to comply with national goals and that not allowing the participation of renewable energies in the National Electric System («SEN», for its acronym in Spanish), under the argument of ensuring reliability, represents a discriminatory measure that leads to legal uncertainty.

Dispatch

• The Supreme Court resolved that the Ministry of Energy («SENER», for its acronym in Spanish) and CFE are invading the authority conferred upon CRE and CENACE, limiting the entry of new participants into the market and providing exclusive benefits to CFE, which results in dispatch instability and impacts economic efficiency, all against the model established by the energy reform and a free competition regime.

A limitation of private participants in the electric market, especially in the renewable sector would be in detriment of generators, off-takers and consumers, and the general public due to environmental and health consequences of favoring the generation of energy out of traditional sources. This is the reason why, as part of its arguments, SCJN stated that the relevant provisions would be «…limiting the dispatch of Power Plant Units with Intermittent Renewable Energy, thereby definitely reducing their ability to participate in the market, given that this leads to the impossibility of providing electricity regardless of whether or not they are more efficient»6

. SCJN emphasized that these provisions also threaten existing international obligations and agreements, especially where specific objectives were established to guarantee open competition, free trade, and specific contributions to solve environmental pollution and to protect the right to a healthy environment.

Exclusive benefits and fortifying measures on CFE

• The Supreme Court resolved that certain measures distort the market, affording exclusive and clear advantages to CFE as a market participant. Likewise, it was pointed out that the energy reform requires CFE to cease being treated as privileged entity and is regarded a competitive entity in the market, and that there is not a clear legal segregation between the State and CFE, which violates the rights of free market and economic competition, thus creating a disadvantage for the other participants in the market.

Valid Provisions

Strengthening measures on CFE that do not violate open market and economic competition

• SCJN resolved that some measures are valid, as they do not violate principles of an open market or economic competition, nor they afford a competitive advantage to CFE.

SCJN considered that the Policy validly provides for strategies and resources intended to strengthen CFE, aiming to convert it from a state-owned monopolistic company into a competitive participant in the market, as stated in the energy reform, which has as one of its main objectives precisely to establish the conditions necessary to promote the efficient and competitive development of the market.

Ancillary services and capacity balance

• In the last group analyzed, which addressed new ancillary services and capacity balance for intermittent renewable energies, the Supreme Court resolved that the provisions of such group do not imply disadvantages for renewable generators since «…it has been seen that renewable energy power plants have specific characteristics, such as intermittency; therefore, it is valid to grant them a treatment different to others…» and that, as provided in the Policy, such treatment will be based on specific characteristics of this type of energy, guaranteeing the safety, continuity, reliability, and quality of SEN.

The resolutions reached by the SCJN will become effective as of the date of notification to defendant authorities.