Bad energy: electricity arbitration in Mexico.

In the past four years and due to drastic changes in the regulatory environment governing the manner in which the private companies provide electricity into the public grid, there has been an important increase in the number, amount and complexity of disputes in Mexico.

The main cause of the regulatory changes could be found in the attempt of the Mexican government to reconfigure the electricity market and strengthen the state-run public utility (CFE). Basically, the government has tried to reverse the constitutional reform of the prior administration which opened the participation of national and foreign private investment in the sector, eliminated the monopoly of the CFE in the production of electricity and set the rules for the development of a market in which the CFE and the private companies would concur. The new bill of the Mexican government: (1) limits private participation in the power generation market to a 46 percent threshold; (2) eliminates power purchase agreements (PPAs); (3) abolishes independent energy sector regulators; and (4) merges the independent system operator CENACE into the structure of the state-run public utility (CFE).

Putting aside the debate about the manner in which the Mexican government has implemented this counter-reform in the electricity market, the reality is that the legal amendments implemented, as well as the de facto reluctance to issue new authorisations or renew the existing permits, has caused a lot of stress and uncertainty in the sector. The reaction of many companies against these modifications has manifested in filing of constitutional lawsuits (amparos) aimed to obtain from Mexican Courts provisional injunctions against them and ultimately a potential declaration about their unconstitutionality.

Another strategy, mainly of US and Canadian companies, has been to seek the support of their governments triggering a consultation proceeding between the US and Mexican government under the USMCA. Regardless, and in addition to this consultation proceeding, the US and Canadian companies may also have the opportunity to directly file investment-treaty arbitrations against Mexico. A similar opportunity is available for many European and even Asian companies whose countries have entered into Investment Treaties with Mexico. Of course, the complexity and length of this type of arbitration does not necessarily imply that the private investors would obtain favourable rulings or that the large indemnifications they would be seeking could be easily obtained.

“There are cases in which one or several contracts have jurisdictional clauses, and the others have arbitration clauses.”

Notwithstanding, the legal amendments of the electricity regime in Mexico are not limited to potential disputes with the Mexican government or authorities. The disruption have led to other practical and business consequences. Particularly, some projects which were in the middle of their construction or about to end are facing the real possibility of never starting their operation. Other projects are not quite optimistic about the return of their investment within the expected time and/or afraid of future control fixing by the government of the price of the electricity.

To further complicate the above-described scenario, energy projects are usually designed in the industry following a multilayered structure. They usually involve construction contracts, administration contracts, maintenance contracts, development contracts and even purchase and sale or share participation agreements involving the companies owning the projects, between several investors. All these components may work well in a friendly environment, however, once the economic and profit premises change, the companies involved are turning against each other causing a perfect storm.

“The legal amendments of the electricity regime in Mexico are not limited to potential disputes with the Mexican government or authorities.”

The multi-contract and multi-party structure of the energy projects, paired with the financial and expectation stress, has provoked in several cases the clash of economic interests between the private companies involved, leading to disputes whose resolution has become very difficult. In this regard, many different scenarios have been on display in the disputes arising during the past years. The complexities faced by the companies in dispute refer to several factors going from the forum, language, interdependence of the contracts, etc. For instance, in some cases, and although the contracts could be deemed as part of one single project, the dispute resolution clauses contained in them are not identical. There are cases in which one or several contracts have jurisdictional clauses, and the others have arbitration clauses. Other scenarios include incompatible arbitration clauses, with different arbitration institutions, number of arbitrators, languages or even applicable laws. These differences have caused the undesired effect of having parallel litigations and arbitrations or arbitrations with different arbitral tribunal hearing disputes with the same or similar factual background.

Whatever the challenges produced by this new landscape of disputes in the energy sector in Mexico are, it has become clear that many companies are not necessarily ready to safely navigate through it. Indeed, unfortunately, we have seen many companies with deficient legal counsels which are lacking a strategic approach increasing the risks and entangling the disputes with no visible end in sight. For this reason, the need of having an experienced team of in-house counsels, a government relations department, as well as specialised attorneys not only in arbitration, but also in complex contractual and regulatory topics, has become imperative to assess the legal and financial risks of a dispute, design a comprehensive strategy and take the best decision for the business.