Mexican Court Ruling Throws AMLO’s Power Revamp Into Doubt

(Bloomberg) -- The Supreme Court's rejection of a planned overhaul of Mexico's power sector dealt a setback to President Andres Manuel Lopez Obrador's efforts to give preferential treatment to the state-owned utility.

Mexico's highest court decided that some regulatory changes made by the country's energy ministry were anti-competitive and harmful to the clean energy transition. Its ruling increases the risk of a presidential bill modeled on similar lines being overturned by the courts if it gets congressional approval, according to some analysts.

“The Supreme Court's decision sends a strong signal to congress ahead of this discussion,” Rodolfo Ramos, an analyst at Bradesco BBI, wrote in a note on Thursday, a day after the ruling. “The fight is far from over.”

Since taking power in 2018, the president, who is known as AMLO, has vowed to shore up Mexico's embattled state-run companies and reverse a previous move to open up the energy industry to private operators. His reform bill -- which gives priority to Comision Federal de Electricidad, or CFE, to supply electricity in the country -- has came under fire from the business community.

​The U.S. Chamber of Commerce warned on Friday that the electricity bill, if passed, would be in contravention of Mexico's commitments under the USMCA trade agreement.

‘Troubling Decisions'

“Unfortunately, this move is the latest in a pattern of troubling decisions taken by the Government of Mexico that have undermined the confidence of foreign investors in the country at the precise moment enhanced foreign direct investment in Mexico is needed more than ever,” Neil Herrington, the chamber's senior vice president of the Americas, said in a statement.

While the ruling Morena party and its allies are expected to have enough of a majority to get the bill passed by congress, the Supreme Court may then reject it, said analysts at Mexico City-based Emerging Markets Political Risk Analysis.

“Given that many of the provisions in the proposed bill would also negatively impact competition, the court would likely annul significant parts of the reforms if passed,” they wrote in a note.

AMLO's bill seeks to give priority to CFE's hydroelectric plants and other government facilities in dispatching electricity, at the expense of privately-owned solar and wind farms. It also removes CFE's obligation to buy electricity through auctions, and calls on the energy regulator to revoke self-supply permits -- allowing companies to generate their own electricity-- that don't meet certain conditions.

Mexico's AMLO Proposes Bill Prioritizing State Power Utility

Mexico's Interior Minister Olga Sanchez Cordero, who is a retired Supreme Court justice, declined Thursday to say whether the ruling will impede the president's bill. She noted that the decision overturns policies but not a law.

AMLO has said that he will look to change the constitution if current efforts to bolster CFE and state-owned oil company Pemex aren't enough. Should the bill face hurdles, he may follow through with that threat, said Bradesco BBI's Ramos.

“Although more difficult to pass, requiring a two-thirds majority in congress, the risk of a constitutional reform is still there, and is likely to be AMLO's last resort to implement his views in the energy sector,” he said.

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