On the Constitutional Amendment on Strategic Areas and Companies

Mexico’s energy sector is being profoundly modified, from the highest-level legal order to the specific rules and regulations to its institutional framework. President Claudia Sheinbaum and her governing coalition Morena, who have been in power for about two months, face the challenge of implementing these changes while attracting hefty investments and turning them into a build-out of much-needed energy infrastructure.

The Constitutional amendment in question represents a fundamental turnaround in Mexico’s energy sector that undoes, albeit not in an integral way, the 2013 Constitutional amendments that open investment to private companies in power generation and oil and gas activities. Despite its importance to the energy sector, the official subject of this amendment had the rather general name of “modifications to strategic sectors and companies.” Aside from specific energy activities detailed in Article 28 below, the reference to strategic industries includes “internet service supplied by the State“ and “lithium.”  Concerning the strategic companies, the reference is to the two companies that dominate Mexico’s energy sector: national oil company Petróleos Mexicanos (Pemex) and state-owned electrical utility Comisión Federal de Electricidad (CFE).

These changes are concentrated in three articles (25, 27, and 28) of the Constitutional text, briefly summarized as follows. The critical change in Article 25 is the official denomination of Pemex and CFE from “productive state companies” to “public state companies.” Beyond what would seem simple semantics, this modification has at its core the reversion of the 2013 amendment that meant that Pemex and CFE faced competition amongst equals with private companies and, as such, they were to prioritize revenue maximization.

Regarding the modification of Article 27, the key concept is that no company should prevail over CFE. In other words, CFE should not compete in equal conditions with different companies and should, at least, preserve its current dominating status.

Article 28 defines a set of activities as strategic and in which the State should be the exclusive participant, therefore not legally constituting a monopoly. This modification, however, added two essential tasks to be performed by the state-owned company in the power sector: preserving energy security and “supplying electricity to the people at the lowest possible price.” The underlying idea here, explained by Secretary of Energy Luz Elena González, is that in the vision of the Sheinbaum administration, to guarantee that power supply is secure and affordable, CFE should have a “preponderance” on how electricity should be supplied in the country.

Implications

Three elements of paramount importance on the implications for the energy sector and, specifically, the power sector from this Constitutional amendment. However, it is essential to note that, as happens in other legal systems, the Constitution provides a rather general and broad set of legal principles, which, with the specifics and uncertainties, will be detailed in the secondary legislation, which the Mexican Congress should publish before April.

The first implication relates to Article 28, which states the state is a guarantor of a secure and affordable power supply, which is the most relevant in this Constitutional amendment. For the Sheinbaum administration, this means that to guarantee those two conditions, the electricity generated by CFE should be given priority over other power generators. In other words, this part of the Constitutional amendment would lay the ground for a change in the electricity dispatch model in the secondary legislation. This would mean modifying the economic dispatch of power and prioritizing CFE at the expense of other power generators, leaving critical issues like the cost of generation and carbon footprint as a secondary priority. For readers unfamiliar with energy issues, the economic dispatch of power refers to the process by which, in an energy system, the system operator chooses power generators to produce just the right amount of electricity that a region demands based on the least expensive generators.

Indeed, changing from an economic dispatch of electricity to one on which CFE had priority, even at higher overall costs, is familiar to the governing coalition. This idea was at the very core of a 2021 legal amendment to the Electrical Industry Law, which was proposed by then President López Obrador and approved by Congress but was deemed unconstitutional by the Supreme Court of Justice in January of 2024. Mexico’s top court found that the proposed amendment to the Electrical Industry Law transgressed the Constitution, particularly articles 25, 27, and 28.

A second implication is that this prevalence of CFE on power generation would cement what the government calls the 54-46 scheme, which calls for the State to generate, through CFE, at least 54% of power generation in Mexico. According to Mexico’s Energy Secretariat, CFE generated 42% of power generation in 2023 in Mexico, while independent power producers accounted for 30% and private generators for 28%.

A third implication of the uncertainty regarding specific investment tools and incentives for private companies to invest in power generation projects in Mexico is that in early November, President Sheinbaum published the National Strategy for the Electricity Sector, which lays out some general details for private investment and a goal for building up between 6 and 9.5 Gigawatts of power generation. However, a more precise outlook will appear once Congress approves the secondary legislation and further regulation is published.

Impacts on the US-Mexico Bilateral Relationship

Uncertainty will likely remain elevated with many significant developments happening on both sides of the border. South of the Rio Grande, aside from the abovementioned incertitude until the secondary legislation of this Constitutional Amendment is published, there is an enormous expectation for the secondary legislation and the implementation of the Judicial Power Constitutional amendment. Additionally, another Constitutional amendment is walking its way through Congress, which, if approved, will extinguish seven autonomous agencies, including the anti-trust agency and the two energy regulators.

North of the Rio Grande, President-elect Donald Trump has focused his attention on Mexico on the flows of immigration, narcotics, and trade rather than on energy or climate policy. On trade, Trump pledged to charge a 25% tariff on all products from Mexico, Canada, and China when he takes power. Moreover, the United States-Mexico-Canda Agreement (USMCA) is set to start a review process in 2026. Some of the changes in this constitutional amendment may conflict with some provisions of the USMCA agreement, specifically chapters 14 and 22. Finally, the United States and the Mexican sectors are intimately integrated, albeit quite asymmetric. Mexico heavily depends on US exports of oil products and natural gas, vital for its power sector. Amid much uncertainty in the coming months, it is clear that, at least in energy topics, both countries have much more to win with more, and not less, collaboration.