Proposed reforms to Mexico's judicial system, regulators sparks concerns in country's power sector

Broad proposed reforms to the Mexican judiciary and the cutting of government regulators could undermine investment in necessary new electric power in the country, industry critics charge.

The changes include the elimination of autonomous regulators and a major overhaul of the judicial system, both of which have so far reined in the decisions of the president and his allies in Congress.

"Hindering those counterweights weakens certainty, which is valuable for companies when evaluating their investments in the country," said David Crisóstomo, director of research and analysis at S&P Global Commodity Insights.

Among the changes proposed, the government intends to dissolve Mexico's independent regulatory bodies, including the antitrust watchdog Cofece, the National Hydrocarbons Commission, or CNH, and the Energy Regulatory Commission, or CRE. Their functions would be assumed by existing ministries. It also plans to slim down the judicial system and require that all judges, including Supreme Court justices, be elected rather than appointed.

Mexico needs to add 90 GW of capacity over 15 years

In energy forums, industry webinars and in private conversations among members of Mexico's energy industry, the main topic of discussion in Mexico in the recent weeks has been the impact of the proposed reforms, particularly the power industry, which has been the most attacked sector during the exiting administration of President Andrés Manuel López Obrador.

"It's terrible! I am very concerned," said a top Mexican executive whose company has operations in the power generation. "Since their creation, independent regulators have taken decisions based on technical considerations," said the executive, who asked not to be identified. "If the government wants to take those responsibilities, but still participate in the sector through its state companies, I am not sure it can be impartial."

In the executive's opinions, reform is inevitable, but the state of the industry is so "bad" and there is so much need for power in the country that the government will likely have to allow some form of participation of private industry regardless of the results.

According to the government's own estimates, (opens in a new tab)in the next 15 years, Mexico will need to add roughly 90 GW of new power capacity, a large part of it from renewable sources.

"The needs of the country will push for new projects, regardless of how the regulation is structured," the executive said. "The big question will be how the needs of the country will be met and who will pay for it." The government cannot do it alone and private industry cannot do it alone either, he added. "We must work together," he said.

Julia González, counsel at Mexico City law firm González Calvillo, which represents companies participating in the Mexican energy sector, also expressed concerns about the expected reforms and said she was particularly worried about changes to the judicial system that, in her view, have been very effective in protecting the rights of companies.

"It is not perfect, it is true," Gonzalez said. "But when it relates to corporate law, and in particular in energy, the judiciary has been very professional."

Decision that could allow reforms by Aug. 23

Since taking office in December 2018, López Obrador has unsuccessfully but repeatedly tried to turn back the liberalization of Mexico's energy sector (opens in a new tab)undertaken by his predecessor, Enrique Pena Nieto, after decades of state monopoly. Every attempt, however, has been blocked by the industry with the help of the judicial system.

López Obrador in February laid down a plan to modify the Mexican Constitution to reform the judicial system if his Morena party obtained a majority in Congress during the general elections in June. Claudia Sheinbaum Pardo, a Morena candidate who won the presidency with 54% of the votes in June, will take office on Oct. 1. But a provision in the law could give Morena and its allies over 70% of the seats in Congress, enough to modify the constitution. Whether or not that "super majority" is obtained will be decided by Mexico's elections authority, the National Electoral Institute, by Aug. 23.

"The reform is needed to stop the abuse of the judiciary," López Obrador said after the election, noting that in 2023 when Congress passed a law for the power sector that he insisted benefited the Mexican people, foreign companies opposed and one judge protected them. "Later, at the Supreme Court, two justices blocked it(opens in a new tab), going against the Mexican people and in favor of companies that only seek profit," he said.

The judiciary is "corrupt, sequestered by both the organized crime as well as white collar criminals," López Obrador has said repeatedly in his daily press conferences. "The goal is to have real rule of law, which is what investors want," he said.

Investments at risk

Judiciary reform is needed, there is no dispute to that, Antonio Ortiz Mena said during a webinar organized by the Mexico Institute at the Washington-based Wilson Center. Ortiz Mena is a partner at advisory firm Albright Stonebridge Group and former head of economic affairs at the Mexican Embassy in Washington.

"The question is if it will improve the overall conditions in the country and help bring more certainty to the business climate," Ortiz Mena said. "Investors do not like surprises."

Dylan Clement, director of international policy at Mexico's National Association of Manufacturing, said his group's members are concerned the government proposal's may negatively impact the commercial climate of the country. Investments in manufacturing are difficult to move, and therefore the rule of law is crucial, he said during the Wilson Center webinar.

"Strong property rights are the cornerstone of investments, and during the current administration, these rights have backslid every year," he added.

The proposed amendments have a far more serious implication, Clement said: There is a direct linkage between the amendments and the US-Mexico-Canada Agreement. The free trade agreement is slated to be revised in 2026.

"The amendments and a series of policies by the current government, like the recent changes to the law of the power sector that gave more control to the state utility CFE over the power market, are in clear violation of the treaty," he said. This could complicate the ratification of the agreement, and this is a problem not just for the manufacturing but for the economy of the country and the competitiveness of the region, he said.

"Mexico is competing with other countries in attracting investments for nearshoring," Clement said. "Our view is that Mexico should be careful when designing these reforms. It is better to get it right, than to get it quickly."