Mexico: Federal Economic Competition Commission


In summary

Competition law enforcement and advocacy in Mexico have been strengthened over the past eight years. Today, the authority is in a sound position to face unforeseen scenarios, such as those brought about by covid-19. In 2020, despite the health crisis, the authority undertook bold enforcement actions and carried out important measures to counter anticompetitive reforms in the energy sector. Regarding COFECE’s jurisdiction versus the telecommunications regulator over digital markets, important court rulings provided greater certainty to market participants. Main challenges ahead include a clear stance on digital markets and leadership renewal.


Discussion points

  • Implementation of remote and digital operations
  • Enforcement in the context of covid-19
  • Advocacy efforts in the energy sector
  • Challenges in digital markets

Referenced in this article

  • Laboratory tests and blood banks, sanctions for bid rigging
  • Secondary market for the intermediation of government debt securities
  • Electricity industry law and system policy, competition advocacy and controversy
  • Hydrocarbons markets, advocacy efforts
  • Uber/Cornershop merger
  • Online search, social networks and cloud computing, jurisdictional conflict solved in favour of COFECE

Introduction

For the past eight years, I have been kindly invited in my capacity as chair of Mexico’s antitrust agency to contribute to the annual issue of this review, to share the advances in the enforcement of competition law in my country. For this I am very grateful. This will be my last contribution in this capacity, as my term ends in September 2021.

In 2014, Mexico was immersed in a modernisation process of its competition policy and law. COFECE had recently been created as an autonomous authority. In addition, specialised competition courts and tribunals began operating that year. The strengthening of competition policy was perceived not in isolation, but as part of a broader effort by the Mexican state to stimulate competition in various sectors of the economy, particularly the energy, financial and telecommunications sectors. There were high expectations as to how these reforms would translate into an effective competition system.

Within the agency, we knew that the new Federal Economic Competition Law would not automatically transform the Commission into a solid institution. Therefore, much of the agency's work has focused on its strengthening, envisioned as a long-term strategy. Eight years later, COFECE has established itself as a relevant, effective, and credible antitrust authority. Some of COFECE’s most prominent cases have involved the financial sector, which had previously gone by mostly unchecked by regulatory agencies. The authority has also invested considerable efforts and resources to unblock competition in energy markets. Despite the challenges posed by social distancing measures in the context of covid-19, the Commission has accomplished relevant results that are described in the remaining sections of the article.

Competition law enforcement

2020 was a year of multiple challenges for the Commission owing to covid-19 restrictions. As for most competition agencies around the world, the health emergency disrupted COFECE’s normal operation. For example, since the onset of the pandemic the authority has been unable to conduct on-site searches. In addition, enforcement procedures, such as investigations and trial like proceedings, were suspended for 90 calendar days.

COFECE’s remote and digital operation

The Commission was able to react promptly in the face of the challenges posed by the pandemic to maintain continuity of most of its operations in a digital environment. This was the result of prior implementation of digital tools that allowed the agency’s personnel to immediately begin working remotely through electronic means. Moreover, in the case of merger control, since January 2020,[1] the Commission required mandatory use of the electronic merger filing system,[2] which has allowed merger review to continue uninterrupted throughout this time.

These prior efforts provided important lessons that allowed the authority to implement a new digital environment for its investigations and trial-like proceedings. In April 2020, the Commission issued the ‘Emergency Regulatory Provisions of the Federal Economic Competition Law to make personal notifications by email’, which allow notifications that are usually made in person to be valid if made via email.[3] In June 2020, the agency released its ‘Emergency Regulatory Provisions of the Federal Economic Competition Law on the use on electronic means in certain procedures processed before the Federal Economic Competition Commission’, which established the rules for the implementation, use and handling of electronic means in procedures such as the filing of complaints and investigations for monopolistic practices, among others. The provisions in the latter also establish an electronic filing platform, as well a platform to carry out hearings, testimonials and confessionals among other proceedings.[4] Based on the experience gained with the implementation of the aforementioned emergency regulatory provisions, and as part of the actions for further digitalisation in 2021, the Commission is developing permanent provisions that will allow for the execution of all our proceedings electronically and remotely, beyond the health emergency.

Investigations and trial-like proceedings

After the publication of the rules noted above, in July 2020, the Commission was able to resume its enforcement actions despite the pandemic. So, in 2020, four new investigations were launched, two of which are related to possible cartel conducts in markets relevant in the context of the pandemic. One probe investigates the market of medical oxygen (an essential medicine to treat respiratory ailments); the other, on non-residential real estate spaces (rentals by businesses hit by social distancing and confinement).[5] The other two investigations are into possible abuse of dominance in the markets of digital advertisement and retail of consumer goods.[6] Also, in 2020 the Commission concluded four trial-like procedures of which three resulted in fines. Two of these are bid-rigging cases in the public health sector, one in the procurement of polyethylene products and the other in laboratory tests and blood bank services.[7] The third fine was imposed for collusive agreements to maintain retail prices of gasoline and diesel in the state of Baja California.[8]

It is worth highlighting that COFECE’s enforcement actions during 2020 led to a 195 per cent increase in fines imposed with respect to 2019. Furthermore, also this year, a decision taken by COFECE in the freight railway sector that allowed the sectoral regulator to enforce its tariff-setting powers for the first time in this industry, potentially reducing costs and final consumer prices in diverse sectors that use the newly tariff-regulated routes.[9]

Also, during 2020, the Commission issued an investigative opinion that preliminarily determines the absence of competition conditions in the card payments network in Mexico.[10] The main findings of this investigation is that the existence of a sole card payment network has its origin in the applicable rules to the network that preclude coexistence with payment networks. This includes anticompetitive requirements for new entry to the payment network, and the co-ownership by eight banks of the clearinghouse that process operations in the payment network, in effect granting them advantages over competitors, among others. This case is currently in a post-investigation stage, similar to the trial-like procedure of monopolistic practices, where the economic agents with legal standing have the opportunity to present arguments and offer evidence to the Commission, before a final decision by the Board of Commissioners is reached.[11] Furthermore, in 2020 the Commission conducted the final phase of two investigations into possible collusion in the markets of hygiene products manufactured with cellulose and liquefied petroleum gas (LP gas), both resulting in a Statements of Objections in early 2021. These probes are relevant because, on the one hand, cellulose is used to manufacture hygiene products for daily use, such as baby diapers, feminine hygiene protection and incontinence products,[12] and on the other hand, LP gas is the domestic fuel used most in the country, consumed by 76 per cent of Mexican households.[13] Also, early in 2021, a trial-like proceeding in the financial sector concluded with the Board of Commissioners’ decision to fine Barclays, Deutsche Bank, Santander, Banamex, Bank of America, BBVA Bancomer, JP Morgan and 11 traders a total of US$1.7 million.[14] These economic agents entered into agreements to manipulate prices, establish the obligation not to commercialise or acquire certain government securities in specific transactions on the secondary market for the intermediation of government debt securities. A class action is currently pending in the United States District Court of New York in relation to this case for a proposed settlement, totalling US$20.7 million by Barclays and JP Morgan.[15]

Merger review

On the merger review front, since the change of government in 2018, the Commission has experienced an increase in notifications related to corporate restructures in the energy sector, especially in the gas markets, and of those that have exploitative contracts within the framework of the hydrocarbons law. The Commission perceives that several companies are trying to diversify risks as a result of the regulatory changes announced in this sector by the executive branch since the beginning of this administration. Some of these reforms are the subject of the following section.

Further, in 2020, several cross-border operations were filled, which are being assessed in 2021 by the Commission. For example, three transactions involve the North American region: Air Canada/Air Transat (where the airlines recently withdrew their operation); Danfoss/Eaton Hydraulics (who are the leading players in hydraulic components in the region); and Tupy/Teksid (which involves the region’s leading firms in cast iron components).

In 2020, we worked on updating the guidelines for merger notifications, finally published in April of this year. This document includes elements for analysing joint ventures, clarifies issues related to the calculation of thresholds and makes recommendations for submitting notifications under the failing firm defence.

Competition advocacy

Before the 2013 reform that liberalised the Mexican energy sector, the Constitution only allowed state-owned monopolies to operate in the hydrocarbons and electricity industries, with very limited room for private participation. COFECE accompanied this liberalisation process, which saw the increased participation of new entrants through diverse enforcement and advocacy actions. However, COFECE has recently undertaken an even more active role as a result of the measures taken by the Executive branch since 2020, which sought to change the rules of the game by making the playing field unevenly in favour of the state-owned electricity and oil companies, the Federal Electricity Commission (CFE) and Petroleos Mexicanos (PEMEX), respectively. To date, attempts to implement said changes have come about in secondary regulation and law and not through reforming the Constitution, which explicitly establishes the possibility of the participation of private parties in these markets.

Electricity industry

A paradigm shift began to take place in this industry during 2020 when the National Energy Control Center (the national grid operator) issued the ‘Agreement to guarantee the efficiency, quality, reliability, continuity and safety of the National Electric System as a consequence of the acknowledgement of the COVID-19 pandemic’. This Agreement established extraordinary measures in light of a potential reduction in the demand for electricity owing to the health emergency that could allegedly cause instability in the system, calling for the need to limit access to the grid, mainly for power plants based on renewable energy sources. COFECE reacted promptly by issuing an opinion, addressed to the Ministry of Energy (the Ministry), the Energy Regulatory Commission (CRE) and the grid operator,[16] which noted that such measures should:

  • be based on technical, non-discriminatory and transparent criteria;
  • not hinder the operation of wind and solar power generators in particular (which are more efficient potential entrants); and
  • be analysed, together with all the actors of the industry, to determine the actions required to create a stable system in line with the country’s energy needs and capacity in the medium term.[17]

Despite the recommendations made by the Commission, risks to competition in the electricity industry were aggravated when the Ministry issued a ‘Policy for Reliability, Security, Continuity and Quality of the National Electric System’, which made permanent many of the grid operator’s measures. This policy eliminated competition in the generation and supply of electricity as set forth in the Mexican constitution and Electricity Act in force because it compromised two pillars of competition in the industry: open and non-discriminatory access to transmission and distribution networks (natural monopolies owned and operated by electricity CFE); and the mechanisms by which generators are dispatched in order of efficiency (the cheapest ones first, then according to increasing costs, which promotes competition and entry of more efficient generators). Further, it granted advantages that favoured the CFE.

COFECE considered that the policy’s measures could completely eliminate competition and consequently filed a ‘constitutional controversy’ before the Supreme Court of Justice (SCJN), to rule on the limits that the sector regulator has regarding the constitutional principles of competition when issuing regulation. The SCJN soon ordered the suspension of the measures contained in the policy until its final ruling.[18] Early in 2021, this court ruled in favour of COFECE,[19] declaring the policy’s main provisions as unconstitutional and invalidating them.

After this ruling, the Ministry declared the policy void. However, soon after, the president of Mexico submitted a bill for a new Electricity Law before Congress. The bill confirmed the anticompetitive measures set forth in the policy, which had been invalidated by the SCJN. Therefore, the Commission filed a second ‘constitutional controversy’ against it, which has been accepted by the SCJN and is currently under review by this court.[20]

Hydrocarbons industry

This industry began a transition from a state-owned enterprise (SOE) monopoly to markets open to competition in 2014,[21] a change that implied the design and implementation of a wide range of secondary regulation. The Commission supported this process through diverse enforcement and advocacy measures.

COFECE’s role underwent an important twist in 2019, when sector regulators (the Energy Ministry and CRE) began to modify or eliminate all regulatory provisions that in 2014 were put in place to level the playing field for new participants entering an SOE-dominated market (asymmetric regulation), by preventing PEMEX from abusing its market power; for example, in the wholesale prices of gasoline and diesel, as well as in the storage terminals of these fuels.[22]

COFECE first noted that regulators became slower in granting new permits for the retail of gasolines in services stations, significantly more so for brands other than PEMEX, as well as in the modifications and transfers of these permits between private players. As of January 2019, the average time frame for the issuance of permits for the retail of gasolines had gone from 21 to 75 working days, with permits related to the PEMEX brand taking 66 days to resolve, compared to 84 days for other brands. Regarding imports permits, since 2018, the Ministry has not granted any 20-year permits, but only those with a one-year validity. Therefore, the Commission issued an opinion with recommendations for the regulation of these permits to be applied in an expedite and non-discriminatory manner.[23]

Later in 2020, energy regulators proposed new regulation for obtaining import and export permits for hydrocarbons. According to an opinion issued by the Commission, this regulation would:[24] reduce incentives to invest in transport and storage infrastructure by removing 20-year import permits and substituting them with five-year ones, grant the Ministry broad discretion to adjust import and export volumes of oil products and petrochemicals, allow the authority to deny permits without justification or explanation, and establish unclear and burdensome requirements for the applications for permits. In early 2021, a federal judge in a specialised court on competition decided to order the suspension of this new regulation. In his ruling, the judge considered the recommendations made in COFECE’s opinion as sound. Subsequently, the regulation had to be repealed through a publication in the Official Gazette.

Finally, in May 2021, the Hydrocarbons Law was amended to completely eliminate PEMEX’s asymmetric regulation.[25] Regulators claimed that PEMEX’s participation in these markets had been significantly reduced, so there was no need for this regulation to continue to be enforced. These modifications implied eliminating the requirements regarding price and discount policies for wholesale, the publication of information, the breakdown of invoices, and prohibitions such as conditioning, denying or discriminating in the sale of gasoline and diesel, among others. In the Commission’s view, also made public, asymmetric measures are particularly important considering that as of today, PEMEX is still the main participant in the wholesale market, supplying 83 per cent of the national gasoline market and 73 per cent of diesel.[26] Given this market context, this amendment opens up opportunities for PEMEX to engage in abuse of dominance conduct foreseen in the Mexican competition law, such as imposing exclusivities or conditioning supply in wholesale activities – thus, increasing the need for our vigilance and the likelihood of investigations by COFECE into possible anticompetitive conducts.

Economic recovery proposals

In October 2020, the Commission released recommendations for the prompt recovery of the Mexican economy, becoming the first public institution in Mexico to present concrete proposals to contribute to economic growth after the covid-19 crisis. The document, ‘Proposals on Economic Competition Matters to Support the Recovery of the Mexican Economy’, draws from previous advocacy efforts such as opinions, market studies and other public policy recommendations linked to competition, and uses this knowledge to promote a ‘build-back-better’ approach. Its main premise is that recovery will be more sustainable when based on the participation of a greater number of market participants, especially if their ability to remain in the market is provided by their capacity to compete, and not from unduly advantages granted by political decisions, measures or policies from public authorities.[27] The proposals are related to high-impact markets such as health, transport (freight and passenger), energy, finance and public procurement. Some of COFECE’s proposals have already been implemented; for example, in the generic drugs market the industrial property authority and the health authority linked their systems to increase access and transparency for drug patent expiration information.

Digital markets

Many jurisdictions have witnessed that the digitalisation process poses significant challenges in terms of the agencies effectiveness to secure competitive markets. To respond to the rising importance and challenges of the digital economy, in March 2020, the Commission laid out its Digital Strategy. For example, in strengthening the human and technical capabilities of the Commission to face the challenges of these markets.[28] As part of the strategy, a digital markets unit was established in July 2020.[29] This unit is in charge of analysing the development of digital markets and their implication on competition. It is also responsible for gathering and generating knowledge on digital markets that might support other substantive units within the Commission when their enforcement activities are related to these markets. Additionally, the strategy recognises the importance of international cooperation on this matter. In this sense, the Commission understands the importance to explore the possibility of entering into second generation cooperation agreements that would allow for more effective and efficient cooperation with other jurisdictions.

Finally, it is worth highlighting two landmark rulings from the Judiciary regarding digital markets in Mexico. In the first case, the courts specialised in competition granted COFECE jurisdiction to review the high-profile merger between Uber and Cornershop (a grocery delivery service).[30] This, after the Federal Telecommunications Institute (IFT), the telecommunications regulator with antitrust powers in this said sector, claimed jurisdiction over its review, arguing that the companies belong to the telecommunications ecosystem. In its decision, the court determined that the notifying parties:

  • are not telecommunications concessionaires, and they only use these to provide their own services through a digital platform;
  • provide services that are not of telecommunications, but of logistics and intermediation between users, drivers and deliverers; and
  • use the internet as an input, which does not constitute the platform’s service nor represent a source of income (therefore, the use of the internet does not grant jurisdiction to the telecoms regulator).

More recently, in 2021, the Judiciary ruled that COFECE has authority over the markets of online search services, social networks and cloud computing.

The path ahead

I would like to close by commenting on a couple of important challenges the Commission will face in the short term. The first one is related to how the agency should continue addressing the digital economy. The Commission has closely followed the international debate regarding the ideal antitrust approach towards these markets. Considering this, the Commission has also looked at the tools it has at its disposal, such as article 94 of the Competition Act.

Article 94 is a ‘hybrid regulatory’ tool that was inspired by the markets investigation tool of the Competition and Markets Authority (CMA) of the United Kingdom. This tool allows for the analysis and correction of behavioural barriers undertaken by market participants, especially those that despite not having substantial market power, may carry out conducts that accelerate the market ‘tipping point’ usually found in two-sided (or more) digital platforms. In this regard, international discussion has warned that the intervention of the competition authorities through traditional tools may occur too late, when the rest of the potential entrants can no longer compete with the platforms that have consolidated. Article 94 contains the potential means to overcome this need for timely action. However, one of the main drawbacks from investigating anticompetitive practices in digital markets, even using tools such as article 94, is the time that it may take to impose a sanction or implement structural or behavioural remedies could be ‘too late’. For this reason, I believe there is also a need in Mexico to debate on a procedure which expedites interventions through certain quantitative criteria, allowing for the imposition of ex ante obligations on market participants considered as ‘gatekeepers’.

Given the experience gained through cases involving digital markets, the know-how accumulated from following and participating in the international debate, and the challenges we know that will come as part of the digitisation of the economy, COFECE is in a unique position within the country to put forth proposals for the strengthening of competition policy in this context and should therefore take a leading role in the matter.

The second challenge has to do with the Commission’s institutional setting. In 2021, two leadership positions will become vacant, the Commission’s chair (myself) and the head of the Investigative Authority (our prosecutor). One can expect that the agency’s investment in institutional strengthening, staff training and career building will allow it to transition through this phase smoothly. I look forward to new leadership arriving, with a fresh pair of eyes and with new ideas and creativity to keep moving the agency forward into a better position, domestically and internationally.


Notes

[2] The Guidelines for the notification of concentrations through electronic means before the Federal Economic Competition Commission which regulate the process are available, in Spanish, at https://www.cofece.mx/wp-content/uploads/2019/07/Lineamientos-concentraciones-reforma-18-jul-2019.pdf.

[3] DOF. Acuerdo No. CFCE-104-2020, in Spanish, available at https://www.cofece.mx/wp-content/uploads/2020/04/DOF-23abril2020-01.pdf.

[4] DOF. Acuerdo No. CFCE-154-2020, in Spanish, available at https://www.dof.gob.mx/nota_detalle.php?codigo=5595563&fecha=25/06/2020.

[11] The complete preliminary investigative opinion is available, in Spanish, at https://www.cofece.mx/wp-content/uploads/2020/12/DOF-16diciembre2020-01.pdf.

[15] In the Mexican Government Bonds Antitrust Litigation, Case No. 18-cv-02830(JPO), available at https://www.mgbantitrustsettlement.com/.

[17] The complete opinion is available, in Spanish, at https://www.cofece.mx/CFCResoluciones/docs/Opiniones/V132/28/5125826.pdf.

[18] Suspension derived from the Constitutional Controversy 89/20202, in Spanish, available at https://www.scjn.gob.mx/sites/default/files/acuerdos_controversias_constit/documento/2020-07-24/MI_IncSuspContConst-89-2020.pdf.

[19] Constitutional Controversy 89/2020, in Spanish, available at https://www2.scjn.gob.mx/ConsultaTematica/PaginasPub/DetallePub.aspx?AsuntoID=272324.

[20] Constitutional Controversy 44/2021, in Spanish, available at https://www2.scjn.gob.mx/ConsultaTematica/PaginasPub/DetallePub.aspx?AsuntoID=282370.

[21] The markets opened to private participation since the reform are oil processing and refining, as well as gas processing, hydrocarbons transportation, storage and distribution; and exploration and extraction of hydrocarbons under contracts with the federal government, in Spanish, available at https://www.gob.mx/cms/uploads/attachment/file/10233/Explicacion_ampliada_de_la_Reforma_Energetica1.pdf.

[22] ACUERDO A/043/2019, in Spanish, available at https://www.cre.gob.mx/Acuerdos/.

[25] Thirteen Transitory of the Hydrocarbons Law of 2014.

[26] Data of 2020, prepared by COFECE with information from the Energy Information System of the Ministry of Energy, in Spanish, available at https://sie.energia.gob.mx/.

[29] DOF. Acuerdo No. CFCE-158-2020, in Spanish, available at https://www.cofece.mx/wp-content/uploads/2020/07/DOF-03julio2020-01.pdf.

[30] Press Release COFECE-020-2020, available at https://www.cofece.mx/wp-content/uploads/2020/05/COFECE-020-2020_-cornershop-uber.pdf , and File C.C.A. 4/2019 of the First Collegiate Circuit Tribunal on Administrative Matters Specialized on Economic Competition, Broadcasting and Telecommunications, in Spanish, available at http://sise.cjf.gob.mx/SVP/word1.aspx?arch=1304/13040000260354650018016.doc_1&sec=Victor_Hugo_Figueroa_Carro&svp=1.

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