Mexico's CFE Power Grab Sparks Expropriation Fears, Investor Pushback

Mexico's Power Sector Faces Regulatory Challenge

Mexico's power sector is facing a new regulatory challenge after the government released a draft proposal that would centralize electricity sales under the state-run Comision Federal de Electricidad (CFE). The draft, published on Dec. 5, has drawn sharp criticism from private energy companies and industry groups, who argue the move could amount to an indirect expropriation of private assets.

The plan would force independent power producers to sell electricity to CFE for five years, significantly limiting their access to the wholesale market according to Bloomberg.

Under the current rules, independent generators had the right to sell to CFE via long-term contracts and later transition to the open market after those agreements expired. The new proposal removes that option and gives CFE the ability to acquire power plant assets at no cost. The only alternative for companies is to seek new permits directly from the government, a process that adds regulatory uncertainty.

Mexico's energy ministry has remained silent on the issue, declining to comment on the draft regulations. However, the Mexican Association of Energy, a private company lobby group, has already raised concerns. In a public comment linked to the draft, the association said the new rules could "configure as an indirect expropriation" of private assets, given that the previous regulations recognized full ownership rights.

Background and Legal Implications

The draft is part of a broader effort by the Mexican government to increase state control over the energy sector. It follows a constitutional reform passed in October 2024 that overhauled energy regulations and laid the groundwork for CFE's expanded role. The December guidelines are now a practical extension of that reform, detailing how independent producers will be integrated into the state-led framework.

Analysts warn that the proposal could trigger legal disputes, particularly under the United States-Mexico-Canada Agreement (USMCA). Several power producers operating in Mexico, including AES Energy, Naturgy Energy Group, and Mitsubishi Power, have ties to the U.S. and Canada. If these firms believe their rights under USMCA are violated, they may initiate claims under the trade agreement's investor-state dispute settlement mechanisms.

Market Reactions and Investor Concerns

The new rules have raised concerns across the energy market. Independent power producers account for about one-fifth of Mexico's operating generation capacity, making their potential realignment under CFE a major shift in the sector. Pablo Zarate, a senior managing director at FTI Consulting, noted that the regulations highlight the government's struggle to balance state control with investor confidence. "These draft regulations show that tension. They also ignite concerns that, if not ironed out, could spark dispute settlement mechanisms under current USMCA rules and other investment treaties," he said according to Bloomberg.

Companies are now assessing their options to mitigate the impact of the new rules. Some may seek direct negotiations with the government to secure new permits, while others might explore legal or political avenues to challenge the regulations. Foreign investors, especially those with exposure to Mexico's energy market, are watching closely for signs of broader policy shifts that could affect other sectors according to Bloomberg.

Risks and Uncertainties

The government's centralization of power contracts is not the only recent move affecting Mexico's trade and investment landscape. New import duties approved by Mexico's Senate in late December are also creating ripple effects. The tariffs, which range from 5% to 50%, target countries without free trade agreements with Mexico, including India, China, and South Korea. These duties are expected to take effect on Jan. 1, 2026, and are projected to impact a wide range of exports, including auto components, electronics, and machinery.

In addition to trade and investment issues, labor disputes are also drawing international attention. The U.S. Trade Representative has invoked the Rapid Response Labor Mechanism (RRM) under USMCA to address alleged violations of workers' rights at two Mexican facilities—Mondelez Mexico in Puebla and Bernhard Schulte Shipmanagement in Campeche. These cases highlight the growing scrutiny of labor practices in Mexico under the trade agreement.

What Analysts Are Watching

Analysts are closely monitoring how the government and private sector navigate these challenges. The key issue is whether Mexico can maintain state control over energy without undermining investor confidence. The energy sector, in particular, is sensitive to policy changes due to its high capital intensity and long-term investment horizons according to Bloomberg.

For now, the draft regulations remain in the public comment phase. The government will likely face pressure from both domestic and international stakeholders to address concerns about expropriation risks and regulatory clarity. The final version of the rules will determine whether Mexico's energy landscape moves toward a more centralized model—or if compromises are made to preserve private sector participation according to Bloomberg.