The 2021 year was characterized by dramatic change in Mexico, as the country emerged from the COVID-19 pandemic. But, unlike the Mexico Committee’s 2020 Year in Review submission, this set of articles does not cover COVID-19 or Mexico’s continued emergence from social and economic lockdown. This is, in part, because even without covering the pandemic, the legal and political updates out of Mexico were groundbreaking. And the reverberations of these developments have been felt far and wide—including across the border into the United States.
Perhaps most notably, 2021 saw Mexico’s President Andrés Manuel López Obrador (also known as AMLO) initiate energy reforms that would fundamentally change the power dynamics—literal and figurative—in Mexico, and would shape the landscape for foreign investors in Mexico. U.S. and Canadian investors, in particular, faced novel challenges during 2021, with the first full calendar year under the trade agreement between the United States, Mexico, and Canada, which entered into force in mid-2020. Novel legal theories in Mexico were also tested—particularly in the context of cannabis regulation—as the outright prohibition of recreational cannabis use was deemed unconstitutional as an improper infringement on the right to develop a personality. And these were not the only legal challenges brought to bear in Mexican courts, as Mexico’s Supreme Court limited the ability of states to outright ban abortion and the ability of medical service providers to, without limitation, refuse to provide medical services to patients based on personal conscientious objection. This article covers these developments, and more.
Electricity in Mexico is typically derived from petroleum, natural gas, coal, or renewable sources. In 2021, Mexico’s electricity industry underwent important changes, which have continued a decades-long trend of radical shifts in the industry. This section will explain these recent developments within the broader context of the history of electricity in Latin America.
Latin American energy production has typically followed three main models: (1) a state-owned monopoly purchases from independent power producers; (2) a single buyer of electricity purchases energy under long-term contracts after competitive bidding procedures; or (3) generators, distributors, marketers, and large consumers trade electricity in spot transactions and long-term contracts as part of a competitive wholesale power market.
In the 1990s, most Latin American countries instituted reforms in the electricity industry, motivated by the poor performance of state-owned energy monopolies. Under the old systems, the public, state-owned company had a vertical monopoly on the electricity value chain: generation, transmission, distribution, and commercialization. This model caused fiscal deficits in the state-owned enterprises. Therefore, reforms focused on two main principles to improve electricity service: (1) the separation of roles, such that the state is responsible for policy making and regulation and the private sector is the primary investor and service provider and (2) the introduction of competition wherever possible to improve economic efficiency.
For its part, during this era of reform, Mexico still relied heavily on a state-owned monopoly model, including through the public Federal Electricity Commission (Comisión Federal de Electricidad (CFE)), but the country slightly opened the market to private participants. For example, the country amended its Electric Energy Public Service Law (Ley del Servicio Público de Energía Eléctrica) to authorize the Ministry of Energy to grant energy production permits to self-sufficient companies, independent producers, and long-term auctions.
A few decades later, on December 20, 2013, the market was opened significantly, when an amendment to the Mexican Constitution was published in the Official Gazette (Diario Oficial de la Federación (DOF)). The amendment created a competitive Whole-Sale Power Market (Mercado Eléctrico Mayorista (MEM)), in which generators, distributors, marketers, and large consumers could trade electricity in spot transactions and long-term contracts.
Less than a year later, on August 11, 2014, the Energy Industry Law (Ley de la Industria Eléctrica (LIE)) was published in the DOF. That law, among other things, provided for the creation of the following:
(1) The Regulation Energy Commission (Comisión Reguladora de Energía (CRE)), which grants permits for generation and commercialization of electric power, regulates transmission and distributions fees, and regulates the MEM;
(2) The National Center of Electric Control (Centro Nacional de Control de Energía (CENACE)), which operates the MEM, guarantees access to the transmission and distribution network, and determines energy market prices; and
(3) The Clean Energy Certificates (Certificados de Energía Limpia (CELs)), which ensure that energy generation comes from a certain amount of “clean energy” (if a generator does not produce enough electric power with clean energy, the operator will need to purchase CELs as an offset).
In the wake of these reforms, private enterprise started to generate electricity with wind, solar, and hydraulic sources, and foreign investment in electricity increased. As a result, CFE became a state-owned provider that was forced to compete with these private enterprises—while still retaining its transmission and distribution monopoly.
This background is important for understanding Mexico’s most recent energy reforms. On March 3, 2021, Mexico’s Congress approved the New Energy Bill to amend the Electricity Industry Law, paving the way for CFE to regain the monopoly it enjoyed prior to Mexico’s 2013 energy reforms. The bill requires CFE to prioritize electricity generated at CFE-owned plants, in place of the current system, which gives priority to the least expensive electricity. Specifically, electricity will be dispatched in the following order: (1) hydroelectric facilities (which are owned mainly by CFE); (2) other CFE-owned facilities; (3) privately owned wind and solar facilities; and (4) other privately owned electricity generation facilities. Concerned about the impact of these reforms on U.S. investors in Mexico, the U.S. Chamber of Commerce responded with a public statement asserting that the measure would contravene Mexico’s USMCA commitments. Also, Mexico’s Federal Commission of Economic Competition asserted that the measure would “seriously damage” the conditions of competition for generation and commercialization of electricity in Mexico, as well as serious questions regarding the measure’s constitutionality.
When the New Energy Bill encountered challenges in Mexican court, President López Obrador turned his attention to the Mexican Constitution. On September 30, 2021, President López Obrador presented to the Congress an initiative to reform the Constitution, specifically to return the Mexican electric industry to a vertically integrated monopoly (the Initiative). Among other things, the Initiative required the following:
(1) CFE shall generate 54 percent of Mexico’s necessary energy, and private companies only 46 percent;
(2) Private companies must compete to sell electric power to CFE, which is the only institution authorized to market and sell energy to consumers at the price determined by the CFE;
(3) Subject to certain narrow exceptions, all permits issued pursuant to the 2014 LIE shall be canceled, except for those of self-sufficient companies, independent producers and long-term auctions, whose permits are not to be renewed;
(4) All 2014 CELs must be canceled;
(5) The CRE is dissolved; and
(6) The CENACE is incorporated into CFE.
In sum, these reforms would grant CFE control of the entire electric power industry. Although private companies could generate energy, they would be required by law to sell this electricity to CFE for distribution and transmission, so there is no real competition. Likewise, in part through the elimination of the CELs, generation through fossil fuels would be preferred—even though these energy sources are more expensive and harm the natural environment.
At the end of 2021, the Mexican Congress agreed to continue the discussion of this reform until 2022 due to the technical, financial, and economic complexities of reform. This promised another full of additional significant developments in the Mexican energy industry.
As discussed above, 2021 proved crucial in the Mexican government’s efforts to restore state control over the energy sector. President López Obrador’s key measures—including the New Energy Bill and the constitutional reform—are in tension with Mexico’s commitments under international trade and investment agreements, including the United States-Mexico-Canada Agreement (USMCA).U.S. investors should exercise care to ensure that they do not inadvertently forfeit their rights to seek relief under the USMCA—in particular, relief through the investor-state dispute settlement (ISDS).
ISDS is a mechanism in the USMCA and its predecessor agreement (the North American Free Trade Agreement (NAFTA)) that permits U.S. investors to initiate arbitration against the government of Mexico to seek monetary compensation for breach of certain rules in the trade agreement.
For the most part, the USMCA significantly diminishes narrows U.S. investors’ access to ISDS regarding with respect to Mexico. There is one very important exception: U.S. investors with “legacy investments” in Mexico—that is, investments established during the lifetime of the NAFTA’s lifetime (January 1, 1994, to July 1, 2020)—have full access to ISDS under NAFTA rules for claims brought by July 1, 2023.
This section offers practical tips for U.S. investors to secure their rights under the USMCA.
Under both the USMCA and the NAFTA, U.S. investors do not forfeit their rights to use ISDS merely by going to Mexican court. Rather, “both agreements allow investors to pursue domestic remedies to challenge Mexican government action.” But, both the USMCA and the NAFTA include a “trap door that investors should avoid.” If an investor alleges in Mexican court that a measure breaches an investment-related rule in the USMCA or the NAFTA, that investor will be precluded from alleging breach of that same rule in ISDS. This Mexico-specific provision is intended to prevent investors from getting two bites at the apple through pursuing identical international claims against Mexico; unlike the United States, Mexico is a “monist” state in which treaty commitments automatically create private rights of action under domestic law. For U.S. investors in Mexico’s energy sector, this provision makes it critical to frame arguments in domestic litigation carefully to avoid this pitfall. An ISDS tribunal will lack jurisdiction to address a treaty claim that the investor has previously alleged in Mexican court.
The ISDS landscape will change on July 1, 2023, three years after the USMCA’s entry into force. On that date, U.S. investors will be able to file new ISDS claims, but with notable limitations. Except for those with certain defined government contracts, U.S. investors will lose the ability to lodge some types of claims that might otherwise be viable with respect to Mexican government measures, including indirect expropriation and fair and equitable treatment claims. Most U.S. investors will also be required to initiate and maintain proceedings in Mexican courts for as long as thirty months before they may pursue ISDS. Therefore, U.S. investors in Mexico’s energy sector should be mindful of the potential change in circumstances on July 1, 2023. To file a claim before that deadline, an investor will need to submit a notice of intent to Mexico by April 1, 2023.
Separate from ISDS, the USMCA permits each Party to initiate state-to-state dispute settlement against another Party. If a dispute settlement panel finds the responding Party to be in breach, and if the responding Party does not come into compliance, the panel can authorize the complaining Party to suspend benefits under the USMCA. This remedy can provide leverage to compel compliance with USMCA rules. Importantly, the United States could initiate state-to-state dispute settlement against Mexico, arguing that a measure breaches any of the USMCA’s investment-related rules—or any other relevant rules in the agreement, such as those governing state-owned enterprises—without affecting U.S. investors’ rights to initiate ISDS to challenge the same measure. Given this, U.S. investors should consider whether state-to-state dispute settlement has a role to play in resolving investment-related disputes with Mexico.
The USMCA, which entered into force on July 1, 2020, has updated and modernized the rules governing trade relations between the three largest economies in North America. New provisions on digital trade and state-owned enterprises and enforceable labor and environment obligations are a few of the innovations that build on NAFTA, which USMCA replaced. By creating new market access opportunities, the agreement should prove mutually beneficial for businesses and workers in all three countries.
At the same time, trade challenges continue, including some spawned by the USMCA itself. A good example of an ongoing trade challenge that pre-dates the USMCA—and that the new agreement has failed as yet to resolve—involves Mexico’s concerns about agricultural biotechnology products. Although the USMCA contains provisions aimed at facilitating cooperation in the regulation of agricultural biotechnology, Mexico’s food and drug regulatory authority, Federal Commission for the Protection against Sanitary Risk (Comisión Federal para la Protección contra Riesgos Sanitarios (COFEPRIS)), has issued no decisions on applications for the authorization of new food or feed products created using biotechnology since May 2018. As the Office of the US Trade Representative has observed, this lack of action is contrary to the requirements of Mexican law, which requires COFEPRIS to make decisions on complete applications within six months of receipt. Further, in December 2020, Mexico published a decree providing for the revocation of existing authorizations for the use of genetically modified corn for human consumption, and the prohibition of new authorizations until bioengineered corn is completely phased out by 2024.
This is a significant policy reversal for Mexico. While the country has not embraced the domestic cultivation of bioengineered crops, COFEPRIS historically processed new product applications within the six months required by law. With the election of President López Obrador, this approval process has ground to a virtual halt.
Mexico’s unwillingness to grant approval to new bioengineered agricultural products bodes poorly for American farmers who export their production to Mexico and creates the risk of trade conflict with the United States. In testimony before the U.S. Senate Committee on Finance, for example, Biotechnology Innovation Organization President and CEO Michelle McMurrry-Heath noted that ninety percent of U.S. corn is produced with biotechnology crops, and that Mexico represented nearly thirty percent of U.S. corn exports in 2020. Thus, “[i]f Mexico does not approve a new corn biotechnology product, U.S. corn farmers are reluctant to plant the product for fear of disrupting trade to Mexico. This means, in effect, that Mexico determines which technology U.S. farmers can use.” Moreover, if Mexico were to respond to the use of such technologies in the United States by banning U.S. corn exports to Mexico, it would raise significant issues under USMCA rules.
An example of a trade challenge arising out of the USMCA itself is the agreement’s revised provisions on automotive rules of origin (ROOs). One of President Donald Trump’s primary motivations in pushing for an update to NAFTA was to close perceived loopholes in the agreement’s ROOs for automobiles, which were viewed as encouraging the outsourcing of U.S. jobs. The USMCA significantly tightened these rules, increasing the threshold from 62.5 percent to 75 percent North American-made-content for an automobile to enjoy duty free treatment under the agreement; the USMCA also added minimum requirements for steel, aluminum, and labor value content. Since the agreement’s implementation, the United States has diverged from Mexico (and Canada) in its interpretation of the rules in such a way as to raise questions about the eligibility of Mexican-origin autos for duty-free entry into the United States. Mexico responded by seeking consultations under the agreement’s dispute settlement provisions and threatening to request the establishment of a formal dispute settlement panel. And in early 2022, as of the date of publication, Mexico and Canada launched a dispute against the US based on the interpretation. The diverging interpretations and resulting disagreements have created significant uncertainties for manufacturers on both sides of the border.
After a year in effect, the USMCA has helped change the contours of the United States-Mexico trading relationship. But as the experience of the agricultural and automotive sectors shows, disputes between the two countries will continue, as it to be expected given the significant volumes of trade between the two countries.
On July 15, 2021, the General Unconstitutionality Declaration (DGI) of the Mexican Supreme Court of Justice (SCJN) was published in the Official Federal Gazette (DOF). By means of this DGI, the SCJN invalidated two articles of the General Health Law that prohibited the recreational consumption of cannabis in Mexico. This section will summarize a recent history of Mexico’s regulation of the cannabis industry and suggest predictions for the future.
The latest round of developments began in 2015, when Mexico’s health authority refused authorization to individuals who sought approval for the recreational consumption of marijuana. In response, the affected parties filed an indirect injunction that—after initially being denied by a judge in Mexico City—was examined by the SCJN. The SCJN’s ruling resolved that the articles of the General Health Law on which the COFEPRIS had based its refusal violated the human right to the free development of personality. The SCJN ordered COFEPRIS to grant the relevant authorization. Thereafter, the SCJN granted other amparos allowing personal consumption of cannabis—also invoking the right to development of personality.
The right to the free development of personality has been understood as a right with two dimensions: one external and one internal. The external dimension protects individuals’ right to perform any act they deem necessary to develop their personality, while the internal aspect protects their sphere of privacy from external invasions that limit the ability to make decisions that serve as a vehicle for exercise of their personal autonomy.
After the SJCN’s revolutionary resolution, both the Senate and the Federal Executive presented initiatives that sought to regulate the cannabis market at a national level. In fact, by April 28, 2017, the Mexican Congress had already approved the medicinal and scientific use of cannabis by approving reforms to the General Health Law and the Federal Criminal Code.
During 2018, the SJCN continued to review challenges to the prohibition of various arms of the cannabis industry—including those relating to the acquisition of seeds. By mid-2018, no Mexican court had upheld a prohibition on activities related to the personal consumption of cannabis. Instead, the SCJN had five times over declared unconstitutional portions of the system prohibiting the personal consumption of marijuana.
After these repeated resolutions, the reasoning became mandatory for courts throughout the country. This triggered the process of a declaration of general unconstitutionality, provided for in the Mexican Constitution. (An unconstitutionality declaration requires the Mexican Congress to modify or repeal provisions declared unconstitutional). The term originally given to comply with this requirement expired on October 31, 2019. Since then, the Mexican Congress has endeavored to pass federal law that would comply with the Supreme Court decision and regulate personal consumption of cannabis.
In the meantime, the Mexican federal government issued a regulation on medical non-recreational cannabis use—suggesting that the government is not opposed to loosening at least some of its grip on the cannabis industry. On January 12, 2021, the Mexican government issued the Regulation of the General Health Law on Health Control for the Production, Research and Medicinal Use of Cannabis and its Pharmacological Derivatives (Reglamento de la Ley General de Salud en Materia de Control Sanitario para la Producción, Investigación y Uso Medicinal de la Cannabis y sus Derivados Farmacológicos). This law seeks to regulate, control, promote and monitor the health aspects of the raw material and pharmacological derivatives of cannabis for production, research, manufacturing and medical purposes. Today, the medicinal and scientific market of cannabis in Mexico is open, legal and regulated.
Then, significantly, on July 15, 2021, the SCJN published the DGI in the DOF, effectively eliminating the absolute prohibition on the recreational consumption of cannabis. In practice, the DGI removes COFEPRIS as an obstacle to personal consumption, as well as planting, harvesting, preparing, possessing, and transporting cannabis, even for recreational purposes. These authorizations may only be issued to adults, who may not consume in front of minors or in public places. The DGI does not exempt the Mexican Congress from its obligation to repeal or modify the unconstitutional provisions of the General Health Law. So, the country continues to wait for the required legal provisions to be issued.
One recent proposal approved by the congressional Chamber of Deputies has been widely criticized for continuing to (perhaps unconstitutionally) penalize certain possession. Among other things, the proposed regulation approves the creation of a legal cannabis market for industrial, research and recreational use. The latter may be carried out through cannabis associations, public sale or self-cultivation. The proposed law foresees five types of licenses: cultivation, transformation, commercialization, exportation, importation, and research, which will be regulated by (National Commission against Addictions (Comisión Nacional contra las Adicciones (CONADIC )).
All that remains is to wait for the final legislative and regulatory terms that will govern the cannabis market —primary and secondary— in Mexico. The coming year will surely hold more significant developments for those tracking the cannabis industry in the country.
During 2021, the Mexican Supreme Court (Suprema Corte de Justicia de la Nación) (SCJN) ruled on five issues that are especially important for the country’s public life due to their legal, political, and social significance. Interestingly, all of these most notable cases were issued during the second half of the year. The following is a brief synopsis of these resolutions and their practical effects.
The first resolution was published in the Official Federal Gazette (DOF) on July 15, 2021 and announced a General Unconstitutionality Declaration for certain portions of the General Health Law (Ley General de Salud) that prohibited the recreational consumption of cannabis in Mexico. The General Health Law’s prohibitions were invalidated because they violated the fundamental right to the free development of personality. As a result, Mexico’s federal health authority, COFEPRIS, may issue authorizations allowing the recreational use of cannabis. But, in order for the recreational use of cannabis to be fully permitted in Mexico—including cultivation, possession, exportation, commercialization, transportation, among other activities—the Mexican Congress must approve authorizing legislation. This is expected to happen in the coming months.
Decisions on the following three topics were issued in September 2021: the legal termination of pregnancy, conscientious objection to providing medical treatment, and ex officio control by some jurisdictional bodies.
After several years of feminist action in Mexico, the SCJN finally resolved that it is unconstitutional for the states to criminalize abortion in absolute terms, in connection with cases challenging absolute abortion prohibitions in the Mexican states of Coahuila and Sinaloa. This was the first pronouncement of this right of women and pregnant persons. Although this resolution does not oblige the states to modify their legislation, it does prohibit judges from penalizing pregnant persons who decide to have abortion and medical personnel who assist them in this process.
A few days after this resolution, the SCJN also issued an important decision on conscientious objection by medical personnel to providing medical treatment. The resolution effectively invalidated Article 10 of the federal General Health Law, which did not limit medical and nursing personnel in exercising their right to object to providing medical treatment to others (the right of conscientious objection). The SCJN resolved that such a right cannot be absolute; it must be limited because it may put at risk the human rights of third parties. The SCJN ruled, among other things, that the right to conscientious objection must have guidelines for exercise and must be individualized to guarantee that an institution has both objecting and non-objecting personnel, in order to treat at least some patients seeking care.
Also in 2021, the SCJN—abandoning a 2012 criterion—determined that the jurisdictional bodies of the Judicial Branch of the Federation, in direct and indirect amparo proceedings, may ex officio (i.e., without the need for the parties to request it from the authority) review the constitutionality of all laws within their jurisdiction. By virtue of this resolution, all organs of the federal judiciary may invalidate—and must refuse to enforce—any provision of law that they believe violates human rights.
Finally, in October 2021 and following the analysis of an appeal filed by the Legal Counsel of the Presidency, the SCJN suspended the effects of a decree that created the National Registry of Mobile Telephone Users (PANAUT), which was published on April 16, 2021, in the DOF. This resolution addressed a constitutional complaint filed by the Federal Telecommunications Institute, which alleged that the creation of the PANAUT violated the rights of access to information and communication technologies, privacy, and the protection of personal data of mobile telephone users. The ruling has maintained the status quo (with the PANAUT intact), until the SCJN decides on the merits of the controversy.
The above-mentioned resolutions, although they do not constitute all those resolved in the country this year, best reflect the balance of power between the executive, the legislature, and the judiciary branch and the legal, political, and social tensions and challenges currently experienced in Mexico.
The Mexico Committee wishes to express special thanks to paralegal Jane Kim of Wilmer Cutler Pickering Hale and Dorr, LLP, for her expert input and work on this submission.
