The United States on Wednesday escalated its dispute with Mexico over its energy policies, filing a formal complaint under a regional trade agreement saying it is discriminating against American firms.

Washington has requested dispute settlement consultations under the US-Mexico-Canada Agreement, the first step in a process that could lead to retaliation over actions it says harms US firms and impedes development of clean energy.

The conflict has been brewing for 18 months, and US officials have repeatedly expressed serious concerns about changes in Mexico's energy policies, warning that they would violate the country's commitments under the trade pact.

"We have tried to work constructively with the Mexican government to address these concerns, but, unfortunately, US companies continue to face unfair treatment in Mexico," US Trade Representative Katherine Tai said in a statement.

"These policy changes impact US economic interests in multiple sectors and disincentivize investment by clean-energy suppliers and by companies that seek to purchase clean, reliable energy."

Mexican President Andres Manuel Lopez Obrador's push to boost the state's role in the energy industry has alarmed foreign investors and environmentalists, who see the moves as favoring fossil fuels over renewable energy.

Tai has said arbitrary treatment puts $10 billion in US investment in Mexico at risk, especially in renewable energy.

The US decision to step up the complaint is likely to increase friction with Lopez Obrador who has promoted changes to strengthen the state-owned electricity provider CFE and roll back the effects of liberalization under previous governments that he says benefited private companies.

USTR said that since 2018, Mexican policies have favored CFE and state oil company Pemex, including delaying or denying new permits, or revoking existing ones, for private firms aiming to operate renewable energy facilities, including wind and solar.

In addition, the government granted Pemex an extra five years to comply with its ultra-low sulfur requirements for diesel, which would have obliged the company to buy from US producers, USTR said.

And just last month regulators said it would require users of Mexico's gas transportation network "demonstrate that they source natural gas from Pemex or CFE."

It is the first formal trade complaint against Mexico under the two-year old USMCA.

The first step in the dispute settlement process is for the parties to hold consultations within 30 days. If there is no resolution within 75 days, Washington can request creation of a panel to rule on the issue.

While the process could lead to punitive tariffs on Mexico, senior USTR officials told reporters the goal is to find a resolution to reopen the market not to retaliate.

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