Mexico Moves to Seize American Assets

According to the Mexican newspaper Reforma, the Tuxpan terminal is part of roughly $500 million that companies have invested in gasoline and diesel storage facilities in Mexico. This includes terminals run by IEnova, a subsidiary of San Diego-based Sempra Energy, and Indiana-based Bulkmatic. Reforma reports that both companies have had storage terminals closed recently by Mexican authorities. Monterra told me it has complied with all regulations but that the energy regulator isn’t answering its calls and the terminal remains closed.

There’s trouble brewing between Mexico and the U.S., and I’m not talking about immigration. President Andrés Manuel López Obrador’s desire to put the state in full control of the energy industry, as it was in the 1970s, is running head-first into treaty obligations on trade and investment. The arbitrary closing of private gasoline-storage facilities is a fraction of the problem.

Constitutional amendments proposed by AMLO, as the president is known, and sent to Congress for approval in a bill last month are labeled electricity reform. Yet while “reform” normally suggests improvement, this legislation, if passed, will take Mexico, and North American integration, backward.

The bill modifies Articles 25, 27 and 28 of the Mexican Constitution. Article 27 would be amended to establish “that the strategic area of electricity belongs exclusively” to the state and consists “of generating, conducting, transforming, distributing and supplying electrical energy.”

Private companies would still be allowed to operate under the new law, but they would have to sell to the state-owned federal electricity company, or CFE, which would set prices as a monopsony and would run a monopoly in selling to users. The CFE would be in charge of dispatching supply and guaranteed a minimum 54% of the market.

This is a big change. Since Mexico opened its energy markets to private investment in 2014, electricity generators selling power into the grid have enjoyed dispatch of supply according to price, with more cost-efficient plants, like those using renewables, natural gas and modern technology, going first. Large consumers, including manufacturers, have been allowed to contract directly with private suppliers, which rent transmission lines at prices set by an independent regulator.

A state takeover of the entire electricity market and the end of an independent regulator makes no sense in a developing country that needs competition to ensure plentiful and cheap electricity for manufacturing. But AMLO’s new law isn’t about enhancing electric power. It’s about consolidating state power—via its companies, the CFE and Petróleos Mexicanos (Pemex).

Writing in the newspaper Milenio last week, Mexican legal scholar Sergio López Ayllón warned that under the reform the CFE “acquires constitutional autonomy, an unprecedented condition with enormous legal and economic consequences.” Mr. López Ayllón didn’t stipulate what those consequences might be. But it’s clear that by giving the CFE, which has long wrestled with corruption, constitutionally mandated control over the nation’s supply and pricing of this valuable commodity, Mexico would dangerously centralize political and economic power in the state-owned company.

There’s an estimated $45 billion in private capital—foreign and domestic—in Mexico that will be affected by this new law. Notably, it will cancel all permits and long-term power-purchase agreements with the CFE—which were necessary to secure financing.

AMLO’s initiative also destroys the nascent wind and solar industry. But he’s focused on helping Pemex unload its high-sulfur fuel oil, which is difficult to convert into revenue in the market. Greater use of CFE fuel-oil-powered plants implies rising pollution and emissions when cheaper and cleaner options are readily available.

The bill violates the U.S.-Mexico-Canada Agreement—formerly Nafta—as it abrogates contracts, capriciously strips investors of value, eliminates market-based competition, discriminates against private capital, cancels access to activities not reserved as exclusive in the agreement, and eliminates independent regulators, including in hydrocarbons. It also contravenes environmental commitments. As the seizure of the terminals demonstrates, for investors there’s more where that came from.

In a July 22 press conference Mr. López Obrador pooh-poohed concerns that the U.S. might object to his crackdown on competition, insisting that Washington hasn’t complained. If Mexico’s Congress reads that as implicit U.S. approval of the bill, it will be a tragedy not only for investors but for all Mexicans.

Write to O’[email protected].