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Opinion

Pros and Cons of a Super Regulator – The case of the Spanish Regulator

Leonardo Beltrán and Andrés Chambouleyron are non-resident Fellows at the Institute of the Americas located in La Jolla, California.

Extraordinary session of the Senate of the Republic of Mexico, June 29, 2020. Credit: Senado de Mexico.

LA JOLLA, California, United States, Jul 20 2020 (IPS) - On June 10, 2020, Senator Ricardo Monreal, President of the Political Coordination Board of the Senate of Mexico, presented a legislative initiative to reform Article 28 of the Political Constitution of the United Mexican States, in order to cluster in a single regulator of economic competition, the Telecommunications, Broadcasting and Energy sectors.

The initiative contemplates the creation of the National Institute of Markets and Competition for Social Well-being “INMECOB” as an autonomous constitutional body with legal identity, technical, operational and management autonomy that would replace the following institutions:

  1. The Federal Commission of Economic Competition (“COFECE”)
  2. The Energy Regulatory Commission (“CRE”)
  3. The Federal Telecommunications Institute (“IFT”)

The main purpose of the initiative is to contribute to the austerity policy of President López Obrador administration, with the integration of these three regulators that, although they share some general characteristics and objectives, the final goods and/or services they provide are different.

The three regulators are intended to ensure that social welfare is maximized through economic competition in each sector, for example, by ensuring free access for competitors in cases where due to the characteristics of the infrastructure they naturally tend to become monopolies (i.e. electrical networks or gas pipelines, where duplicating the infrastructure would result in a much higher cost to the final consumer).

Although the legal framework of the three regulators, in terms of competition, is the same, each institution applies a different set of processes, which can result in different evaluation standards that could penalize or benefit individuals simply due to the interpretation and organizational culture of each entity in question.

Likewise, administrative management in terms of procurement of goods and services, material and equipment, social communication, among other functions, could be optimized by integrating them into a single institution.

The initiative estimates that from the merger of the three institutions, savings of 500 million pesos per year (22 million dollars) could be obtained, as a result of the reduction in the workforce and operating budget of both COFECE and IFT, where 79.6% is represented by cutting out 440 positions (1 in 5 employees) and the rest would come from general services or operating expenses.

The initiative also argues that in addition to the financial benefit, there will be a lower risk in the capture of the regulator by the private sector, as the relative importance of a certain sector would be reduced within the activities of the regulatory body.

Considering that Senator Monreal’s project cites the National Commission of Markets and Competition of Spain as a precedent for consolidating competition authorities and sector regulators in a single body, we analyzed in detail this particular case and its potential application to the Mexican case.

 

The role of the National Commission of Markets and Competition in Spain

According to its own internet portal, the recently created (2013) National Commission of Markets and Competition (CNMC) aims to guarantee, preserve and promote the proper functioning and transparency of markets, ensuring the existence of effective competition and defending the interests of consumers and companies.

It is a public body with its own legal personality under parliamentary control, which guarantees its independence from the government and legal certainty.

The CNMC is the result of merging the former National Competition Commission (CNC) created in 2007 with sector regulators – the National Energy Commission (CNE), the Telecommunications Market Commission (CMT), the Committee of Railway Regulation (CRF), the State Council for Audiovisual Media (CEMA), the National Commission of the Postal Sector (CNSP) and finally the Airport Economic Regulation Commission (CREA).

The functions of the National Competition Commission (CNC) were essentially three, a) the prosecution of anticompetitive behaviors such as collusive behaviors and abuses of dominant positions, b) the control of operations with economic concentration (prior control of mergers or acquisitions), and c) the promotion of competition in those concentrated markets through liberalization or a greater opening.

Similarly, the National Energy Commission (CNE) created in 1998 had as its essential mission to ensure effective competition in energy systems, which would include the electricity market, as well as the markets for both liquid and gaseous hydrocarbons (natural gas and oil).

The CNE regulated tariffs and service quality in natural monopolies (electricity and gas distribution and transport networks), but also promoted competition in those segments where competition was not effective (gas and electricity commercialization) and resolved conflicts or disputes between different market agents (access to transport networks).

On the other hand, the objectives of the Telecommunications Market Commission (CMT) created in 1996 were a) to be the arbitrator between operators in the face of conflicts such as network interconnection, b) to control compliance with universal service obligations, c) to assign numbering to the operators, d) to adopt measures to ensure free competition between operators, e) to set rates for regulated services, f) to set interconnection charges between networks, g) to exercise sanctioning power, h) to carry out analysis and definition of markets and finally i) to coordinate its functions with the National Competition Commission.

Lastly, the objectives of the Committee for Railway Regulation (CRF), the State Council for Audiovisual Media (CEMA), the National Commission for the Postal Sector (CNSP) and the Commission for Airport Economic Regulation (CREA) were to regulate each of the markets by setting tariffs where competition was not possible and deregulating and promoting competition where it was technically feasible and desirable.

The creation of these regulatory bodies was due to the privatization of state-owned public service companies, the end of state monopolies and the need for Spain to adapt to European regulations.

 

Operation of the CNMC

The CNMC exercises its functions through two governmental bodies: the Council and the President, who is also the Council’ president. The Council is a collegiate decision-making body made up of ten members appointed by the Government with the proposal of the Economy and Competitiveness Minister, and includes persons of recognized prestige and professional competence, after the candidate appears before the corresponding Commission of the Congress of Deputies. Their mandate is for 6 years, non-renewable and is subject to a strict incompatibility regime.

The Council can act in Plenary or in Room. To this end, it is organized into two rooms: one dedicated to competition issues (Competition Room) and the other to supervision of regulated sectors (Regulatory Supervision Room). The Plenary is made up of all the members of the Council and chaired by the President.

In addition, the CNMC has four directions of instruction: Competition; Energy; Telecommunications and the Audiovisual Sector, as well as Transport and the Postal Sector, as illustrated in the following table.

 

 

What are the advantages of a consolidated body?

The arguments used by the Spanish government to justify the consolidation process of the competition authority and the sector regulators in a single body are basically the following: 1) guarantee legal certainty and institutional trust, 2) avoid unnecessary duplication of control of each operator and contradictory decisions in the same matter, 3) take advantage of economies of scale and regulate the administered sectors, establishing an integrating vision in terms of regulation and the defense of competition to adapt it to the changes that have occurred in the economic environment for the benefit of consumers, 4) aim at effectiveness, efficiency, rationalization, agility, objectivity and transparency, 5) unify criteria to offer a balanced and comprehensive solution to consumer problems, 6) adjust the operation of the regulatory authority to the regulations of the European Union, especially in the telecommunications and energy sectors, seeking a greater market integration of the European Single Market.

In summary, what they were looking for was to save administrative costs, streamline and make management more transparent, avoiding duplication and preventing potentially contradictory opinions by unifying criteria in a single agency.

 

Economic analysis and application to the Mexican case

The creation of the original sectoral regulators that regulated energy, telecommunications, railways, ports and the postal market occurred due to the need generated after the privatization of the former state monopolies by becoming private monopolies.

Sector regulation in this case is essentially an ex-ante regulation that is applied to those segments of the markets considered natural monopolies, which are unable to compete due to their technology. These segments are normally electricity and gas distribution and transport networks as well as the old landline network before the irruption of mobile and internet.

In these cases the regulation is ex-ante because it is applied before observing how the market behaves, since it is assumed that natural monopolies (by definition) cannot compete and therefore their rates must be regulated and they must provide their services with a minimum acceptable level of quality.

The body in charge of defending and promoting competition, on the other hand, exercises supervision and eventually also regulation, but of an ex-post type, on those markets in which anti-competitive behavior is observed. In this case the remedy (e.g. sanctions or prohibitions, obligations etc.) is applied after observing how competitive the market is, not before, because it is not possible to predict how competitive a market will be before observing how the companies behave in that market.

The eventual state intervention in a market is normally subsequent to the observation and verification of anti-competitive behavior by the authority.

It is for these two reasons that both types of agencies (competition and sector regulator) are normally separate: their nature is different because they serve markets and/or companies with different characteristics or technologies. Some are natural monopolies that require ex-ante regulation of rates and quality due to their technological impossibility of competing and the others operate in markets that are not competitive enough and that require supervision and (eventually) ex-post regulation to inject more competition, which is, by nature, impossible to achieve in the first group.

While there are segments within regulated sectors that are potentially competitive, such as the production, generation, and commercialization of natural gas and electricity, where sector regulators normally have the power to make ex-post regulation by deregulating potentially competitive markets, the competition agencies are the natural authorities to apply such policies.

Having said all this, there is no argument (economic at least) that justifies the adoption of a super regulatory body that consolidates the competition authority and the sector regulators.

Reviewing the arguments put forward by the Spanish authorities in the previous section, it can be easily verified that: 1) All the advantages that a single regulator supposedly has would also be shown by two separate regulators: one competition authority on the one hand and another multi-sector regulator on the other that regulates natural monopolies, 2) In fact, the CNMC works with 2 suites, the Competition Suite and the Regulatory Supervision Suite, each suite with its directions of instruction that operate separately.

Apparently, and judging by the arguments wielded by the Spanish authorities, the only advantage that the creation of a single authority would offer (in addition to complying with some European regulations) would be to have a single board of directors and a single president, avoiding duplication and reducing administrative costs.

It is clear that for the Mexican case, neither of the two apparent advantages put forward by the Spanish authorities would apply, since, on the one hand, there are no USMCA regulations obligating to adopt a similar measure (Canada and the United States have separate authorities) and there is no assurance that consolidating the current competition authority and sector regulators into one body will result in lower administrative costs.

The CRE of Mexico also has the power to dispose of the income derived from the rights and uses that are established for its services to finance its total budget and a public trust in which it will contribute the remainder of the excess income that it has to accumulate the equivalent to three times its annual budget and if there are additional resources, these will be transferred to the Treasury of the Federation.

This means that CRE’s operation does not represent a burden for public finances and that the cost is self-sustaining from the payment of those regulated by the reception of the service. The CRE, in addition to the regulatory mandate in economic matters, has the mandate to establish technical regulations to address the reliability, stability and security in the supply and provision of electrical energy services, a technical attribute that does not share with the other two Mexican institutions.

In summary, the consolidation project presented does not seem to be able to guarantee any of the objectives it pursues, neither reduction of administrative costs nor less capture power by the authorities. In fact, consolidation into a single agency could generate a superstructure with greater duplications than those that exist today, and nothing guarantees that the new agency will be less prone to capture by the regulated sectors.

 
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