Mexico's electricity reform will unleash international arbitrations, Fitch warns

Mexico’s electricity reform will unleash international arbitrations, Fitch warns

The rating agency recalled that the constitutional initiative seeks to limit private participation in Mexico’s electricity generation to 46%, which is now close to 60%, which “would add uncertainty to future demand and price.”

The autonomous energy regulators would also disappear, cancel all self-supply contracts and prioritize the dispatch of the Federal Electricity Commission (CFE) plants over private renewables.

“The proposal could further weaken Mexico’s rule of law and could discourage future private investment in the sector,” Fitch said.

The agency said the proposal would also bring the CFE’s control of “the entire electricity supply chain,” including generation, transmission, distribution and supply, which “would end the autonomy of the independent operator of the system.”

To meet the country’s power demand, the CFE would have to increase its investment and development pace, the rating agency said.

“If the initiative passes, Fitch believes that the capacity of the system would be pressured as of 2024, and that private participation would be necessary to carry out the new generation projects that are needed,” he argued in his report.

The report recalled that the ruling National Regeneration Movement (Morena) postponed the reform debate until 2022, despite being a priority of the president, Andrés Manuel López Obrador.

The opposition Institutional Revolutionary Party (PRI), which had been open to voting on it, announced this Monday that it will not discuss the initiative until the 2022 elections, when six of the 32 entities will renew their governorships.

The PRI leader, Alejandro Moreno, questioned the attitude of the Morena leader, Mario Delgado, who promised to “erase the PRI” in next year’s elections.

To approve the reform, the ruling alliance requires two-thirds of the votes of Congress, a qualified majority that it lost after the midterm elections on June 6.

In this context, Fitch considered that the approval of the reform “is unlikely.” “But if it happens, the credit implications would be significant,” he warned.

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