Submitted by the OAS Trade Unit to the FTAA Working Group on Competition Policies

Mexico: Report on Developments and Enforcement of Competition Policy and Law (1995 - 1996) (Continued)

III. Regulatory and Trade Policy Matters

The role of the Commission in relation to the implementation of other policies is to help foster a pro-competitive environment. During the 1995-1996 period, the Commission participated in government efforts aimed at implementing private participation in the provision of public services and in the operation of property in the public domain. Of special note are the review of the regulatory framework applicable to the distribution of natural gas and airports, the policy of issuing licenses for the radio spectrum, and designing the strategy for privatizing public enterprises in several sectors. In all cases, the Commission's opinions sought to establish conditions that would facilitate the development of efficient markets in the sectors recently opened to private activity, the prevention of anticompetitive practices, and the introduction of mechanisms for coordinating with the regulatory authorities.

These opinions were put before the Secretariats in charge of the sectors and the Inter-Secretarial Commissions on Expenditures and Finance and on Disincorporation, on which the Commission has a permanent seat. Also noteworthy is the participation of the CFC on the Commission on Foreign Trade and on the National Commission on Standardization, where it has sought to facilitate coordination of the competition policy with policy in the areas of industrial development, trade, consumer protection, and environmental protection.

a. Regulation on Natural Gas

The Commission contributed to the drafting of the preliminary draft Regulation on Natural Gas, issued by the Executive in November 1995. This regulation included the following points on competition:

• Liberalization of natural gas imports so as to promote the operation of market forces in first-hand sales.
• Vertical disaggregation of this industry in transportation, storage, distribution, and marketing.
• Prohibition on vertical integration in transportation and distribution within the same zone, except when there are efficiency gains.
• Promoting the establishment of an extensive structure that is useful for development. In this respect, an exclusivity period was established for the first concession for distribution in a specific zone, as Mexico's lag in this area was taken into account. Nonetheless, this exclusivity will be limited to the construction of distribution networks and to transport gas in the zone covered by the permit.
• Bidding for distribution permits with exclusivity rights, based on the best service and price conditions, fostering competition through the market.
• Awarding of distribution permits subject to calls for bids; the award is conditioned on a favorable opinion by the Commission, so as to prevent anticompetitive concentrations.
• Based on broad, transparent, and non-discriminatory criteria, granting permits for transportation, storage, and non-exclusive distribution, so as to foster free competition, reinforcing free access to marketing.
• Notice to the Commission of any transfer of permits.
• Open and non-discriminatory access to the transportation, storage, and distribution services, in order to foster the efficient development of the systems and to limit market power.
• Eliminating cross-subsidies.
• Suppressing regulated prices and rates when, in the Commission's opinion, competitive conditions prevail.

b. Law on Airports

The Airports and Civil Aviation laws constitute the new regulatory framework for air services. The Commission participated actively, since 1995, in the drafting of both preliminary draft laws, along with the SCT. During the period in question, the Commission worked basically in the preparation of opinions regarding the functioning and structure of the market for airport services covered by the respective law, since the aspects related to civil aviation were submitted in the 1994-1995 period.

The following points on competition, which were incorporated into the Law on Airports, merit special mention:

• Granting concessions, based on transparent criteria, for the administration, operation, and construction of airports, as well as permits for civilian airports.
• Assignment of concessions for airports through a public bidding open to all economic actors who meet the technical requirements for providing the service.
• Restrictions on concentrations that put the efficient operation of the markets at risk.
• Obligation to provide airport and complementary services generally and without any discrimination among users. This provision and the authority of the SCT to establish rules and general bases for setting schedules for departures and arrivals, and for setting priorities of order among the aircraft, are aimed at impeding the establishment of barriers to entry and the unlawful displacement of competitors.
• Obligation of concessionaires to provide what is needed to give the airport competitive options for complementary services, except when there are technical or safety limitations.
• Establishment of bases for SCT regulation of rates and prices when conditions for competition do not attain in the view of the Commission.

c. Granting Concessions for the Radio Spectrum

In general, with the opening in telecommunications, the CFC has expressed its support for establishing bidding processes, its interest in the application of formulas which, without interfering in the operation of the markets, foster the broad participation of all economic actors capable of efficiently providing the services that have been liberalized in this sector.

In particular, the assignment of the radio spectrum for certain uses is fundamental to the process of establishing competitive conditions in the telecommunications market. To this end, the Federal Law on Telecommunications provides: a) periodic publication of a program that specifies the frequency bands that will be given in concession for certain uses, their geographic coverage, and their specific uses; b) their concession through public bids; and c) the requirement that a favorable opinion be obtained from the Commission in order to participate in the bids. Pursuant to this law, the SCT presented an initial effort to assess and plan for the 3-39,500 Mhz bands, and submitted several bidding forms for consultation. Finally, the grounds for granting concessions to the 12.7-13.2 Ghz bands, set aside for point-to-point and multipoint microwave links. During this process, the Commission contributed actively to raising competition-related issues.

To facilitate the procedures for bidders so as not to impair the efficient issuance of concessions, the Commission adopted the following measures:

• Notification of the Commission through a copy of the request submitted to the SCT.
• Favorable opinion of the Commission subject to confirmation that said copy was received.
• Revocation of the favorable opinion granted in the first instance, when the Commission considers that granting the concession may pose a risk to the process of competition. In such circumstances, the Commission would require the information needed for issuing the respective opinion.
• In particular, as for the grounds for granting concessions for the 12.7-13.2 Ghz bands, the Commission suggests exploiting the concession by a call for bids for said band by a specific number of companies that administer the spectrum, who in turn would market it to the users in competitive conditions.
• The next call for bids is for the concessions for the bands set aside for paging services, and later, of the spectrum for the use of local access wireless services, cellular phone services, and what are called personal communication services (PCS).

d. Railroads

The Commission participated in the study of the various options for restructuring and privatizing railroad services, as part of the Inter-Secretarial Commission on Disincorporation. During this process, it made several recommendations aimed at favoring competitive conditions in this sector. Finally, on November 13, 1995, the General guidelines for investment in the railroad system were published in the Official Gazette.

With a view to bolstering competitive conditions in the disincorporation scheme, the Commission made the following recommendations:

• To award the regional railroad concessions to different companies.
• Possibly to incorporate additional compulsory rights of way, once the period necessary for the companies to develop and consolidate their markets has elapsed. Based on this proposal, the following policy was adopted in the Inter-Secretarial Commission on Disincorporation: a) To establish additional rights of way after the first 20 years, at the request of any user or the SCT, when competitive conditions do not obtain in any specific route or routes. In this connection, an opinion must first be obtained from the CFC. b) To review the concessions when they have been in place for 30 years, and to establish additional rights of way as appropriate.

IV. International Affairs

A. Bilateral relations with the United States

In December 1995, Union Pacific (UP) and Southern Pacific (SP) informed the Interstate Commerce Commission of their intent to merge. These companies provide rail freight transportation services in the central-west and southwestern United States, and together they account for the lion's share of traffic in merchandise by rail from and within Mexico. Consequently, the UP/SP concentration would dominate rail freight services in the border area, creating anticompetitive conditions in bilateral trade.

In the face of this situation, the Commission expressed its concern to the Department of Justice and the Interstate Commerce Commission of the United States, and to UP and SP. In addition, based on the principles of international comity, and in the framework of the cooperation provided for in Chapter XV of NAFTA, the Commission expressed interest in cooperating with the Department of Justice in investigating the possible anticompetitive effects of this merger. To this end, the Commission monitored the case during the hearings held in the United States, and met with the companies that could be affected by this concentration.

Finally, in the United States restrictions were considered on the UP/SP merger to prevent anticompetitive effects.

B. International Cooperation

The Commission maintains contacts with the Commission of the European Union, Spain, and the Latin American competition agencies, on the basis of informal cooperation, generally related to technical assistance issues.

• The Governments of Mexico and France signed a technical cooperation agreement in the context of the French-Mexican Joint Commission on Technical and Scientific Cooperation. The agreement includes an annex on competition, which resulted from negotiations by the Commission, with the support of the Secretariat of Foreign Affairs (SRE), and in particular with the support of the Embassy of France in Mexico.

• In addition, conversations have been held with the Tribunal for the Defense of Competition of Spain, and General Directorate IV (competition) of the European Union on competition policies in order to examine the possibility of adopting bilateral technical cooperation agreements.

C. Regional Integration Arrangements

1. North American Free Trade Agreement (NAFTA)

Under NAFTA Article 1504, a working group on trade and competition is to be created. During the period covered by this report, the Commission participated in the fifth and sixth meetings of this Group, which were held in March in Ottawa, Canada, and in November in Mexico City.

2. Free Trade Area of the Americas (FTAA)

In the framework of the FTAA, seven working groups were created, one on each of the agreement's principal chapters. These working groups include one on competition policy. The Commission participated in the first and second meetings of the Working Group on Competition Policy within the FTAA, which were held May 16 and 17, 1996, and August 15 and 16, 1996, respectively, in Lima, Peru.

3. Asia-Pacific Economic Cooperation (APEC)

Within APEC there is no specific working group on competition-related issues. Nonetheless, these issues are discussed in the Committee on Trade and Investment, and the Commission currently participates in drafting the points on competition to be included in Mexico's Individual Liberalization Plan in that forum.

D. International Organizations

1. Organization for Economic Cooperation and Development (OECD)

The Commission participates actively in the working groups within the Committee on Competition Law and Policy (CLP) of the OECD. It should be noted that beginning in July 1996 a joint working group was created on trade and competition.

2. United Nations Conference on Trade and Development (UNCTAD)

The Commission participates in UNCTAD on competition-related issues through the Intergovernmental Group of Experts, and also helped define the points on competition raised by Mexico at UNCTAD IX, held in April-May 1996 in South Africa.

V. Other Consultations/Information and Enforcement Initiatives

In response to the needs for transparency and clarity in enforcing the Competition Law, the Commission has adopted a policy to facilitate oral and written consultations, as well as analysis of its positions with interested persons, to meet the need to give guidance to economic actors and the general public. Nonetheless, it should be clarified that the responses to said consultations have no legal or binding effect, and do not prejudge the later decisions of the Plenary in response to the complaints and notifications cited, nor regarding the sua sponte investigations undertaken by the Commission. In this context, during the 1995-1996 period, 44 written consultations were received, reflecting a growing interest on the part of the economic actors in the guidance offered through this mechanism.

In addition, the Commission published an annual report on the performance of its functions, which is also a means for giving guidance to economic actors in relation to the criteria used in interpreting and enforcing the Competition Law. To date, three reports have been published.

Mention should also be made of the Commission's efforts to contribute to the analysis and dissemination of the law through hearings, conferences, and seminars. In particular, meetings were held with members of the Commerce Committee of the Chamber of Deputies, to discuss specifics of the Law's enforcement and interpretation. In addition, several presentations were made in Mexico and abroad on the Law, the activities of the Commission, and the competition-related aspects of the legislation regulating the delivery of public services in communications, transportation, and distribution of natural gas.

III. Regulatory and Trade Policy Matters

The role of the Commission in relation to the implementation of other policies is to help foster a pro-competitive environment. During the 1995-1996 period, the Commission participated in government efforts aimed at implementing private participation in the provision of public services and in the operation of property in the public domain. Of special note are the review of the regulatory framework applicable to the distribution of natural gas and airports, the policy of issuing licenses for the radio spectrum, and designing the strategy for privatizing public enterprises in several sectors. In all cases, the Commission's opinions sought to establish conditions that would facilitate the development of efficient markets in the sectors recently opened to private activity, the prevention of anticompetitive practices, and the introduction of mechanisms for coordinating with the regulatory authorities.

These opinions were put before the Secretariats in charge of the sectors and the Inter-Secretarial Commissions on Expenditures and Finance and on Disincorporation, on which the Commission has a permanent seat. Also noteworthy is the participation of the CFC on the Commission on Foreign Trade and on the National Commission on Standardization, where it has sought to facilitate coordination of the competition policy with policy in the areas of industrial development, trade, consumer protection, and environmental protection.

a. Regulation on Natural Gas

The Commission contributed to the drafting of the preliminary draft Regulation on Natural Gas, issued by the Executive in November 1995. This regulation included the following points on competition:

• Liberalization of natural gas imports so as to promote the operation of market forces in first-hand sales.
• Vertical disaggregation of this industry in transportation, storage, distribution, and marketing.
• Prohibition on vertical integration in transportation and distribution within the same zone, except when there are efficiency gains.
• Promoting the establishment of an extensive structure that is useful for development. In this respect, an exclusivity period was established for the first concession for distribution in a specific zone, as Mexico's lag in this area was taken into account. Nonetheless, this exclusivity will be limited to the construction of distribution networks and to transport gas in the zone covered by the permit.
• Bidding for distribution permits with exclusivity rights, based on the best service and price conditions, fostering competition through the market.
• Awarding of distribution permits subject to calls for bids; the award is conditioned on a favorable opinion by the Commission, so as to prevent anticompetitive concentrations.
• Based on broad, transparent, and non-discriminatory criteria, granting permits for transportation, storage, and non-exclusive distribution, so as to foster free competition, reinforcing free access to marketing.
• Notice to the Commission of any transfer of permits.
• Open and non-discriminatory access to the transportation, storage, and distribution services, in order to foster the efficient development of the systems and to limit market power.
• Eliminating cross-subsidies.
• Suppressing regulated prices and rates when, in the Commission's opinion, competitive conditions prevail.