Autonomy of the Regulator in the Mexico Energy Sector

The new Mexican government will take office on December 1, 2018, leading to significant speculation on energy policy shifts. Already, MORENA’s[1] House of Representatives coordinator filed an initiative in congress, suggesting a reform to the Organic Law of the Federal Public Administration (the “Law”). MORENA seeks to centralize the National Hydrocarbons Commission (“CNH”) and the Energy Regulatory Commission (“CRE”), main regulators of the energy industry, under the Ministry of Energy (“SENER”). The Energy Regulatory Agencies were created under the Mexican Constitution, and reform to the Law is thus not plausible. However, the initiative started a discussion on the importance of the autonomy of the Energy Regulatory Agencies. This post analyzes the legal effect of the reform proposal and the adjustments necessary to maintain the technical and administrative autonomy of the Energy Regulatory Agencies. Creation of the Energy Regulatory AgenciesIn the energy reform of December 20, 2013, Energy Regulatory Agencies were created under the Mexican Constitution, Article 28. The Law of the Energy Regulatory Agencies confines the authorities and functions of the CNH and CRE as entities of the Centralized Public Administration. This law frames the autonomy of the regulatory agencies by setting forth that they will have: (i) technical, operational and administrative autonomy; (ii) will have legal personality; and (iii) may dispose of the income that results from the governmental fees that are established for the services they render according to their authorities. Structure of the Energy Regulatory Agencies – Basis of their Autonomy Though the CNH and CRE are governmental agencies, they have technical and administrative autonomy, as found in their governing body. An Energy Regulatory Agency is integrated by seven commissioners, including its President and an Executive Secretary, which constitute the governing body. The Commissioners are appointed for staggered terms of seven years of annual succession, are proposed by the Federal Executive, and are ratified by a two-thirds vote of the Senate. The Senate may reject the three candidates proposed by the President of the Republic in their entirety, and the President must submit a new proposal. The President may appoint a Commissioner: (i) within the 30-day period mentioned above, if the Senate has not selected a Commissioner, and (ii) if the Senate has rejected for a second time the short list proposed by the President.As the Governing Body is a fundamental part of the autonomy of the Energy Regulatory Agencies, there are also requirements that the Commissioners must fulfill, in order to protect such autonomy. Among the requirements are: (a) not having been secretary or undersecretary of state, attorney general, senator, representative of the House of Representatives, governor of any state or head of government of Mexico City, during the year prior to the appointment; and (b) not having occupied, in the year prior to the appointment, any employment, position or administrative function in the companies subject to the regulation of the Energy Regulatory Agencies. These requirements are essential for protecting the impartiality of the Commissioners and to avoid politicization of the process.Just as the foregoing requirements serve to ensure the independence of the Energy Regulatory Agencies, there are other mechanisms set forth within the same Law of the Energy Regulatory Agencies that seek to maintain transparent regulatory agencies in the industry, such as codes of conduct for the Commissioners, mechanisms to ensure transparency in decision-making, negotiations and actions of the Governing Body and provisions that allow coordination with other government agencies. Authorities of the CNH and CREAs the CNH and CRE have their internal structure that safeguards their autonomy, they were also conferred authorities that complement that autonomy and provide their technical value, because these are functions and authorities that only the Energy Agencies can exercise. The CNH on one hand is mainly responsible for regulating the upstream sector of hydrocarbons industry, and the CRE is responsible for regulating the midstream and downstream sectors in hydrocarbons and power industries. Both regulatory agencies have a perfectly defined role in the law. Among others, the functions of the CNH include: (i) regulating and supervising surface reconnaissance and exploration, as well as the exploration and extraction of hydrocarbons, including their collection from production points and their integration into the transport and storage system; (ii) tendering and executing the contracts for the exploration and extraction of hydrocarbons; and (iii) managing the technical aspects of the assignments and contracts for the exploration and extraction of hydrocarbons. Also, among the main functions of the CRE are: (i) promoting the efficient development of the industry; (ii) promoting competition in the sector; and (iii) promoting the efficient development of the following activities: (a) commercialization, transportation, storage, distribution, compression, liquefaction and regasification, as well as the sale to the public of oil, natural gas, liquefied petroleum, petroleum products and petrochemicals; (b) transport by pipelines, storage, distribution and sale to the public of bioenergetics; and (c) power generation, public power transmission and distribution services, power transmission and distribution that are not part of the public service, and the sale of power. Authorities of SENERThe identification of the authorities of the CRE and CNH is relevant when emphasizing that the new regulatory framework clearly defines the role of SENER within the industry. As can be seen in the Law of Energy Regulatory Agencies, the three institutions need to act in a coordinated manner for the benefit of the industry and to comply with their constitutional mandates.SENER is responsible for conducting the energy policy within the constitutional framework to guarantee the competitive, sufficient, high quality, economically viable and environmentally sustainable energy supply required for the development of national life. Likewise, it is in charge of exercising Mexico’s rights in hydrocarbon matters and conducting energy planning. Unlike the CNH and CRE, SENER is a governmental entity of the Federal Public Administration responsible for energy policy, and it reports directly to the Executive. Legal Effect of the Reform ProposalThe Mexican Constitution and laws that created the Energy Regulatory Agencies clearly set forth that the CNH and CRE are agencies of the Centralized Public Administration, and thus must coordinate with SENER to develop the energy industry and comply with the energy policy established in applicable laws. “Centralizing” consists of grouping agencies by sectors under the coordination of a centralized agency, in which the delimitation of functions and authorities in homogeneous sectors of activity is sought, to define responsibilities, avoid duplication of functions and allow government decisions and actions to flow quickly and efficiently. The aim of the constitutional reform in the energy sector is to strengthen energy regulators, renewing their role and functions, and allow energy actions to flow. For practical purposes, the CNH and the CRE are already centralized in a certain manner to the SENER, by having to coordinate with this ministry, as mentioned above, for the development of the energy policy. Therefore, reforming the Law to centralize CNH and CRE under SENER appears unnecessary. Maintaining Technical and Administrative AutonomyThe Organization for Economic Cooperation and Development (“OECD”) defines “regulatory body” as the “market arbitrator” in charge of contributing to the provision of essential public services. The OECD establishes that for these regulatory agencies to be successful they must be constantly alert, informed by real-time data, verify sectoral trends, and evaluate the impact of their decisions. In order for the CRE and the CNH to maintain their technical and administrative autonomy at all times, special attention must be paid to internal governance: the Governing Body continues with autonomy in decision-making and its actions, and their Commissioners continue with their same process of appointment; a clear code of conduct exists; there is transparency in business processes and resolutions; and there is accountability and budgetary independence. Attention must also be given to external governance, relating to the functions, relationships and distribution of authorities and responsibilities with other governmental and non-governmental interested parties, such as SENER and other agencies. Meeting these elements fosters a stable environments for investors, confidence on the part of regulated parties, transparency, increased investments, updated information, efficient markets, and improved government monitoring.Over the last six years, the nation has undertaken efforts to strengthen and coordinate these institutions, which in the opinion of the OECD, have acquired their quality as true energy regulatory agencies. There is still a lot of work ahead, but the results can been seen in the confidence regulated parties have placed in the Energy Agencies in day-to-day operations. The proposed reform to the Law is unnecessary. For the effectiveness of the energy market, CNH and CRE need only continue working in coordination with SENER and continue strengthening themselves as Energy Regulatory Agencies, in order to maintain their autonomy. [1] National Regeneration Movement (MORENA) is the party that has majority in the House of Representatives and Senate, and was led by the elected presidential candidate Andrés Manuel López Obrador. Maria Luisa LicónGabriel RuizThompson & Knight, LLP