Academic journal article Energy Law Journal

Increasing U.S.-Mexico Cross-Border Trade in Electricity by Nafta's Renegotiation

Academic journal article Energy Law Journal

Increasing U.S.-Mexico Cross-Border Trade in Electricity by Nafta's Renegotiation

Article excerpt


International trade in electricity remains small compared to the overall trade in goods and services. In 2011, electricity exports represented about $40 billion and 662 Terawatt-hours (TWh).1 This is 0.225% of the nearly $18 trillion in worldwide trade in a year when eighty-seven countries reported positive exports or imports.2 Despite this low percentage, trade in electricity remains essential for some nations, and has several advantages.3

Cross-border electrical interconnections benefit nations greatly. They can provide greater grid reliability, lower costs, transactional opportunities, economic trade benefits, and the potential for growing renewable deployment.4 However, trade in electricity differs drastically from other commodities, particularly because electricity storage remains expensive.5 Additionally, electricity requires infrastructure to flow between the markets. The U.S.-Canada electric systems' integration goes back several decades.6 Canada and the U.S. have developed thirty transmission connections, which enable trade.7 The Mexico-U.S. border, by contrast, has few connections, which limits trade.8

Many factors can deter these transmission connections, but a legal system could substantially affect their construction. The current Mexican and U.S. legal frameworks support both further cross-border trade and the electric systems' integration.9 The Mexican legislature introduced open access and other principles governing competitive regimes.10 Prior to this legislation, these principles were unknown to Mexico.11 Although private entities could generate electricity, they had to self-consume it, or otherwise sell its surplus to the vertically integrated State-owned enterprise (SOE).12 Now, generators and the SOE can participate and sell electricity in the wholesale electric market.13 The new law unbundled this SOE, and it can compete with other private generators. Further, the new law set in place a newfangled entity with characteristics similar to the U.S. Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs).14

Presently, NAFTA encourages trade and provides several advantages; but the current renegotiations could bring electricity trade to the next level.15 The three countries benefit from increased trade because the treaty eliminated tariffs on most goods that cross the borders.16 Electricity, as a good, benefits from national treatment under Article 301 and tariff elimination under Article 302.17 Still, NAFTA could become the keystone in the threefold domestic legal structure. Specific provisions in the electric sector at the international level can lock all the undertakings between the three countries, harmonizing the regimes and triggering further trade in electricity.

Nevertheless, the fifth round of NAFTA renegotiations "didn't go so well."18 While we await the sixth and further rounds, it is worth thinking about trade without NAFTA. That "would be a big step backward for businesses, farmers, workers and consumers in each of [the three countries], and would undermine [] national and continental competitiveness and security in ways that could reverberate for decades."19 In the U.S., "millions of jobs depend on trade with Canada and Mexico, and American companies have developed complex, 'just-in-time' supply chains built around an integrated North American market."20 Regarding the energy field, "U.S. pipeline exports of natural gas" have doubled between 2009 and 2016.21 "Almost all of this growth is attributable to increasing exports to Mexico, which have accounted for more than half of all U.S. natural gas exports since April 2015."22 Trade in electricity also would suffer.

Upon the effective withdrawal from NAFTA, tariffs would rise, which would cause prices to spike, cut into company profits and affect end-consumers. Notably, this would damage cross-border trade of all goods, including electricity. Besides, NAFTA encouraged foreign investors to explore the markets and invest in the three countries. …

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