Analysis-Hints of compromise emerge over Mexico's contentious power bill

[February 15, 2022]  By Dave Graham

MEXICO CITY (Reuters) - Tentative signs of progress are emerging in talks between the private sector and Mexico's government towards forging a compromise on President Andres Manuel Lopez Obrador's divisive plan to strengthen state control of the power market.

Mexico's desire to avoid conflict with the United States over a regional trade pact has increased pressure for an accord, and the private sector has recently signaled that some of the government's concerns about the power market are reasonable.

At the same time, business leaders have taken heart from the engagement of one of Lopez Obrador's most trusted aides in the process, which could help to open a path toward consensus.

"I'm seeing a change towards pragmatism, towards taking practical decisions," said Enoch Castellanos, Castellanos, president of Canacintra, a major Mexican industry association.

Still, Castellanos and others familiar with discussions say the two sides remain a long way from agreement. The president's office did not reply to request for comment.

Lopez Obrador, a left-leaning resource nationalist, argues that changing the law is imperative because past governments skewed the electricity market in favor of private capital, weakening state power firm Comision Federal de Electricidad (CFE) and leaving the public at the mercy of business interests.
 

To prevent the CFE being undercut by excess capacity, business groups have indicated they are ready to discuss changing the rules that govern so-called self-supply permits, which allow companies to generate their own power.

They have also indicated a willingness to increase the transmission fees paid by private providers of renewable energy in order to relieve pressure on the cash-strapped CFE.

Such changes could give the president political victories in his revamp of the market, even as negotiators seek other changes to avoid breaching the United States-Mexico-Canada Agreement (USMCA) trade deal, people close to the talks say.

Business lobbies are encouraged by the role in behind-the-scenes talks that they say has been taken by Interior Minister Adan Augusto Lopez, a close ally of the president.

"He's a man with great political ability and I think it's a good sign," said Ildefonso Guajardo, an opposition lawmaker who was one of the architects of USMCA when serving as Mexico's economy minister in the previous centrist government.

Business representatives see Lopez as likelier to help craft a deal on the bill than Energy Minister Rocio Nahle or CFE boss Manuel Bartlett, who have staunchly defended the original plan.

The interior ministry did not reply to a request for comment. Neither did the energy ministry nor the CFE.

Mexican President Andres Manuel Lopez Obrador meets with U.S. Energy Secretary Jennifer Granholm at the National Palace in Mexico City, Mexico, Jan. 20, 2022. Mexico's Presidency/Handout via REUTERS

U.S. PRESSURE

The president's proposal to give precedence to the CFE over private companies has alarmed Mexico's diplomatic allies.

U.S. Climate Envoy John Kerry said last week he had pressed Lopez Obrador to ensure the bill did not breach USMCA, prompting the president to insist the pact would not be affected.

"We are not going to fight with the U.S. government," Lopez Obrador said.

Government officials say the president is adamant the trade pact will not be infringed.

Yet to avoid that, the legislation will need to excise various provisions that restrict the rights of investors, said Kenneth Smith, one of the Mexican officials who negotiated USMCA between 2017 and 2018 under the prior administration.

If not, the president's bill could trigger lawsuits by investors and compensation claims under international dispute panels, saddling Mexico with heavy indemnities, Smith said.

"Mexico's in a very weak position if it gets into a dispute resolution situation of that kind," he said.

Despite hints of emergent common ground, there has been no firm indication of what compromises the government could make, and business leaders say they believe the president is determined to pass a constitutional change.

That requires a two-thirds majority in Congress, and Lopez Obrador has made public overtures to opposition lawmaker Guajardo's Institutional Revolutionary Party (PRI) to find the votes. The president's ruling Morena party and its principal allies are well short of an overall two-thirds majority in Congress.

But it was the PRI that oversaw a liberalization of the electricity market in 2013. Guajardo said he did not believe the party would support a bill that hindered Mexico's industrial competitiveness by discouraging investment in clean energy.
 

That, Guajardo said, was the problem with president's first proposal. He was skeptical an amended energy bill would go to a vote before the current session of Congress concludes at the end of April, or even prior to gubernatorial elections in June.

(Reporting by Dave Graham; Editing by Daniel Flynn and Kenneth Maxwell)
 

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