Mexico energy’s road to reform: enabling legislation enacted

by Jed Bailey | August 21, 2014

 

On August 11, 2014, Mexican President Enrique Peña Nieto enacted the legislation required to implement the Constitutional energy reform that was passed in December, 2013 (See Energy Narrative’s report Mexico’s Natural Gas and Electric Power Reform: First Impressions). The legal changes are broad and profound, comprising both new laws (including the Electricity Industry Law, the Geothermal Energy Law, Hydrocarbons Law, the Hydrocarbon Tax Law, and the Mexican Petroleum Fund for Stabilization and Development Law) and amendments and revisions to existing laws (including the National Water Law, the Law on Foreign Investment, the Public-Private Associations Law, and the Fiscal Coordination Law).

Every aspect of Mexico’s energy sector will be affected with greater private sector participation and competition in electricity generation, natural gas logistics, and hydrocarbon exploration and production. Concluding the roughly three-month Congressional debate on the legislation represents a major step along the long road to reform and confirms the government’s dedication to recasting Mexico’s energy landscape.

Although a significant milestone, much remains to be done. Most importantly, detailed regulations remain to be created, contracts and bidding processes for a range of newly allowed activities must be designed and vetted, and government bodies—including those newly formed and those newly reformed—must hire staff and adopt policies and procedures to carry out their new mandates. In addition, Pemex and CFE—newly reincarnated as State Productive Enterprises—must adapt to their new role as participants in a competitive market.

All of this will take time. While the new playing field is being defined, daily operations and investment in new infrastructure must continue. While the new laws provide transitory measures to accommodate existing contracts and ensure continuity, a lengthy transition period will extend the current model to new investments that would otherwise have been made under the new laws. A greater share of the market under legacy contracts will affect the new market’s initial conditions and potentially limit competition in the near term.

This creates a tension between enacting the new system as quickly as possible and resolving all details and potential difficulties before making the transition. As such, the pace of progress so far, and the process in which the enabling legislation was passed, could be seen in both a positive and negative light.

Trading legitimacy for political certainty?

The draft legislation package was not introduced to Congress until April 30th, 2014, the final day of Congress’ normal session, requiring special sessions over the summer for the new laws to be passed. This delay, and further delays in June caused by a rift between the PAN and PRI over the timing of electoral reforms, pushed back the final passage until mid-August. This is roughly four months later than planned, but still relatively quick given the ambitious timetable originally envisioned in the December Constitutional changes.

Once debate began, each set of legislation moved quickly and deliberately through both the Chamber of Deputies and the Senate. Great care was taken to follow congressional process to the letter in order to limit accusations that the reforms were forced through. Even so, the debate resulted in few changes; the final bills as passed were nearly identical to the draft laws that were submitted in April. PRI-PAN support remained steady throughout the process, while PRD opposition was equally sustained. This suggests that PAN and PRI representatives thoroughly vetted the draft legislation prior to submitting it for formal consideration. In this way, certainty of passage was bought at a cost of excluding controversial topics, such as reforming the unions or addressing government pensions.

This approach limited the PRDs ability to derail the process, but also feeds an underlying skepticism that the reform will disproportionately benefit an elite few at the expense of the broader public. A delay in seeing the proposed benefits could quickly devolve into a public judgment that the reforms failed. Managing these expectations during a tumultuous and drawn out transition period will be the next major political challenge.

The government is aware of this risk and has promised that the reforms will bring lower energy bills, greater foreign investment, faster economic growth, and stronger, more competitive, state energy companies—much of this to come before the end of the current presidential administration. Keeping these promises will be difficult, even if the reform process continues on task and largely on schedule.

More worryingly, many of the benefits must be measured against a hypothetical alternative: economic growth may be faster and energy costs may be lower than they would have been without the reform, but the general public will compare them with past experience. In this way, improvements over what might have been may still be viewed as a failure if economic growth remains lackluster and energy prices higher than in the past.

Keep an eye on the rank and file

Maintaining momentum and the sense that benefits are coming is therefore critical for the reform’s success. This will be hard to do in the near term, as much of the next phase will take place behind closed doors: drafting regulations, contracts, and policies will happen outside of the public legislative debate. Institutional changes within the government, regulators, and Pemex and CFE will also be largely invisible, although just as vital.

The changes will directly affect public employees first, making them a helpful barometer of the reform’s progress. The staff of every affected government department or state-owned entity must support the changes if they are to be implemented effectively. New hires must be brought in with the required skills and experience, while those with skills that are no longer needed must be retrained or relocated. All of this must be done in real time as the new system is being created as there will be little time to adapt once the new market—and new competitors—are in place.

Public indications of how these employees view the transition process or difficulties they may face along the way, could provide early indications of difficulties that the wider community will face or how public perceptions and support for the reform may soon be leaning.

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