Challenges to the Effective Implementation of Competition Policy in Regulated Sectors: The Case of Telecommunications in Mexico Symposium on Competition Law and Policy in Developing Countries
Challenges To The Effective Implementation Of Competition Policy
Challenges to the Effective Implementation of Competition Policy in Regulated Sectors: The Case of Telecommunications in Mexico Symposium on Competition Law and Policy in Developing
Oliver Solano 0 1
Rodrigo Garcia-Verdu 0 1
0 This Article is brought to you for free and open access by Northwestern University School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of International Law & Business by an authorized administrator of Northwestern University School of Law Scholarly Commons
1 Oliver Solano, Rafael del Villar, Rodrigo Garcia-Verdu, Challenges to the Effective Implementation of Competition Policy in Regulated Sectors: The Case of Telecommunications in Mexico Symposium on Competition Law and Policy in Developing Countries , 26 Nw. J. Int'l L. & Bus. 527, 2005-2006
Challenges To The Effective
Implementation Of Competition Policy
In Regulated Sectors: The Case Of
Telecommunications In Mexico
Oliver Solano, * Rafael del Villar °° & Rodrigo
Abstract: This article reviews Mexico's competition law and policy,
with particular emphasis on the challenges that the Federal Competition
Commission ("CFC") has faced in implementing an effective competition
policy. Some of the difficulties analyzed are the loopholes in the current
laws, the lack of cooperation between the CFC and other sectoral
regulators, and the regulatory arbitrage by market participants. These
challenges are then illustrated by the developments in the
telecommunications sector. This sector is particularly interesting in the case
of Mexico given the overwhelming power of the dominant firm and the
overlapping and even conflicting mandates of the different government
authorities overseeing the sector. The article concludes with a series of
specific policy recommendations aimed at improving the effectiveness with
which the competition authority in Mexico implements competition policy.
Mexico's competition law and policy were conceived as part of the
broader structural reform agenda that began in the mid 1980's to develop an
open, market-based economy.' Although the Mexican Constitution of 1917
*Corporate and Legal Advisor, International Trade, Competition and Regulatory Policy.
Banco de M6xico.
The World Bank. We are grateful to Sue Choi, George J. Schaefer III, and Francisco
Javier Soto Alvarez for very helpful comments and suggestions. All remaining errors are
those of the authors alone. The views contained in this article are those of the authors and
should not be attributed to any of the institutions with which they are affiliated.
1Other reforms that complemented the adoption of a formal competition policy
framework were the liberalization of international trade, foreign investment, and the
financial sector, the deregulation of large sectors of the economy, and the scaling back of the
already established some basic competition notions and principles in its
Article 28,2 effective enforcement did not materialize until the enactment of
the Federal Economic Competition Law (Ley Federal de Competencia
Econ6mica, or "LFCE"), and the creation of the Federal Competition
Commission (Comisi6n Federalde Competencia, or "CFC") in June 1993.3
Despite the progress achieved over the past decade, competition policy
has faced various obstacles that have prevented its full implementation in
the way it was originally envisioned. For example, certain changes
introduced by the judiciary's interpretation of the competition law have
limited the role and scope of the competition authority. Some articles of the
LFCE, such as those that prohibit barriers to interstate trade, have been
declared unconstitutional by the Supreme Court of Justice (Suprema Corte
de Justicia de la Naci6n).4 Furthermore, the Supreme Court has also
determined that Notaries Public are not economic agents, and thus fall
outside of the scope of the LFCE. 5 Moreover, the courts have restricted
public sector's participation in the economy through a series of mergers, liquidations,
transfers and privatizations of state-owned enterprises. See Gabriel Castafieda, Santiago
Levy, Gabriel Martinez & Gustavo Merino,Antecedentes econ6micospara una nueva ley de
competencia econ6mica, 60 EL TRIMESTRE EcoNOMico 237 (1994) (for a discussion of the
economic context in which the LFCE and the CFC were introduced).
2 Constituci6n Politica de los Estados Unidos Mexicanos [Const.], as amended, Diario
Oficial de la Federaci6n [D.O.], 5 de Febrero de 1917 (Mex.). The provisions in the current
Constitution include the promotion of free competition and the prohibition of monopolies
and monopolistic practices. The Constitution also establishes exemptions in the following
sectors: postal services, telegraphs, radiotelegraphy, oil and other hydrocarbons, basic
petrochemicals, radioactive minerals, nuclear energy, electricity, the issuance of bank notes,
the minting of coins, labor unions and cooperative societies, and patent protection and
intellectual property rights. In fact, Article 28 of the previous Constitution of 1857 already
included the prohibition of monopolies, except for those related to the minting of coins,
postal services, and patent protection. Nevertheless, neither Constitution contemplated
penalties or sanctions against those agents that violated the law, or established which
government authority was responsible for guaranteeing compliance with the law.
3 ey reuefal de Comnpetencila E ,on-Mca t[-.'.C-.1.j t,,,,t-,on L..¢vas ... €....
Diario Oficial de la Federaci6n [D.O.], 24 de Diciembre de 1992 (Mex.). Five years later the
accompanying regulations to the law were issued. Reglamento de la Ley Federal de
Competencia Economica, Diario Oficial de la Federaci6n [D.O.], 4 de Marzo de 1998
4In particular, Articles 14 and 15 of the LFCE were declared unconstitutional by the
Supreme Court of Justice. Sentencia y voto de minoria relativos a la Controversia
Constitucional 1/2001, promovida por el Gobernador Constitucional del Estado de
Durango, en contra del Pleno de la Comisi6n Federalde Competencia Econ6mica, Diario
Oficial de la Federaci6n [D.O.], 10 de Marzo de 2004 (Mex.).
5The Supreme Court stated that: "Although the notary intervenes in the economic
activity of the country by charging an honorarium for providing authorized professional
services, such honorariums are regulated by the corresponding tariff, and it may not be
reputed that providing the services is a commercial transaction, first because the exercise of
that activity is forbidden to him by the mentioned Law for the Notaries of the Federal
District, and second because article 75 of the Code of Commerce does not repute providing
application of the law in cases of monopolization (relative monopolistic
The implementation of an effective competition policy has also been
limited by the lack of cooperation between the CFC and some important
sectoral regulators. Another major difficulty has been the abuse by market
participants of the amparo, an injunction process in the Mexican
legislation 7 designed to safeguard due process, which has been used as a
litigation tactic to delay or avoid enforcement of the resolutions of the
CFC.8 The existence of loopholes in the laws, the absence of cooperation
professional services as a commercial transaction." AMPARO EN REVISION 586/99,
QUEJOSO: CARLOS RUBtN CUEVAS SENTiES, Suprema Corte de Justicia de Ia Naci6n
[S.C.] [Supreme Court], Segunda Sala, October 1999. See also "Notarios Piblicos.No son
agentes econ6micos para efectos de la Ley Federalde Competencia Econ6mica," Suprema
Corte de Justicia de la Naci6n [S.C.] [Supreme Court], Primera Sala, Tesis Aislada en
Materia Administrativa (la. XXXI/2002), Semanario Judicial de la Federaci6n y su Gaceta,
XV, April 2002; see Rafael del Villar & Francisco Javier Soto Alvarez, Logros y dificultades
de la Politica de Competencia Econ6mica en M~xico, 821 INFORMACION COMERCIAL
ESPA&OLA 107, 119 (2005) [hereinafter ICE] (for a discussion of the far-reaching
implications of this decision for economic competition).
6 For example, in 2003 the Supreme Court declared that Fraction VII of Article 10 of the
LFCE, which describes relative monopolistic practices, was unconstitutional. According to
the Supreme Court, "Fraction VII of the contested Article 10 does not accurately specify the
framework under which the administrative authority can exercise the faculty it was granted
to impose sanctions on those who incur in relative monopolistic practices, because this
fraction is limited to indicating generic criteria referring to the competition process and free
competition being damaged or obstructed .... ." AMPARO EN REVISION 2589/96,
QUEJOSO: WARNER LAMBERT GROUP MEXICO, Pleno de la Suprema Corte de
Justicia de la Naci6n [S.C.] [Supreme Court], Pigina 140 (Mex.). "Competencia Econ6mica.
El Articulo 10, Fracci6nVII, de la Ley Federalrelativa,al no especificarIa conducta sobre
Ia cual recaerila sanci6n que prev , viola las garantiasde legalidady seguridadjuridica
previstasen los Articulos 14y 16 de Ia Constituci6nFederal," Suprema Corte de Justicia de
la Naci6n [S.C.] [Supreme Court], Pleno, Tesis Aislada en Materia Constitucional y
Administrativa (P. X11/2004), Semanario Judicial de Ia Federaci6n y su Gaceta, XIX, April
2004 (Mex.). "Suspensi6n Provisional. Es procedente contra la ejecuci6n de las multas
administrativasimpuestas por la Comisi6n Federal de Competencia para sancionar las
conductas sefialadas en el Articulo 10, Fracci6n VII, de Ia Ley Federal de Competencia
Econ6mica, en relaci6n con el Articulo 7 . Fracci6n V,de su Reglamento," Suprema Corte
de Justicia de Ia Naci6n [S.C.] [Supreme Court], Segunda Sala, Jurisprudencia en Materia
Administrativa (2a./J. 11/2003), Semanario Judicial de la Federaci6n y su Gaceta, XVIII,
March 2003 (Mex.). For more details, see ICE, supra note 5, at 120.
7 Ley de Amparo, Reglamentaria de los Articulos 103 y 107 de la Constituci6n Politica
de los Estados Unidos Mexicanos, Diario Oficial de la Federaci6n [D.O.], 10 de Enero de
8 An example is the resolution by the CFC at the end of 1997 declaring that Tel~fonos de
M6xico, or Telmex, the largest telecommunications firm in Mexico, has substantial market
power in five telecommunications markets. The courts granted an injunction to Telmex and
ordered the CFC to correct the procedure. Once the CFC had corrected the procedure,
Telmex requested a new injunction which the courts granted. Afterwards, Telmex presented
a third injunction which was also granted by the courts. These three injunctions deal with
between government agencies, and the regulatory arbitrage by market
participants to exploit them have undermined the effectiveness of
competition policy in Mexico.
This article contributes to the debate on competition policy in
developing countries in general, and in Mexico in particular, by analyzing
some of the difficulties and challenges the competition authority in Mexico
has faced. Some of these difficulties are illustrated using the
telecommunications sector as an example. We believe this is a particularly
interesting sector given the enormous economic power of Telmex, the
dominant telecommunications firm in the country, the overlapping and even
conflicting mandates of the different government authorities overseeing this
sector, and the rapid technological change that has characterized it in recent
decades. Furthermore, the telecommunications sector has been at the
forefront of international trade disputes between Mexico and the United
States, in the context of the commitments assumed by both countries to
liberalize their services sectors as members of the World Trade
The rest of the article provides an overview, analysis, and proposed
solution to the challenges that the Mexican telecommunications industry
presents. Section II provides an overview of the competition framework in
Mexico, including a discussion of some of the difficulties faced by
Mexico's competition authority. Section III then illustrates the particular
challenges faced in the implementation of an effective competition policy in
the telecommunications sector. Finally, section IV summarizes the main
findings and presents some specific policy recommendations to improve the
effectiveness of competition policy in Mexico.
II. AN OVERVIEW OF MEXICO'S COMPETITION FRAMEWORK
The Federal Competition Commission ("FCC") is the administrative
agency in charge of the monitoring, surveillance, and protection of the
competition process in Mexico. The competition regime's general policy
objectives are to protect the competition process and encourage free
competition by preventing and eliminating monopolies, monopolistic
practices, and any other activities that would oppose or hinder the efficient
performance or operation of markets for goods and services. 9 The CFC has
procedural matters without going into substantive issues. Thus, after more than eight years of
litigation it is still unclear what the result of the resolution will be. See below for a detailed
discussion of this process; see Sheoli Pargal, Regulatory Environment for Private Sector
Participationin Infrastructure,in MEXICO. A COMPREHENSIVE DEVELOPMENT AGENDA FOR
THE NEW ERA (Marcelo Giugale et al. eds., 2001) (for a discussion and recommendations
regarding the amparo process); see ORGANISATION FOR ECONOMIC CO-OPERATION AND
DEVELOPMENT, COMPETITION LAW AND POLICY: REVIEW OF MEXICO (2004) (for the review
of Mexico's competition law and policy by the OECD's Competition Committee).
9 Articulo 2, Ley Federal de Competencia Econ6mica [L.F.C.E.] [Competition Law], as
a number of tools to achieve these objectives. In order to prevent
monopolies, the CFC has two main tools. First, it has the ability to
authorize or reject proposed mergers, and to qive assessments, opinions and
market determinations to sectoral authorities. 0 Second, it is empowered to
investigate1 1 and sanction anti-competitive behaviors, including absolute
monopolistic practices such as cartel2s, as well as relative monopolistic
practices having exclusionary effects.1
The CFC has a general and overarching mandate to protect and
promote the competition process in order to foster economic efficiency.' 3
While this role is implicit in all economic activities, some areas of the
economy, especially in regulated sectors, call for the explicit participation
of the CFC. Table 1 shows some of the main sectors and policy areas,
amended, Diario Oficial de la Federaci6n [D.O.], 24 de Diciembre de 1992 (Mex.).
10Articulos 16-22, Ley Federal de Competencia Econ6mica [L.F.C.E.] [Competition
Law], as amended, Diario Oficial de la Federaci6n [D.O.], 24 de Diciembre de 1992 (Mex.).
These articles define the merger review process of the CFC and the market concentration
thresholds for obligatory notification to the CFC. The merger review process is similar to the
one followed by the competition authorities of most OECD countries. Article 24, Fractions
IV, V, and VI grant the CFC authority to issue non-binding opinions on competition matters
in regards to drafts of new laws and regulations as well as of administrative programs and
11Articulo 24, Ley Federal de Competencia Econ6mica [L.F.C.E.] [Competition Law],
as amended,Diario Oficial de la Federaci6n [D.O.], 24 de Diciembre de 1992 (Mex.).
12Articulos 35-38, Ley Federal de Competencia Econ6mica [L.F.C.E.] [Competition
Law], as amended, Diario Oficial de la Federaci6n [D.O.], 24 de Diciembre de 1992 (Mex.).
13 "Esta ley tiene por objeto proteger el proceso de competencia y libre concurrencia,
mediante la prevenci6n y eliminaci6n de monopolios, preicticas monop6licas y demdts
restriccionesalfuncionamientoeficiente de los mercados de bienesy servicios. " Articulo 2,
Ley Federal de Competencia Econ6mica [L.F.C.E.] [Competition Law], as amended, Diario
Oficial de la Federaci6n [D.O.], 24 de Diciembre de 1992 (Mex.). ("This law has the
objective of protecting the competition process and free concurrence by means of the
prevention and elimination of monopolies, monopolistic practices, and other restrictions on
the efficient operation of markets for goods and services.")
14 A number of sectoral laws contain explicit references to the LFCE and to the CFC.
According to these laws, the CFC can object to the participation of economic agents in
public auctions and privatizations when it considers that such participation would impose
significant risks to competition. Moreover, these laws establish that the CFC can issue
determinations of substantial market power, which enable sectoral authorities to impose
tariffs, quality and information regulations. "La Comisi6n tendrd las siguientes atribuciones:
...IV.- Opinarsobre los ajustes a los programasy politicasde la administraci6nptiblica
federal, cuando de stos resulten efectos que puedan ser contrariosa la competencia y la
libre concurrencia; V- Opinar, cuando se lo solicite el Ejecutivo Federal, sobre las
adecuaciones a los proyectos de leyes y reglamentos,por lo que conciernen a los aspectos
de competencia y libre concurrencia;VI.- Cuando lo considerepertinente, emitir opini6n en
materia de competencia y libre concurrencia, respecto de leyes, reglamentos, acuerdos,
circularesy actos administrativos, sin que tales opiniones tengan efectos juridicos ni la
Comisi6npueda ser obligada a emitir opini6n[.]"Articulo 24, Ley Federal de Competencia
Econ6mica [L.F.C.E.] [Competition Law], as amended, Diario Oficial de la Federaci6n
[D.O.], 24 de Diciembre de 1992 (Mex.).
along with the relevant sectoral agencies,
CFC plays a
* Federal Regulatory Improvement Commission (Comisidn
Federalde MejoraRegulatoria,or "COFEMER")
The competition-related provisions in many of these sectors' laws give
the CFC important roles. Furthermore, only the CFC has the authority to
apply the competition law. Thus, certain rules of involvement between the
CFC and these agencies are necessary. The existing sectoral laws
contemplate the various types of interactions.15
First, the CFC is required to make an assessment of the competition
conditions or substantial market power in certain regulated sectors before
the regulator can impose price controls (as well as other obligations, such as
quality and information disclosure requirements). 16 More specifically, in
the road, air, sea, and rail transport sectors, the CFC must determine if there
is an absence of effective competition in the market, while in the
telecommunications sector it must determine if an economic agent has
substantial market power. In practice, this type of mechanism presents
1. This mechanism causes considerable delays, since the CFC and the
sectoral authorities' decisions are sequential. Thus, it may unnecessarily
block sectoral authorities from imposing a pro-competitive regulation in a
timely manner since they have to wait until after the CFC has come up
with its resolution;
2. As explained below, this mechanism multiplies the opportunities to delay
or avoid enforcement by contesting the authorities' resolutions in the
courts using the amparo or injunction process;
3. Authorities have to disclose their intention of regulating or affecting
15See, e.g., Ley Federal de Telecomunicaciones [Federal Telecommunications Law],
Diario Oficial de la Federaci6n [D.O.], 7 de Junio de 1995 (Mex.); Ley de Caminos, Puentes
y Autotransporte Federal [Federal Roads, Bridges, and Transport Law], Diario Oficial de la
Federaci6n [D.O.], 22 de Diciembre de 1993 (Mex.); Ley de Aeropuertos [Airports Law],
Diario Oficial de la Federaci6n [D.O.], 22 de Diciembre de 1995 (Mex.); Ley de Navegaci6n
[Water Transport Law], Diario Oficial de la Federaci6n [D.O.], 19 de Julio de 1993 (Mex.);
Ley de Aviaci6n Civil [Civil Aviation Law], Diario Oficial de la Federaci6n [D.O.], 12 de
Mayo de 1995 (Mex.); Ley Reglamentaria del Servicio Ferroviario [Train Transport Service
Law], Diario Oficial de la Federaci6n [D.O.], 12 de Mayo de 1995 (Mex.); Ley Federal
sobre Metrologia y Normalizaci6n [Federal Metrology and Standards Law], Diario Oficial
de la Federaci6n [D.O.], 1 de Julio de 1992 (Mex.); Ley de Sistemas de Ahorro para el
Retiro [Retirement Savings Systems Law], Diario Oficial de la Federaci6n [D.O.], 23 de
mayo de 1996 (Mex.); Ley de Instituciones de Cr~dito [Credit Institutions Law], Diario
Oficial de la Federaci6n [D.O.], 18 de Julio de 1990 (Mex.).
16The LFCE establishes the elements that the CFC has to take into account for
determining whether or not there is substantial market power. See Articulos 12, 13 y 31, Ley
Federal de Competencia Econ6mica [L.F.C.E.] [Competition Law], as amended, Diario
Oficial de la Federaci6n [D.O.], 24 de Diciembre de 1992 (Mex.).
entrenched interests before it is necessary; and
4. There is no guarantee that a CFC resolution will trigger the expected or
anticipated action by the sectoral authority.
Second, in several government processes and procedures, including
privatizations, tenders, auctions, permits, concessions, and licenses, the
participants or applicants must obtain a favorable opinion from the CFC as
a clearance prerequisite.17 If the CFC determines that competition in a
market could be negatively affected, it may refuse the applicants' request or
impose certain conditions for its authorization.
In terms of remedying anticompetitive mergers (e.g., derived from
privatizations, auctions, permits, concessions,, or licenses), the CFC has
both structural (e.g., divestiture of assets) 18 and behavioral remedies (i.e.,
remedies that regulate the agent's behavior).1 9 To complicate matters
further, the responsibility for merger reviews is sometimes shared between
the CFC and sectoral authorities. Additionally, it is sometimes unclear
which authority has the final say. This is the case, for example, with
mergers in the banking sector, where the CFC, the Ministry of Finance
(Secretaria de Hacienda y Cr~dito Ptiblico), the National Banking and
Securities Commission (Comisi6n Nacional Bancaria y de Valores), and
the Central Bank (Bancode Mixico) are involved in the review process.
The CFC has weak structural remedy capacities by law and thus has
probably resorted excessively to behavioral remedies, which are difficult to
devise and administer and relatively easy to evade.2 ° With regard to
monopolistic practices, the CFC has no structural remedy capacities by law.
This means that the CFC has limited power to solve cases of significant
abuse of dominance incurred by single economic agents. In such cases
behavioral remedies are unlikely to alter the incentives of the agent and thus
Telecommunications Law. The CFC may object that certain economic agents participate in
spectrum auctions. See Articulos 16-22, Ley Federal de Competencia Econ6mica [L.F.C.E.]
[Competition Law], as amended,Diario Oficial de la Federaci6n [D.O.], 24 de Diciembre de
18 The CFC has conditioned the approval of certain mergers on the divestiture of assets.
This was the case, for example, in the merger between Kimberly Clark and Scott Papers in
1996. See del Villar & Soto Alvarez, supra note 5, for details. See also Articulos 19 y 35,
Fracci6n II, Ley Federal de Competencia Econ6mica [L.F.C.E.] [Competition Law], as
amended, Diario Oficial de la Federaci6n [D.O.], 24 de Diciembre de 1992 (Mex.).
19 For example, in 1996 the CFC approved the partial merger between the two major
airlines of the country, Aerom~xico and Mexicana, but it imposed significant restrictions to
the joint operations of the airlines. See the discussion below. See Articulos 35-38, Fracci6n
II, Ley Federal de Competencia Econ6mica [L.F.C.E.] [Competition Law], as amended,
Diario Oficial de la Federaci6n [D.O.], 24 de Diciembre de 1992 (Mex.).
20 For example, several firms, including Telmex, have successfully avoided paying the
fines imposed by the CFC by appealing the rulings through the courts.
unlikely to eliminate the relative monopolistic practice. In other countries,
such as the United States, the antitrust agency can ask for structural
remedies and has the leverage to negotiate a settlement which gives the
prosecutor the tools to solve the problem.
In addition to the above, the CFC can issue opinions and
recommendations regarding the effects on competition of proposed and
existing laws, regulations and other government acts, such as the terms of
reference for privatizations and auctions.21 These opinions and
recommendations may be issued at the request of the Federal Executive on
its own initiative, or as part of the Regulatory Impact Assessment
procedures undertaken by the Federal Regulatory Improvement
Commission (Comisi6n Federalde Mejora Regulatoria, or "COFEMER").
Unfortunately, in many cases the opinions and recommendations of the
CFC are not binding and can be ignored by the sectoral authority. As a
result, the power of the CFC to remedy anti-competitive outcomes is
limited. Therefore, it would be desirable that the opinions and
determinations of the CFC be binding for the relevant sectoral authority so
that anti-competitive situations in regulated sectors can be effectively
The above problem can be aggravated by the fact that in many cases
the policy objectives pursued by the sectoral regulators may not necessarily
coincide, or even be compatible, with those of the CFC. Indeed, while the
CFC must always seek to promote competition and economic efficiency,
sectoral regulators may pursue other objectives. 22 As a result, the
relationship between the CFC and these sectoral agencies has not always
been smooth and there have actually been cases in which opinions strongly
differ or where the recommendations of the CFC have been ignored.
For example, in the air transport sector the CFC found several regional
markets (flight segments between city pairs) where there was no effective
competition. It issued a recommendation to the sectoral regulator, the
Secretariade Comunicacionesy Transportes ("SCT"), after it was notified
of the creation of Cintra, a holding company of the two largest airlines in
the country. The CFC approved the merger in 1996, but it reserved the right
to demand that the companies be sold separately if the merger proved to be
anti-competitive after four years. The privatization into separate companies
21Articulo 24, Fracciones IV, V y V, Ley Federal de Competencia Econ6mica [L.F.C.E.]
[Competition Law], as amended, Diario Oficial de la Federaci6n [D.O.], 24 de Diciembre de
22 Some sectoral regulators may be concerned primarily with the effective provision of a
given service, the stability of a given sector or the attainment of certain sectoral growth
targets, and not necessarily with the efficiency with which the sector operates. For example,
in the telecommunications sector the authorities argued for years that cross subsidies from
long distance to local service were needed to increase teledensity. This policy was designed
in a way that inhibited local service competition.
took place only at the end 2005 in a process in which one of the two airlines
(Mexicana) was sold to the Mexican hotel chain operator Posadas de
M~xico, which also made an unsuccessful bid for the other major airline
Another example is the case of Telcel, Mexico's largest provider of
cellular phone services. This company is controlled by the same group that
controls Tel6fonos de M6xico, or Telmex, the dominant
telecommunications operator in the country.23 In 2001, Telcel made an
application for permission to provide long distance services. Despite the
CFC's negative opinion, the sectoral regulator, the Comisi6n Federal de
Telecomunicaciones ("COFETEL"), authorized Telcel's application
without providing an adequate explanation as to why the CFC opinion was
overruled.2 4 Since then, Telcel has increased its market share to more than
75% of subscribers, making it by far the largest mobile operator in
In other cases, like that of the railroad sector, the lack of an adequate
sectoral regulatory framework has led to inefficient market outcomes. In the
railroad sector, for example, the absence of a strong and independent
regulatory agency and the lack of effective regulatory measures have
created problems with interlinear traffic and access to the railroad
network. In particular, the two major operators of the concessioned
railroad networks have failed to reach an agreement even eight years after
the privatizations have concluded.27 The weak regulatory framework has
not given the sectoral authorities sufficient tools to break the stalemate and
solve the dispute.
Table 2 shows other opinions and recommendations made by the CFC,
some of which have been accepted by the sectoral regulators.
23 In December 2004, Telmex stated that its competitors did not have a significant share
of the market for fixed-line local service. In particular, Telmex had a market share of 79.4%
in domestic long distance service in the 200 cities opened to pre-competition (100%
elsewhere) and 77.6% in international long distance service measured on the basis of total
number of billed minutes in the 200 cities open to competition (100% elsewhere). See
Telmex, Annual Report (Form 20-F).
24 See Informe Anual de Competencia Econ6mica, Comisi6n Federal de Competencia
Econ6mica [Annual Report of the Federal Competition Commission] (2001).
25 In December 2004, the market share of Telcel was 77% in pre-paid plans and 74% in
post-paid plans. Telcel's share of the Mexican cellular market was approximately 75% in
2004. See Am6rica M6vil, Annual Report (Form 20-F) (2004).
26 The sector is still under the direct regulation of the Ministry of Communications and
27 See ICE, supra note 5, at 112.
OF OPINIONS AND RECOMMENDATIONS COMPETITION COMMISSION AND THEIR
Airports: Access to Airport
Railroads: Extent of
competition in grain
transport North-Center of
the country. (2003-2004)
Ports: Granting access to
ICAVE to public docks in
Petroleum Gas ("LPG")
Energy: Natural Gas
Granting second cable
There was no reasonable condition of Tariff regulation was
competition in the provision of these services. imposed on privatized
CFC recommended tariff regulation. airport controlling groups
Effective competition did not exist.
Ferromex appealed the
opinion and CFC reversed
Itdid not find justification to give access to Denied access for ICAVE.
ICAVE since it controls its own dock in the
Opinion against regulations that facilitate price The LPG regulation has
arrangements among competitors. ot been enacted due to the
ncapacity to reach an
greement among the
Opinion against limiting permissions for CFC Opinions were
Natural Gas transport of own use. ncluded in regulation.
Favorable opinion to the granting of second
The second concessions
ariffs in fix to mobile
Tariffs in mobile to mobile
long distance calls.
iverse conditions must be established:
congruence between intra-network tariffs and
nterconnection tariffs. Recommends
eliminating distorting conditions and engineer
a reduction of interconnection tariffs.
At the moment no decision
as been announced by the
Wireless services to support Recommends classifying the 5.7 GHz band for The SCT has announced
Broadband Internet Access. 'free use" to promote the competitive that it will revert its initial
(2005-present) provision of Broadband Internet services. decision and classify it as a
"free use" band.
Another instrument being used is coordination agreements between the
CFC and diverse state governments and sectoral authorities. The CFC has
entered into coordination agreements with several states, municipalities and
sectoral regulators.2 8 However, it has not been able to reach such
agreements with some of the most important regulators, like COFETEL, the
telecommunications sectoral regulator whose policies favor market
planning and who simply consider that they may continue to operate as
before without CFC intrusion.2 9
Finally, an additional problem that hinders enforcement and
compliance is the litigious abuse of the amparo process. Similar to an
injunction, an amparo (literally meaning shelter or protection) is a judicial
review procedure whereby a complainant can ask for the reparation,
suspension, or annulment of an act of government authority that is deemed
to violate the complainant's constitutional rights (e.g., due process).3 °
Although the amparo is a necessary mechanism to maintain a constitutional
system of checks and balances, the reality is that this procedure has more
often been used by companies under investigation as a mere litigation tactic
to delay or avoid enforcement of the resolutions of the CFC.3'
Currently, an amparo can be granted by any federal civil judge. As a
result, the affected companies can present amparo cases to judges that have
a limited background in the issues being discussed, let alone adequate
knowledge of the economic issues which are necessary to understand
competition cases. One of the potential policy actions to remedy this
situation is the creation of courts within the judicial branch that would
concentrate on economic competition cases in which specialized judges and
28 Cooperation agreements have been signed with 16 of the 32 states and with the Centro
Nacional de Desarrollo Municipal (National Center for Municipal Development). With
sectoral regulators, the Federal Competition Commission has so far signed cooperation
agreements with the Comisi6n Federal de Mejora Regulatoria, or COFEMER (Federal
Regulatory Improvement Commission), the ProcuraduriaFederal del Consumidor, or
PROFECO (Consumer Protection Agency), the Comisi6n Reguladora de Energia,or CRE
(Energy Regulatory Commission), and the Unidad de Precticas Comerciales
Internacionales,Secretaria de Economia (International Trade Practices Unit, Ministry of
29 In addition to the above mentioned agreements with national authorities, the
Government of Mexico has signed agreements related to the application of competition laws
with the United States and Canadian Governments. The CFC has also signed agreements
with the FiscaliaNacionalEcon6mica (National Economic Prosecutor) of Chile and with the
Fair Trade Commission of the Republic of Korea.
30 According to the former President of the Supreme Court, Genaro G6ngora Pimentel,
the effects of the amparo are to be understood as not limited to those established by law. The
term amparo includes authorities of all those persons that have public force by virtue of the
circumstances, be they legal or de facto and are able to act not as simple individuals but as
individuals that exercise public acts. Thus, the amparo proceeds not only against legitimately
constituted authorities, but also against mere de facto authorities.
31See, e.g., supra note 8.
32 Mexico has local and federal civil judges. Federal civil judges are the ministers of the
Supreme Court, the magistrates of the Circuit Collegiate Tribunals and the judges of the
magistrates could help limit the use of the amparo process only to those
cases with sufficient merits.33
III. THE CASE OF THE TELECOMMUNICATIONS SECTOR
Similar to other infrastructure sectors, telecommunications plays a
fundamental role in the day-to-day operations of nearly all industries.
Telecommunications services are especially important with respect to the
access to the network and infrastructure that are necessary for other related
industries and companies to operate. For example, in today's world one
cannot imagine doing business without broadband access to the Internet.
But in order for companies to provide access services to the Internet and
Internet-based telephony to end consumers and other businesses, they need
to have access to the underlying telecommunications network.
In Mexico, access to the basic telecommunications network by
potential providers has been constrained by the need to obtain concessions
from the Ministry of Communications and Transportation ("SCT").34 In
several cases, the granting of concessions has been delayed for years. For
example, at the end of the 1990s and beginning of the 2000s, a group of
important cable TV companies requested permission to provide telephony
services.35 To this date, the SCT has not allowed them to provide this
important service to their customers, supporting the monopolistic position
of Telmex in a market that is fifteen times larger than the cable TV market.
Such barriers to entry to these markets keep other service providers out
and consequently raise the prices for services to end consumers and other
businesses. Naturally, this increases the cost structures of firms that rely on
these services for their operations, which in turn makes them less
competitive. In Mexico, although prices for telecommunications services
have decreased over the past decade, they still remain among the highest
relative to other OECD member countries, as Table 3 shows.
33 See, e.g., Pargal, supra note 8.
34 See Ley Federal de Telecomunicaciones [Federal Telecommunications Law], art. 11,
Diario Oficial de la Federaci6n [D.O.], 7 de Junio de 1995 (Mex.).
35 After not being allowed to provide telephony services directly to end users but only
permitted to lease capacity to authorized telephony operators, in 2004 the Chmara Nacional
de Televisi6n por Cable or Canitec (National Chamber of Cable Television) asked the
opinion of the CFC as to the provision of voice services through Cable TV networks. In its
opinion, the CFC stated that Cable TV networks should also be allowed to offer telephony
services as quickly as possible and with the smallest regulatory burden as a tool to develop
the competition process in fixed telephony services. Letter from Eduardo Perez Motta,
President of the CFC, to Pedro Cerisola, Minister of Communications and Transport (Oct.
31, 2005), available at
http://www.cfc.gob.mx/contenedor.asp?P-Results.asp?txtDirhttp://xeon2/cfc0l/Documentos/Esp/Resoluciones (Opinion 3 of the Telecommunications
Many of the shortcomings in the performance of the
telecommunications sector can be traced back to the privatization process of
Telmex. For example, Telmex was privatized in 1990 before the
establishment of an adequate regulatory framework or a sectoral regulator.
In fact, it was not until 1996 that the Federal Telecommunications
Commission ("COFETEL") was established, and even then it was granted
limited autonomy and weak regulatory powers.4 1
Another problem with the privatization process was that Telmex was
auctioned off in order to maximize the revenues from its sale obtained by
the government, as was the case with many other state owned enterprises.
In exchange, Telmex was granted in its "Title of Concession" certain rights
and obligations to build, maintain, operate, and commercially exploit the
public telephone network.42 The government imposed several targets,
obligations, and performance requirements on Telmex, but granted it six
years of monopoly rights in the long distance market.43 In hindsight, it was
36These comparisons are made by taking prices converted into U.S. dollars and adjusted
for purchasing power parity. They are based on bundles or packages which have been
defined by consensus a-mono OECD memher countries since 1990. The packages are
updated periodically by the OECD, and the information on which the comparison is based is
collected by Teligen, a private research specialist in the telecommunications industry.
Source: OECD, Communications Outlook 2005.
37 This comparison refers to residential packages as defined by the OECD, which include
local calls, long-distance calls and calls to mobile phones.
38This comparison refers to packages that include local calls, long-distance calls and
calls to mobile phones.
39 This comparison refers to OECD's medium-use basket packages, which include
incoming and outgoing calls.
40 This is a comparison of the best plans in each country.
41 For instance, the Minister of Communications and Transport can remove COFETEL
commissioners at his discretion.
42 Modificaci6n al Titulo de Concesi6n de Telffonos de Mexico, S.A. de C.V., as
amended, Diario Oficial de la Federaci6n [D.O.], 10 de Diciembre de 1990 (Mex.).
43 Id. at Condition 5-4.
a serious policy mistake to have given such protection to an entrenched
When Telmex's monopoly rights ended, the long distance market was
gradually opened to new entrants between 1996 and 1997. 44 However, this
market was governed by a set of International Long Distance Rules ("ILD
Rules") 45 which were drafted in a way that sustained Telmex's market
power despite the entry of new operators. Indeed, pursuant to the ILD
Rules, international gateway operators (i.e., authorized long-distance
service licensees) had to apply the same "uniform settlement rate" to all
long-distance calls to or from any country, regardless of which operator
originated or terminated such calls.46
The uniform settlement rate for each country was set by the
longdistance service licensee (through negotiations with the operators) that had
the largest outgoing long-distance market share for that country during the
previous six months.4 ' This rule implied that Telmex in effect set the prices
for the whole sector. Under the principle of "proportionate return,"
incoming calls (or associated revenues) from a foreign country had to be
distributed among international gateway operators in proportion to each
operator's market share in outgoing calls to that country.4 8 The
enforcement of these ILD Rules resulted in new firms being charged high
interconnection fees, which were "negotiated" by the already dominant and
well-established incumbent firm.
The Federal Telecommunications Law empowers the COFETEL to
impose specific obligations on a firm which has been declared by the CFC
to have market power in a relevant market in terms of the Federal
44 The Ministry of Communications and Transportation, or SCT, granted long distance
concessions to Alestra (a joint venture of AT&T), Avantel (a joint venture of MCI), and
others at the end of 1995. As is well known, MCI eventually filed for bankruptcy in the
United States and AT&T was taken over by SBC.
45 The International Long Distance Rules were published in December 1996 and entered
into effect in January 1997. See Reglas de Larga Distancia Intemacional [R.L.D.I.], as
amended, Diario Oficial de la Federaci6n [D.O.], 11 de Diciembre de 1996 (Mex.) also
available at http://www.cft.gob.mx/cofetel/html/9-publica/reglas/1 Idic96.shtml.
46 Id. at R.23 (establishing the uniform settlement rate); id. at R.2, fraction 12 (defining
uniform settlement rate).
47 Id. at R. 13-21 (establishing that the determination of the settlement rates is by the
largest operator in Mexico).
48 Such a practice was implemented by the Federal Communications Commission of the
United States to protect U.S. international carriers and consumers from whipsawing behavior
of foreign monopolists. Whipsawing is a form of anticompetitive behavior that involves the
ability of foreign carriers to obtain unduly favorable terms and conditions from U.S.
International Service providers, by setting competing carriers against one another.
Protection From Whipsawing on the U.S.-Philippines Route, 68 Fed. Reg. 31 (Feb. 14,
2003), available at http://a257.g.akamaitech.net/7/257/2422/14mar20010800/
Competition Law. 49 These obligations may include fixing rates (including
price controls), and imposing quality of service and information disclosure
requirements. However, the practical problem is that the CFC has no role in
the design or content of the subsequent regulations. These regulations are
the sole responsibility of the COFETEL. These problems are aggravated by
the abuse of the amparosystem described above.
In December 1997, the CFC identified five relevant markets where
Telmex was dominant: local telephony, local access (interconnection),
national long distance, international long distance, and inter-urban transport
(resale of long distance). 50 Despite this declaration, which in theory would
empower the regulator to take action against Telmex, COFETEL has been
unable or unwilling to impose the obligations which were issued by a
In addition, Telmex has avoided any sanctions by repeatedly appealing
the decision. The declaration was initially appealed before the CFC using
the reconsideration procedure, but the CFC confirmed its resolution in
1998. Nevertheless, Telmex still filed a number of amparos to delay the
enforcement of this decision. COFETEL eventually issued a resolution
establishing certain obligations for Telmex in 2000, but Telmex appealed
this resolution through another amparo, which delayed the entry into force
of these obligations.
Subsequently, in 2001, a judicial court annulled the original resolution
of the CFC. In 2002, as a consequence of this ruling, Telmex was able to
obtain the annulment of all acts derived from the original resolution,
including COFETEL's resolution. Because of this, the CFC had to restart
the original proceedings in order to correct the deficiencies that the judicial
court had found. When the CFC finally issued a new resolution declaring
Telmex's dominance, Telmex once again challenged this resolution and
eventually won the amparo in May 2004.52
issued yet another resolution, which was likewiseInapApeuagluedst b2y0T04e,lmtehxe.5C3FC
" See id. at RA 493/2003.
Thus, it is only when the resolution by the CFC becomes firm and
enforceable that COFETEL can be legally empowered to issue its new
resolutions to address Telmex's anti-competitive behavior. Nevertheless, it
has become clear that Telmex's strategy has been to appeal and challenge
any resolution that threatens its dominant position in the market. More than
an enforcement problem, this has become a structural and regulatory
problem because the legal framework does not facilitate the job of the CFC.
Because of the above impasse, presumably at the request of those
firms in the United States whose interests where being affected (i.e., the
former Mexican affiliates of AT&T and MCI-Worldcom), in 2000 the
United States requested consultations with Mexico concerning certain
measures that were deemed to be inconsistent with Mexico's General
Agreement on Trade in Services ("GATS") commitments and obligations
on telecommunication services. While consultations took place between
2000 and 2001, the parties were unable to reach an agreement; thus a WTO
Panel was established in 2002 to address the issue. The WTO Panel
reviewing this case issued its Report on April 2004. 54 Although some of the
claims by the United States were dismissed, the Panel resolved that Mexico
had failed to comply with some of its GATS commitments. 5
With respect to the relevant competition issues, the following findings
were of particular importance: (i) Mexico failed to ensure that a major
supplier (i.e., Telmex) provided interconnection to U.S. suppliers at
costoriented rates for the cross-border supply; and (ii) Mexico did not take
"appropriate measures" to prevent anti-competitive practices because it
maintained measures that required anti-competitive practices among
These findings were primarily based on the structure of the ILD Rules,
that were deemed equivalent to price-fixing and market sharing prapcrtaiccetisc.e5s7
which by law required the parties to engage in anti-competitive
In its decision, the Panel recommended that the Dispute Settlement Body
request Mexico to bring its measures into conformity with its obligations
under the GATS.58
Mexico did not appeal the decision but expressed some reservations
about the Panel's findings and recommendations. The Panel Report was
54 See Panel Report, Mexico-Measures Affecting Telecommunications Services,
WT/DS204/R (Apr. 2, 2004) [hereinafter Mexico Panel Report].
55 See Bjom Wellenius et al., Telecommunications and the WTO: The Case of Mexico
(World Bank Policy Research, Working Paper No. 3759, 2005) (detailed discussion of the
implications of the WTO panel for international trade in services in general, and trade in
services in the telecommunications sector).
56 Mexico Panel Report, supra note 54, at 199.
57 The "uniform settlement rate" and the "proportionate return" system.
58 Mexico Panel Report, supra note 54, at 224.
finally adopted by the Dispute Settlement Body on June 2004. 59 Thereafter,
Mexico and the United States agreed on certain actions to be taken in order
to comply with and implement the Panel's recommendations.
Among other actions, Mexico agreed to remove certain legal
provisions (namely the ILD Rules) relating to the proportional return
system, the uniform tariff system, and the requirement that the carrier with
the greatest proportion of outgoing traffic to a country (Telmex) negotiate
the settlement rate on behalf of all Mexican carriers for that country, all of
which were deemed to be anti-competitive provisions. As a result, on
August 11, 2004, COFETEL published the International
Telecommunications Rules which replaced the ILD Rulesn.e6w0
The elimination of the anti-competitive provisions contained in the
ILD Rules and the new legal framework provided by the International
Telecommunications Rules are perceived as a positive step towards
mitigating some of the market failures in this case and allowing competitive
commercial negotiations of international settlement rates. However, it is
unfortunate that an international ruling was necessary in order for Mexico
to make some of the necessary regulatory reforms to address this behavior.
For the most part, the rest of the enforcement actions taken by the CFC
and COFETEL to address market structure problems that facilitate
anticompetitive and discriminatory behavior by Telmex have been largely
unsuccessful. As long as the procedures in the administrative and judicial
spheres continue to be blocked and challenged, it is uncertain when or how
the structural problem will be resolved.
The competition authority in Mexico has faced serious challenges in
the application of the LFCE. Some of the difficulties derive from loopholes
in the laws, changes in the scope of the LFCE due to judicial
interpretations, lack of sectoral cooperation, insufficient powers of the CFC
and the sectoral regulators, and the regulatory arbitrage by market
participants, including the abuse of the amparo process and the inability to
impose sanctions effectively. All of these difficulties have limited the
effectiveness with which the competition law is applied by the CFC and the
sectoral regulators. Some of these difficulties are clearly illustrated by the
case of the telecommunications sector in Mexico.
Despite the progress achieved over the past decade, much remains to
be done to increase the effectiveness of competition policy in Mexico. One
Challenges To The Effective Implementation OfCompetition Policy
of the main policy recommendations that can be derived from this
diagnostic is the need to strengthen both the CFC and the sectoral regulators
and increase the cooperation among them. The main way to strengthen them
would be by granting them greater independence from the ministries they
currently depend on, and granting them more powers to sanction
Of course, these recommendations would likely prove ineffective if
they are not accompanied by a parallel reform to the judicial system, which
would limit the use of the amparo process. One of the proposals that has
been advanced is the creation of specialized competition courts that could
speedily dismiss frivolous requests for amparos. Evidently, this suggestion
does not preclude any other innovative solutions which could expedite the
judicial decision making process. Some of these suggestions have already
been incorporated in the reforms to the LFCE being discussed by the
Congress. Those that are not included in the reform will eventually need to
be considered, since there is an urgent need to revamp the implementation
of competition policy in Mexico.
49 See Ley Federal de Telecomunicaciones [Federal Telecommunications Law], as amended, Art . 63 , Diario Oficial de la Federaci6n [D.O.], 7 de Junio de 1995 ( Mex .).
50 Comisi6n Federal de Competencia , GACETA Afio 4 , num 10 , Mayo- Agosto 2001 , available at http://www.cfc.gob.mx/contenedor.asp?P=Results.asp?txtDir-http://xeon2/ cfc01/Documentos/Esp/Comunicaci6n.
51 See Resoluci6n Administrativa por la que la Secretaria de Comunicaciones y Transportes, por Conducto de la Comisi6n Federal de Telecomunicaciones, establece a Telfonos de Mxico, S.A. de C. V, obligaciones especificas relacionadascon tarifas, calidad de servicio e informaci6n, en cu carticterde concesionariode una red pztblica de telecomunicaciones con poder sustancial de mercado en cinco mercados relevantes , de acuerdo con el Articulo 63 de la Ley Federalde Telecomunicaciones, Comisi6n Federal de Telecomunicaciones, 8 de septiembre de 2000 .
52 See Ley de Amparo, supra note 7 , at RA 721/ 2000 .
59 Reparte 0MC culpas entre Mexico y EU , REFORMA (Apr. 3 , 2004 ) (note the cited comments made by Ricardo Ramirez , Deputy Director General, Ministry of Economy).
60Reglas de Telecomunicaciones Internacionales (RTI), issued in June 2004, which replaced the previous Reglas de LargaDistanciaInternacional(RLDI ), as amended Diario Oficial de la Federaci6n , 11 de Diciembre de 1996 .