The Supreme Court of Justice of the Nation declares the Reform to the Electricity Industry Law of 2021 unconstitutional

Executive Summary:

• On January 31, 2024, the Second Chamber of the Supreme Court of Justice of the Nation (SCJN) granted the first amparo against the reform to the Electricity Industry Law of 2021, resolving the Amparo in Review 164/2023 filed by various private companies claiming the unconstitutionality of the Reform to the Electricity Industry Law published on March 9, 2021.
• The said protection was granted by majority vote, with the votes of Ministers Luis María Aguilar Morales and President Alberto Pérez Dayán, who in terms of Article 56, first paragraph, of the Amparo Law, cast his casting vote. Ministers Yasmín Esquivel Mossa and Leina Batres Guadarrama voted against, after evaluating the excuse raised by Minister Javier Laynez Potisek.

The Second Chamber of the SCJN determined that seven articles of the Reform to the Electricity Industry Law are unconstitutional on the grounds that they violate, among other principles, competition and free competition in the electricity generation sector, contravening the constitutional mandate that provides for the creation of a competitive electricity market.

The reform to the LIE, in addition to reducing private participation in the market, sought to grant benefits to CFE by granting it preference in electricity dispatch, modifying the rules for granting Clean Energy Certificates and limiting the conditions of competition in the electricity sector.

The figure of electricity coverage contracts, through which it was intended to grant a benefit in the electrical dispatch to the CFE to the detriment of individuals, is declared unconstitutional. The Second Chamber of the SCJN determined that, according to the Federal Constitution in its text derived from the energy reform of 2013, the order of priority in the dispatch of electrical energy regulated in the Electricity Industry Law of 2021, which constitutes the mechanism by which it is decided which electricity generating plants inject their energy first into the national grid, violates the principles of competition and free competition.

The Second Chamber ruled that the fact that, by virtue of the requested legal reform, the State Power Plants can access the assignment of an electrical coverage contract (for the purchase and sale of energy) through an interconnection contract, being exempted from resorting to auctions as the form that private companies are obliged to satisfy for this purpose, implies a differentiated and privileged treatment that eliminates an area of ​​healthy competition, for which reason it is declared unconstitutional.

Regarding the issue of Clean Energy Certificates, the Second Chamber decided that the requested legal reform, which authorized not only new plants but also legacy plants to receive Clean Energy Certificates, would cause an excessive issuance of clean energy certificates to satisfy the demand of all participants, discouraging the effective production of said clean energy in contravention of the imperative of the permanent Constituent that provides for the principle of sustainable development for energy matters, for which reason it declared the proposed modification unconstitutional.

It is worth noting that the Court considered that the alleged strengthening of state-owned companies is not a reason to ignore the constitutional framework on electricity, since it cannot be ignored that, in certain activities, such as electricity generation, CFE is another competitor in the market and even has a structure that allows it to compete on equal terms.

While it is true that the protection was resolved in favor of the complaining companies, it is also true that, in order for the removal of the legal reform requested in their situation to materialize, the same consequence will necessarily be generated for the rest of the agents that participate in the wholesale electricity market, since otherwise, undue advantages and distortions would be caused in the same.

This is the first resolution of the hundreds of appeals filed against the reform to the LIE, which will begin to be resolved according to the criteria upheld by the majority of the Second Chamber of the SCJN. It may be the case that, at the request of the Federal Executive, the Attorney General's Office or some of the ministers, the Plenary of the Court may attract some appeals for discussion and analysis by all the Ministers. In that case, a simple majority will be enough to declare the unconstitutionality.