Preliminary draft of new provisions regarding cross-participation in the hydrocarbons sector

On August 9, 2022, the Energy Regulatory Commission (Comisión Reguladora de Energía, "CRE") published a new preliminary draft of "General Provisions that establish the procedure and requirements to obtain the authorization for cross-participation, the methodology to analyze the impact on competition, market efficiency and open access, and that interprets for administrative purposes cross-participation referred in paragraphs second and third of article 83 of the Hydrocarbons Law" (the "Preliminary Draft").¹

Background

Article 83 of the Hydrocarbons Law (Ley de Hidrocarburos, "LH") establishes that all individuals or entities that own capital stock of final users, producers or traders of hydrocarbons, oil products and petrochemicals that use transportation or storage services subject to open-access, may only participate in the capital stock of permit holders that carry out such activities, when such cross-participation does not affect competition, market efficiency and open access.

The individuals or entities that carry out cross-participation as referred above must obtain an authorization from the CRE (the "Cross-Participation Authorization"). Prior to the issuance of such authorization, CRE must receive a favorable opinion from the Federal Antitrust Commission (Comisión Federal de Competencia Económica, "COFECE").

In connection with the foregoing, on March 3, 2016, the CRE issued a resolution by means of which it defined the concept of cross-participation established in article 83 of the LH and set forth the procedure to obtain a Cross-Participation Authorization (the "Resolution"). The Resolution is still in force as of the date hereof and its most relevant aspects are as follows:

• Definition of cross-participation. Provides that cross-participation exists when an individual or entity holds, either directly or indirectly, a participation in the capital stock of the following entities; provided that such participation implies holding control of the same:
   
  • Entities that use transportation or storage services subject to open access, either as traders (comercializador), final users or producers of hydrocarbons, oil products or petrochemicals; and
  • Entities that are permit holders for the rendering of transportation or storage services for hydrocarbons, oil products or petrochemicals.

The above resulting in the user and the permit holder forming part of the same economic interest group, which is defined as a group of individuals or entities that share commercial and financial goals and interests and, therefore, coordinate their activities to reach such shared goals;

• Procedure to authorize cross-participation. The permit holder has a term of three months, as of the day of the issuance of relevant transportation, storage or commercialization permit of hydrocarbons, oil products and petrochemicals, as the case may be, to submit to the CRE evidence that the permit holder requested COFECE its favorable opinion regarding cross-participation. This opinion may be also requested concurrently with the filing for request of the relevant transportation, storage or trading (comercialización) permit. Once COFECE issues its opinion, the permit holder must submit it to CRE; and
• Criteria to authorize cross-participation. The CRE will issue the Cross-Participation Authorization when the permit holder demonstrates that the economic interest group where it belongs: (i) carries out its operations on independent systems; or (ii) has implemented corporate and legal mechanisms to prevent the users that belong to its economic interest group, to intervene on the operation and administration of the permit holder.

Main changes introduced by the Preliminary Draft

The Preliminary Draft intents to replace the Resolution to (i) modify the current definition of cross-participation; (ii) modify the procedure to obtain a Cross-Participation Authorization; and (iii) define certain concepts required to analyze cross-participation such as "effective open access", "competition" and "market efficiency."

Modification of cross-participation definition

The Preliminary Draft modifies the current definition of cross participation in order to eliminate the concept of "control" as a requisite therefor. In other words, under the Preliminary Draft, cross-participation would exist when the Economic Agents involved (including their economic interest group) own capital stock either through shares, equity interest or other instruments, irrespective of the amount or percentage of such ownership and whether or not providing "control". 

Methodology and requirements to obtain a Cross-Participation Authorization

The Preliminary Draft establish several elements that the CRE would need to analyze to grant a Cross-Participation Authorization. The analysis would be based on all the documentation and information the applicant would be required to submit for such purposes, which increases significantly from the requirements established in the current Resolution.

Furthermore, permit holders that obtain a Cross-Participation Authorization would be required to carry out a process before the CRE if such Cross-Participation Authorization is required to be modified because of, among others, changes on the corporate structure of the permit holder, assignment of permits, modification of permits and even changes in market conditions.

Changes to the procedure to obtain a Cross-Participation Authorization

The Preliminary Draft establishes that the procedure to obtain a Cross-Participation Authorization may be initiated by the applicant or the CRE. In general, the Economic Agents would have a term of 60 business days to initiate this procedure (as of the day when the relevant permit is issued). The CRE will process this request according to the principles and stages of all administrative procedures (admission, request of information, analysis and resolution). The CRE will have a term of 90 business days to resolve the Cross-Participation Authorization. This term may be extended for 60 additional business days.

Regarding COFECE's opinion, it is established that it has to be delivered by the applicant to the CRE at least 15 business days before the expiring of the above-mentioned term of 90 business days. The Preliminary Draft expressly establishes that the obtainment of a favorable opinion from COFECE does not imply that CRE's Cross-Participation Authorization will be granted to the applicant. Therefore, the CRE may deny the Cross-Participation Authorization even with a favorable opinion from COFECE.

Types of Crossed-Participation Authorizations 

The Preliminary Draft establishes that the CRE may either grant the Crossed-Participation Authorization, deny it or grant it, subject to the condition that the permit holder comply with measures intended to prevent negative impacts on the competition, market efficiency of open access, that the crossed-participation may cause.

Last consideration

It is important to mention that the Preliminary Draft constitutes only a draft of regulation on the aforementioned matter; therefore, the final version of the regulation may have changes with respect to what was published by the CRE, as part of its regulatory improvement process.

As of this date, COFECE has not issued any statement about the Preliminary Draft or how the proposed changes could (i) affect the analysis it must perform to issue its opinion; or (ii) overstep its authority. 

^{1. Available at: https://cofemersimir.gob.mx/portales/resumen/54000.}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2022 White & Case LLP}