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López Obrador va por el sector energético. Imagen: EFE/José Méndez

AMLO Bets on Controlling the Energy Market

López Obrador redoubled his bid to rebuild the Mexican government’s noxious energy monopoly. Now the battle moves to Congress and to the Courts

[Leer en español]

López Obrador, better known by his acronym “AMLO”, came to the presidency of Mexico with an agenda of vengeance against the “evils” of modernity, and nostalgia for the supposed virtues of a past where the country was poorer, but there was an opportunity to “improve” by working for the government. After his victory, he has endeavored to fulfill that promise of institutional regression and is determined to lock Mexico in a time capsule to return the country to the 1970s.

One of the main targets for the rollback is the energy market, which has particular symbolic importance for Mexican political mafias because the “state’s stewardship” (that is crude, costly, incompetent, and -many times- criminal monopoly) over oil and electricity is a pillar of the political legitimacy of the post-revolutionary regime, to which López Obrador enthusiastically belongs.

The romance with monopolies

The oil and electricity monopolies dragged for decades a history of corruption, lousy service, and high costs, which directly influenced the country’s slow development. In 2013, the sector’s situation was so disastrous that the political class was forced to negotiate and approve an energy reform that opened the doors to private investment to provide the oxygen of innovation that the public administration and the country’s economy desperately needed.

The reform allowed, among other things, the importation of gasoline by private individuals and the opening of gas stations other than the hated Pemex, in addition to making possible new spaces for the generation of electrical energy through renewable sources and private companies.

This reform caused the fury of the political mafias feeding off the oil and electricity monopolies for decades. These mafias reacted by supporting López Obrador’s campaign and helping him obtain his resounding triumph in the 2018 elections; now the time has come to repay the favor, and López Obrador is doing so.

  1. Regarding oil, he placed Pemex as a priority of his government and has systematically bet on allocating greater resources and room for maneuver to the moribund quasi-state enterprise, which despite all the support of the intensive therapy in which López Obrador has placed it, continues to lose money in a gigantic way while it is approaching an eventual financial collapse, which will most likely drag the rest of the country down with it.

2. As for electricity, López Obrador canceled the fourth energy coverage auction, called by the previous government, paralyzed progress on permits for the generation of electricity by private companies and has hindered the operation of the already existing ones by means of the sectorial energy program, published in the Official Gazette last July 8th.

However, until now, its efforts of destruction and rollback had been at the administrative level, and since they were illegal, they had been almost unanimously rejected by the federal courts. No more.

AMLO is betting on a return to Mexico's past of monopolies and centralism. Photo: EFE/ Presidencia de México
AMLO is betting on a return to Mexico’s past of monopolies and centralism. Photo: EFE/ Presidencia de México

AMLO doubles down on backward steps

Now López Obrador is going all in. On February 1st, while supposedly convalescing from Covid-19, López Obrador sent to the House of Deputies an initiative to reform the “Electricity Industry Law.” The document is very brief, comprising only 19 pages in which it proposes to modify and add only 8 articles of the aforementioned law. However, its implications are monumental and monstrous:

Basically, the initiative intends to prioritize the generation of electricity through the plants of the Federal Electricity Commission (CFE), leveraging the current distribution monopoly to lag behind the private sector plants (with the underlying idea that they are not business and eventually the government can bankrupt or buy them). Also, it allows the revocation of self-supply permits already granted, eliminates the obligation for long-term auctions, and essentially leaves the wholesale market completely to the whim of the CFE.

The issue cannot be postponed in the Legislative Power because the President presented it under the concept of “preferential initiative.” Therefore, it must be discussed and voted in both Houses of Congress during the first week of April the latest.

Bells are ringing

This initiative, added to López Obrador’s other efforts to reverse the energy reform and recover the old and mafia-like government monopolies over oil and electricity, is causing deep concern in both sectors.

Gonzalo Monroy, one of Mexico’s leading energy experts, said in a telephone conversation for El American that the sector is in alarm and what is most surprising about López Obrador’s initiative is that it would give the government the power to revoke permits already acquired under the 1992 law and that it breaks a sort of “truce” that the government had maintained in terms of not modifying the legal framework.

Monroy explains that if this reform is approved, it will violate Articles 4 and 28 of the Federal Constitution regarding the right to a healthy environment and economic competition and free concurrence, respectively. For this reason, the chambers of commerce will react by filing collective injunction lawsuits.

The consensus of analysts agrees in the sense that the approval of the reform will send a dangerous signal to the private initiative in general since, with this initiative, López Obrador sends a new sign of authoritarianism and reaffirms his commitment to the worst practices and the worst interests of Mexico’s murky past.

Does hope lie in Washington?

The intervention of the White House may be one of the last hopes to prevent further setbacks, and perhaps it will happen, considering that López Obrador’s tyrannical tendencies have already been detected and denounced in the United States:

On October 22, 2020, a bipartisan group of more than 40 senators and House members wrote to then-President Trump, asking for his intervention to contain López Obrador’s bad energy practices.

In response, the Trump administration officially communicated with Mexican authorities in a letter dated January 11, 2021, requesting that Mexico “comply with its US-Mexico-Canada Treaty obligations” and emphasizing the importance of “an attractive investment climate, backed by regulations applied in a non-discriminatory manner.”

It now remains to be seen how proactive the Biden administration’s approach will be. For the time being, Monroy considers it unlikely that Joe Biden will intercede on behalf of any particular company, unless the issue is inserted in the context of a broader binational negotiation, perhaps covering issues such as immigration or security, but this will depend on how much the American president opts for a more tense relationship with his southern neighbor.

In any case, the path would be more or less like this: Once López Obrador’s proposed reform becomes law, companies will file a torrent of writs of amparo. Should those writs of amparo [protective injunction] fail, then especially companies of foreign origin could turn to the dispute panels contemplated in the T-MEC and eventually request more direct support from the U.S. government.

Betting on the past

However, even if they eventually succeed in stopping the advance of the counter-reforms in the courts, the damage to Mexico’s economy, modernity and credibility will already be done.

Today, investors look at Mexico and see the violent, corrupt, and dangerous country it was before 2018 and a dogmatic and increasingly authoritarian country, where projects are at the mercy of the whim of the resident of the National Palace.

That is serious because the only reason Mexico has not collapsed to the level of the poorest African countries is because of its proximity (and trade) with the United States. However, not even that huge advantage can compensate for the consequences of a government run by resentment, incompetence and old political mafias.

“Pa’ acabar pronto”: Not even 3,000 km of border are enough to compensate for the damage produced and that can be multiplied by a single López Obrador.

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