The United States, Canada, and other countries have expressed concerns about changes in Mexico's energy policies for more than a year prior to the United States and Canada's formal requests for consultations against Mexico. The consultations seek the redress of grievances by both renewable and traditional energy companies, and constitute a stepping stone that may help aggrieved foreign investors and domestic private enterprises to make progress toward a smooth operation in Mexico's energy sector. The USMCA consultations may also provide a clearer pathway to bringing Investor-State Dispute Settlement (ISDS) claims for damages against Mexico for harms caused by these measures.
Background
In 2013, Mexico pursued a major energy reform, in response to which foreign investors decided to invest in Mexico. Foreign investors have (1) established and operated wind and solar energy farms and combined cycle facilities in Mexico that generate electricity and contribute to Mexico's grid; (2) strengthened interconnection contracts that bring U.S. electricity to Mexico; and (3) imported U.S.-origin fuels to Mexico for sale at gas stations. However, since the election of the current Mexican government in 2018, Mexico has pursued an energy policy focused on favoring CFE and PEMEX.
The contents of the U.S. request for consultations
The U.S. request for consultations, available here, identifies four measures that appear to breach the USMCA:
- The Electric Power Industry Law: Mexico amended this law to require CENACE, the grid operator, to prioritize electricity produced by CFE over private competitors in dispatching electricity into Mexico's grid. The measure allegedly discriminates against U.S. goods, U.S. investors, and their investments.
- Inaction, delays, denials and revocations of private companies' abilities to operate in Mexico's energy sector: Mexico has hindered private companies' ability to operate in Mexico's energy sector by delaying, denying, or failing to act on applications for new permits or permit modifications; suspending or revoking existing permits, and generally blocking private companies to operate renewable energy facilities; import and export electricity and fuel; store fuel; and build fuel stations. These measures allegedly discriminate against U.S. goods, U.S. investors, and their investments; moreover, they allegedly prohibit or restrict imports or exports of goods. Mexico is also not administering its laws in an impartial or reasonable manner, as the administering body is not regulating fairly.
- Postponement of requirement to supply ultra-low sulfur diesel for PEMEX only: In 2019, Mexico's Energy Regulatory Commission (CRE) granted only PEMEX a five-year extension to comply with maximum sulfur content requirements, which required ultra-low sulfur diesel to be sold through Mexico. The measure allegedly discriminates against U.S. goods; moreover, the CRE allegedly failed to exercise its regulatory discretion impartially by only granting PEMEX the extension and no other enterprises.
- Use of Mexico's gas transportation service: In 2022, Mexico's Secretary of Energy announced a policy and supply guarantee strategy that would incentivize or require current or future users of Mexico's natural gas transportation services to source natural gas from CFE or PEMEX, thereby imposing restrictions on imports of U.S. natural gas. The measure allegedly (a) discriminates against imported products, and (b) prohibits or restricts the import of U.S. goods to Mexico.
Next steps for the consultations, and State-to-State dispute resolution's benefits
Canada, Mexico, and the United States will enter into consultations no later than 19 August 2022.3 If they fail to resolve the matter on 3 October 2022,4 the United States and/or Canada may request the establishment of a panel.
The default rule is that the panel will compose five panelists, but the disputing parties could agree to fewer panelists (such as three) if they so choose.5 The panel's function is to objectively assess the matter and to present a report that determines whether: (1) the energy measures are inconsistent with obligations in the USMCA; (2) Mexico has failed to carry out its obligations under the USMCA; and (3) the energy measures are causing nullification or impairment.6 The disputing parties have the right to at least one public hearing before the panel.7
Dispute resolution may include the elimination of the energy measures, if possible, mutually acceptable compensation, or another remedy.8 Compensation is unlikely to include any retrospective remedy for harm (e.g., monetary damages), but rather will take the form of a prospective remedy.9 If the United States and Canada prevail, and if the countries do not agree on a settlement, the United States and/or Canada may retaliate against Mexico to counteract its harmful actions through, for example, increasing tariffs on U.S. or Canadian imports from Mexico. If the United States and Canada prevail before the panel, they likely will first seek to suspend benefits in the energy sector; if that step is not practicable or effective, they may suspend benefits in other sectors.10 Estimated harm that could be subject to trade retaliation is several billion dollars of trade and investment per year.
State-to-State dispute settlement under USMCA is a relatively fast means of dispute settlement, particularly in comparison with ISDS and World Trade Organization cases. The entire case could be resolved within approximately one year if the complaining parties press for quick resolution. Foreign investors in Mexico's energy sector should closely follow this dispute's evolution, which could cause Mexico to retaliate against foreign investors through additional harmful actions in the energy sector and/or strengthen possible ISDS claims for monetary damages.
Authored by Juan Francisco Torres-Landa R., Jonathan Stoel, Omar Guerrero, Stefan Krantz, Luis Enrique Graham, Kelly Ann Shaw, Miguel Angel Mateo S, Alejandro Garcia Gonzalez, Michael Jacobson, Orlando Federico Cabrera Colorado, and Adriana Pavon.
References
3 USMCA, Art. 31.4.5. ("30 days after the date of delivery of the request")
4 USMCA, Art. 31.6. ("within 75 days after the [US] has delivered the request for consultations")
5 USMCA, Art. 31.9.2.
6 USMCA, Arts. 31.13.1. and 31.18.1.
7 USMCA, Art. 31.11.
8 USMCA, Art. 31.18.2
9 Petr Polášek & Sylvia T. Tonova, "Chapter 12: Enforcement against States: Investment Arbitration and WTO Litigation" in Jorge A. Huerta-Goldman, Antoine Romanetti, et al. (eds), WTO Litigation, Investment Arbitration, and Commercial Arbitration, (Kluwer Law International 2013) 364.
10 USMCA, Art. 31.19.
