What Happened

Mexico's populist president has made no secret of his disdain for the country's 2013 energy reforms, which ushered in a wave of deregulation in the sector. Now, it seems, Mexican President Andres Manuel Lopez Obrador is also training his sights on the electricity industry in the hopes of carving out better terms for Mexico. According to a Feb. 10 report, Lopez Obrador's government is planning to review contracts signed between the Spanish electric utility company Iberdrola and Mexico's Federal Electricity Commission. Iberdrola ultimately intends to supply a quarter of the country's power — enough to make it a threat to Lopez Obrador's goal of giving the state pride of place in generating and selling power. At the same time, Iberdrola attracted Lopez Obrador's ire after its U.S. subsidiary gave one of his predecessors, Felipe Calderon, a position. According to Mexico's president, however, that is tantamount to "corruption" due to legislation that temporarily bars former presidents from holding private sector positions — even though the law states that Calderon has been free to accept such a position since 2013. 

The Iberdrola announcement came hot on the heels of another official move in the electricity sector: On Feb. 8, Lopez Obrador's administration said it would allow people living near a state-owned power plant in Morelos state to vote on whether they want the $628 million facility — which is all but finished — to begin operations. 

Why It Matters

Lopez Obrador's moves against Iberdrola highlight the extent of the president's nationalist policies. In his quarrel with Iberdrola, Lopez Obrador has shown that he is willing to focus the state's attention on a single company on the grounds that its foreign advances represent a long-term threat to public control over power utilities. Naturally, Lopez Obrador's pursuit of the Spanish company raises the risk that he will also seek to amend other contracts in the energy sector to suit the federal government's needs.

The proposed referendum in Morelos, meanwhile, is likely to have a chilling effect on some investments. This effect will be particularly strong in the energy, public works or construction sectors, where projects could become hostages in disputes with local populations. The president has already made it clear that he will side with a vocal minority in debates over otherwise legal projects — something that will raise uncertainty for companies that are considering investing in Mexico's economy.

Background

Lopez Obrador has been searching for ways to reverse the energy reforms that ended the state's pre-eminent role in that sector. In an effort to stall new private investments in the energy sector, for instance, the president has reduced federal funding for the National Hydrocarbons Commission and the Energy Regulatory Commission and slashed salaries for all public servants, thereby triggering a brain drain as employees depart from the regulatory sector in search of greener pastures. 

For the moment, Lopez Obrador lacks the necessary votes in Mexico's Senate to roll back the constitutional amendment that enabled energy reform. But with the president chipping away at the current law, that won't necessarily assuage investors' concerns.