The Energy Regulatory Commission modified the proceeding and requirements for authorizing the cross-participation (vertical integration) in the markets of hydrocarbons, refined products and petrochemicals in Mexico.

On February 27, 2024, the Energy Regulatory Commission (“CRE”) published in the Federal Register Order A/047/2022 containing the “General Administrative Provisions that Establish the Proceeding and Requirements for the Authorization of Cross-Participation, the Methodology for the Analysis of its Effects on Competition, Efficiency in Markets, and Effective Open Access, and Interprets for Administrative Purposes, the Cross-Participation Provided for in the Second and Third Paragraphs of Article 83 of the Hydrocarbons Law” (“New Rules on Cross-Participation”).

This order construes and establishes the applicable regulation under Article 83 of the Hydrocarbons Law (“HL”), which provides for the CRE’s authority to approve and regulate cross-participation (i.e., vertical integration) in the markets of oil & gas, refined products and petrochemicals (“Hydrocarbons”).

The approval of the CRE requires permitholders to have previously obtained the favorable opinion of the Federal Economic Competition Commission (“COFECE”), Mexico’s main antitrust agency.

COFECE has issued advocacy opinions in connection with the regulatory authority of the CRE recommending it not to invade its authority on antitrust matters in those sectors and to avoid generating uncertainty for permitholders. The coordination model between the CRE and COFECE under said Article 83 has been recently reviewed by the Supreme Court of Justice, nonetheless, it has not been decided whether the opinions of COFECE in this proceeding are binding for the CRE.

According to the HL, corporate groups that own capital stock of end-users, producers or marketers of Hydrocarbons (“Users”) that, at the same time, use the services of transportation by pipeline or storage subject to open access (“Logistic Permit Holders”), may only participate, directly or indirectly, in the capital stock of the Logistic Permit Holders when such cross participation does not affect competition, efficiency in the markets and effective open access.

The New Rules on Cross Participation entered into force on the next day of its publication and repealed Order A/005/2016, published on March 3, 2016, that contained the former interpretation and proceeding to authorize cross-participation.

The draft rules on cross-participation were originally published on August 8, 2022, by the CRE at the National Commission for Regulatory Improvement (“CONAMER”), which was amended on November 11, 2022. While the industry had time to analyze the regulation, its impact on the sector is highly relevant due to the regulatory burden that it entails and the possible conditions that the CRE may impose on the permitholders to grant its authorization.

The order also establishes a 60-business day saving period after it enters into force to request the authorization of cross-participation by the regulated entities that have not previously applied for the authorization and fall under the case of Article 83 of the HL. In addition, the obligation to request the authorization arises in the following cases:

1. When new permits of commercialization, transport by pipeline and/or storage subject to open access are granted, or due to amendments in certain cases.
2. When the capital stock structure is modified, and a third party that does not belong to the economic group participates, adding new participants and/or modifying the control or decisive influence, or when the title of the permit changes from one economic group to another.
3. When the market conditions change.
4. By a call-in of the CRE in any of the cases above.

The HL establishes remedies, such as carrying out operations through independent systems or establishing legal and corporate mechanisms that prevent intervening in the operation or administration of the regulated companies.

However, in practice, the resolutions of the CRE and the COFECE have analyzed a wider spectrum of effects of the cross participation to assess the remedies considering the type of Hydrocarbon, the area of influence of the infrastructure and the group, as well as the functional and legal structure with which the groups carry out day-to-day operations.

The order contains new concepts of “Economic Benefit”, “Economic Group”, “Control”, “Available Capacity” that will be used in the methodology of the CRE to interpret and assess the extent to which cross-participation of the economic group allows competition, market efficiencies and effective open access.

In addition to the increased regulatory burden of filing a complete application, the order requires the applicants to demonstrate that the increased efficiencies outweigh any potential damage to the market, increasing consumer welfare.

The Order may be found here.