Mexican High Court Rejects Congressional Auditors' Challenge to Private Generation and Sales of Power

Private power south of the border narrowly escaped in April a congressional audit committee invalidating as unconstitutional their generation and sale of power to the national electricity monopoly, the Comisión Federal de Electricidad ("CFE").  At the request of Mexican President Vicente Fox, the Mexican Supreme Court by a 6-to-5 vote ruled that the audit committee of the opposition-dominated Congress did not have authority to rule on the constitutionality of the power purchase contracts between CFE and private generators.  Had the high court affirmed the audit committee and ruled against President Fox, approximately 7,300 megawatts of privately owned generation capacity in Mexico would no longer have been able to make sales to CFE "• the only private sales permitted under Mexican law "• thereby setting up a scenario in which CFE would be forced to buy out the private owners at fire-sale prices.  While the decision on the authority of congressional auditors falls short of an affirmative endorsement of the constitutionality of private power sales to CFE, it was nevertheless sufficiently reassuring that an audible sigh of relief arose from private power developers following the court's April 16 decision.

Ever since the late 1930's nationalization of Mexico's energy industry, CFE and its predecessor alone were permitted to generate and sell electric power in Mexico.  The law was changed in 1992 to permit private companies to generate or cogenerate power for their own use or for sale to CFE, but not directly to the public.  Since then, private capacity has grown to the point that today it accounts for approximately 20 percent of the capacity available to CFE.

Development of private generation accelerated under the policies of President Fox, until the congressional auditors raised their challenge to the private sales to CFE in early 2004.  Recognizing the chilling effect that the auditors' challenge would have on sorely needed investments in the Mexican economy, President Fox moved quickly to challenge the auditors, resulting in the high court's ruling against the auditors on April 16.    In the near term, the court's decision is not expected to increase new private investments in the Mexican power sector since CFE currently has a 40 percent capacity reserve due to a surge in private investment soon after President Fox's reelection in 2004 and a floundering economy.  [NEW MATTER]