ISDS cases lined up against Mexico’s energy reform laws

April 6, 2021: US-based global law firm Morgan Lewis & Bockius LLP is advising US investors to prepare Investor-State Dispute Settlement (ISDS) claims against Mexico over its Power Industry Law and its proposed Hydrocarbons Reform Bill which enable Mexico to take action against climate change.

The Power Industry Law deals with renewable energy and was adopted on March 10, 2021, while the Hydrocarbons Reform Bill is expected to pass through the Congress without resistance in the coming weeks.

The Power Industry Law strengthens the state-owned Comisión Federal de Electricidad (CFE) in relation to priority for sale of electricity to the national grid, embracing dispatch of renewable energy by private companies. The law is suspended due to a temporary injunction.

Under the proposed Hydrocarbons Reform Bill, the Mexican government would be able to regulate distribution, storage, import and export of fuels and oil, and allow the state-owned petroleum company PEMEX to take over the facilities of companies that lose their permits for reasons of national security, energy security, on national economic reasons.

While the legal advice explains that foreign investors in the Mexico petroleum sector can seek injunctions in the Mexican courts, the advice is to ignore the national courts and to use the international tribunals available under 29 Bilateral Investment Treaties (BITs) and two regional trade agreements.

The BITs allow investors (individuals or legal entities) from countries such as Spain, Italy, Denmark, United Kingdom, Korea, France, Germany, Netherlands, Switzerland, and China to bring compensation claims against the Mexican government.

US investors can also bring compensation claims under the United States-Mexico-Canada Agreement (USMCA) that entered into force on July 1, 2020, and replaced the North American Free Trade Agreement (NAFTA). This agreement banned ISDS cases between the US and Canada, but, following lobbying from energy companies, allows them for energy and some other industries in Mexico. US investors in Mexico before July 1, 2020, can make a compensation claim using NAFTA until June 30, 2023.

Mexico is also party to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that protects investors from Australia, Canada, Japan, New Zealand, Singapore, and Vietnam.

ISDS claims are heard by panels of investment lawyers, have a strong bias in favour of the investor, and have awarded billion dollar compensations for dubious calculations of foregone profits. The government of Mexico’s President Andres Manuel Lopez Obrador may soon face a critical choice about whether to remove ISDS from all these agreements.