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PANEL DISCUSSION: ENERGY REGULATION IN MEXICO

                           Ewell E. Murphy, Jr. [FNa1]
                                    Moderator

                          Miguel Jauregui Rojas [FNaa1]
                                  Panel Member

                          William D. DeGrandis [FNaaa1]
                                  Panel Member

                            Abdon Hernandez [FNaaaa1]
                                  Panel Member

  Copyright (c) 1995 by the United States-Mexico Law Journal; Ewell E. Murphy,
      Jr., Miguel Jauregui Rojas, William D. DeGrandis and Abdon Hernandez

   Ewell Murphy: We have heard descriptions of three very important Mexican
 industries. In at least one of them, the hard minerals industry, there have
 been remarkable openings in the new legislation. In the electric power
 industry, we have seen some clarification of investment rights, i.e.,
 affirmative clarifications. While this legislative change has been going on in
 Mexico, the North American Free Trade Agreement (NAFTA) [FN1] has been created
 and suddenly, in theory, given rights to Canadian and United States investors.
 With the new laws and with NAFTA, do you think that Canadian and United States
 investors have any greater access to the industries you have talked about than
 other foreign investors may have, e.g., investors from Japan or Europe.
   Abdon Hernandez: Since the new law was enacted, numerous companies from
 Canada and the United States are coming to Mexico due to the proper legal
 framework. This is also because the environmentalists in Canada and the United
 States are shutting down their domestic companies, and because of high
 corporate expenses for reclaiming lands that are being environmentally damaged.
 In addition, the United States and Canada are going to Mexico because, with
 NAFTA, there will be more value to mineral products exported from Mexico. NAFTA
 was just the "icing on the cake." The main reasons why Canadian and United
 States producers are going to Mexico are the environmental restrictions in
 Canada and United States and the opening of the Mexican mining industry to
 foreign investors.
   Murphy: In terms of actual legal access to Mexican mining concessions, would
  a Japanese mining company now have as much access as a Canadian or United
 States company?
   Hernandez: Yes, it would. As a matter of fact, the Japanese government is
 actively involved in exploration for the Mexican government as a contractor. At
 the company I work with, we have a joint venture with the Japanese, which has
 been rather difficult. The Japanese have assigned Mexico to Sumitomo, which is
 the vehicle for mining activities in Mexico, whereas Mitsui is the Japanese
 vehicle for mining activities in Peru.
   Murphy: Does this create any antitrust problems?
   *88 Hernandez: I do not know. It is a government action. I assume the
 Japanese have sovereign immunity protection.
   Murphy: What about the electric power industry? Would you say that
 Canadian and United States investors have any special access that foreign
 investors generally do not have?
   William DeGrandis: There are Japanese, French and other companies already
 involved in some of these consortiums. I do not think United States companies
 have any legal edge, but the United States Independent Power Producers (IPPs)
 and power companies have been doing this longer than other entities, certainly
 of any Canadian company that I can think of, except for North Canadian Power.
 The Japanese and the French companies, except for Electricite de France, have
 mainly been equipment suppliers. They are only recently taking a developer role
 to sell their equipment. Thus, United States companies may have a practical
 edge because they are used to being involved in these partnerships. I believe
 that, strategically, to spread risk, there will be more consortiums like
 Samayuka, involving United States, Japanese and Canadian companies, all taking
 their respective roles and risks. But I do not believe a United States company
 has any special legal advantage.
   Murphy: What about the oil industry, specifically the oil service industry:
 contractors, suppliers and manufacturers of secondary petrochemicals. Does
 NAFTA give Canadian or United States investors any access to that area that is
 not generally available to foreign investors?
   Miguel Jauregui: I think you have to differentiate. The only area where
 United States and Canadian investors have an advantage is in government
 procurement. Everything else is on a level playing field.
   Murphy: To the extent that procurement would involve electric power, then the
 same thing would apply for electric power.
   DeGrandis: I would agree.
   Murphy: Mr. Hernandez, you were also talking about the new mining law. You
 said that, consistent with the Constitution, the new mining law requires
 foreign concessions to be taken through Mexican companies.
   Hernandez: Yes.
   Murphy: Regarding Mexican companies, were you thinking only of Sociedades
 Anonimas and S.A. de C.V. as the main corporate structures for mining or could
 other forms of legal organization be used?
   Hernandez: In fact, in the field of mining, Sociedad de Responsibilidad
 Limitadas (S.R.L.s) are very popular.
   Murphy: For tax reasons, I could see that would really work for mining.
   Hernandez: Right. In addition, I have seen at least one set of bylaws of a
 S.R.L. which has different allocations of voting rights so that, in effect, a
 voting trust exists. There may be social parts split into new 100 peso parts.
  There may be various categories of social parts, with some limited voting
 rights and with other kinds of special rights.
   Murphy: This becomes very sophisticated.
   Hernandez: There is more flexibility because one does not have to register
 the articles of incorporation (institutos de incorporacion). This *89 is one
 of the major distinctions from United States companies. In the United States
 there are articles of incorporation; in Mexico, institutos de incorporacion.
 But in Mexico there is no judicial review. Formerly, it was necessary to
 register the institutos in the Public Registry of Property. One would also have
 to go to court, where the Attorney General's Office, more as a formality, would
 ensure compliance with the law, although it is a private law. Today, there is
 no judicial review; thus one has much more flexibility.
   Ignacio Gomez-Palacio: Cultural background must be taken into account
 when you think about Mexico. Mexican corporate law must be viewed through the
 eyes of Mexican culture, with the eyes of a Mexican counsel. One cannot just go
 in and "Japanize," "Americanize" or "Canadianize" Mexico. The mentality of
 Mexico is comprised of seventeen million Indians and other mixed cultures. Our
 concept of progress is like that of the United States; however, the United
 States mentality is closer, than Mexico, to that of Europe.
   Murphy: You said it very well-every country has to be true to its own
 cultural identity.
   Jauregui: About eighteen years ago, Mr. Hernandez and I drafted the charter
 and bylaws, for tax purposes, of the first Mexican S.R.L. It was a joint
 venture between Penoles and AMEX to extract copper. One of the features
 incorporated was the "bucket of oil" clause, whereby corporate investors could
 profit-share as partners in the S.R.L., either in kind with copper extracted or
 in cash if the copper was sold. This created the necessity to prove to United
 States tax authorities that this was a mining partnership.
   Murphy: This is really interesting. It is my understanding that, at least
 until now, one must get clearance from the Ministry of Foreign Relations to
 form a Mexican company that is going to have foreign participation. There has
 to be something like a Calvo clause [FN2] stating that foreigners will not
 appeal to their government for support in the event of claims against the
 Mexican government. Is this still required by the language from Article 27 of
 the Mexican Constitution?
   Hernandez: A permit from the Foreign Affairs Ministry is still required, but
 your application need only include: (1) the preferred names of the corporate
 entity and (2) whether to include an exclusion clause for foreigners or a Calvo
 clause. [FN3] It is really a formality.
   Murphy: But is it correct that you still have either an exclusion of foreign
 investors or a Calvo clause reference?
   Hernandez: Yes.
   Murphy: By agreement of the three countries under NAFTA, Mexican, United
 States and Canadian investors have been given the right to appeal to their
 sovereign government for help in the event of an expropriation *90 or in an
 arbitration, through the arbitration provisions of NAFTA. This seems to be
 inconsistent with the Calvo clause. In spite of that, I understand that the
 Calvo clause will still be required of United States and Canadian investors.
   Hernandez: Rafael Estrada can cast some light on this.
   Rafael Estrada: Under NAFTA, a commission representing the three governments
  is going to be established. That would be the proper forum for a United States
 or Canadian investor to go to for protection. Whether that is a violation of
 the Calvo clause or not is uncertain.
   Murphy: No, it is an argument. I can see the issue here.
   Estrada: The treaty commission is a multi-national entity.
   Jauregui: I would like to add a couple of comments. The Calvo clause
 has perhaps been tampered with. The decree that was drawn up in 1993, prior to
 the signing of NAFTA, states that the Calvo clause is specifically not
 applicable where there is an international treaty. As you know, Mexico treats
 NAFTA as a treaty, not as an agreement.
   Murphy: Was this a presidential decree?
   Jauregui: It was a presidential decree that was drafted by the Ministry of
 Foreign Relations dealing with the applicability of the Calvo clause as it
 relates to international treaties. The decree states that the Calvo clause is
 not applicable in a scenario involving an international treaty.
   Murphy: Essentially, if we argue that NAFTA gives Canadian and United St Mexico
 in order to promote a more free and competitive market.  The following
 discussion presents an outline of the most important recent legislative and
 administrative changes.

                             II. ENVIRONMENTAL LAWS
   In January 1988, the Salinas administration implemented new environmental
 legislation, [FN1] which exemplifies the most advanced and demanding
 environmental laws in the world.  Due to the high cost involved in the
 transformation of industrial plants to comply with such laws, it is very
 difficult for the Mexican government to enforce the new environmental law.
 Mexican authorities, however, are committed to gradual enforcement without
 severely affecting the Mexican economy and its industry. [FN2]

                              III. NEW AGRARIAN LAW
   The Agrarian Law was one of the most important legislative reforms enacted by
 a Mexican President during this century.  In January 1992, the Salinas
 administration proposed important amendments to Article 27 of the Mexican
 Constitution; [FN3]  and in February 1992, a new Agrarian Law [FN4] was enacted
 pursuant to those amendments.  Hopefully, the new Agrarian Law terminates the
 controversial agrarian reform (which endured for almost sixty years), which was
 based upon the free distribution of real property to communities of farmers.
   *66 At the same time, the new law recognizes the legal capacity and
 autonomy of existing agricultural communities in Mexico (the ejidos).
 Moreover, it authorizes the ejidos to engage in commercial activities and to
 form business associations, such as corporations, or contribute their
 individual real property to the business associations, in order to improve
 their productivity and economy.  This reform is of historic significance
 because, for the first time, the ejidos are allowed to operate as actual
 business entities without the drastic limitations imposed under the old law.
  The ejidos are now able to make their own decisions if such decisions are
 agreed upon by the majority of the members (the ejidatarios).  Similarly, the
 ejidatarios may now directly utilize their individual real property of the
 ejido or temporarily assign their property rights to other ejidatarios or third
 parties.  They may also transfer such rights to other ejidatarios or to other
 residents within the same ejido.
   The provisions of the new Agrarian Law and its related constitutional
 amendments could translate into a lengthy dissertation, thus, the following
 summary of the principal provisions is presented:
   1) Article 27 of the Mexican Constitution was amended to allow stock
 corporations to acquire real property in rural areas to the extent necessary to
 accomplish their purposes.
   2) Accordingly, Section 126 of the new Agrarian Law provides that business or
 civil corporations may own real property for agricultural purposes, livestock
 purposes, or to exploit timber resources to the extent authorized by law, if
 these corporations are engaged in the production, transformation, or
 commercializans of the law itself, or by other
 specific laws.
   The new Foreign Investment Law respects the activities reserved to the
 Mexican States by the Mexican Constitution, which are known as areas
 estrategicas (strategic areas), as listed in Article 5 of the new law.  These
 strategic areas include oil and other hydrocarbons, basic petrochemicals,
 electricity, generation of nuclear energy, radioactive minerals, satellite
 communications, telegraph service, radio-telegraph service, postal service,
 railroads, currency issuance, control, supervision, and vigilance of ports,
 airports, and heliports.  The new law, however, liberalizes the participation
 of foreign investment in certain activities connected to those areas, such as
 services relating to railroads, the provision of fuel or lubricants, the
 *70 construction of pipelines for the transportation of oil and gas, and the
 drilling of oil and gas wells, in which foreign investors may acquire up to
 forty-nine percent (49%) of the shares or other interests.
   Also, the new law reserves certain activities to Mexican individuals or
  Mexican companies that contain a foreigner exclusion clause in their bylaws.
 The list provided in Article 6 of the new law is more limited than the list
 provided in the repealed law.  The list in the new law includes:  domestic
 surface transportation of passengers, tourism and freight (but excludes
 messenger and package delivery service);  retail gasoline and L.P. gas
 distribution;  radio broadcasting and other radio and television service
 (excluding cable);  credit unions;  development banking;  and a supply of
 professional and technical services pursuant to express provisions of law.
   Additionally, Article 7 of the new Foreign Investment Law lists a group of
 other areas in which foreign investors is limited to maximums of 10%, 25%, 30%,
 or 49% of the shares, depending on the area of business.  Article 8 lists
 several areas in which foreign investors may freely participate to a maximum of
 49%, but can exceed 49% if a favorable resolution is granted by the Comision
 Nacional de Inversiones Extranjeras (Foreign Investment Commission).  These
 activities include services related to maritime vessels, administration of
 airports, education, credit reporting, insurance agents, cellular telephones,
 and port services.
   In addition, the new law establishes a requirement under Article 9 which
 provides that approval shall be required by the Comision Nacional de
 Inversiones Extranjeras for acquisitions in existing Mexican companies that
 have a total asset value over an amount to be established annually by the
 Comision.  Approval is required if, directly or indirectly, foreign
 participation would exceed 49%.  The amount is currently set at $85 million
 (new pesos) (approximately $27.3 million (U.S.)). [FN15]
   The new Foreign Investment Law also expands the concept of inversion neutra
 (neutral investment), [FN16] which is a non-participatory financial investment
 that is not characterized as foreign investment for the purposes of the
 limitations provided by the law.  The new law extends neutral investment to
 companies not necessarily quoted on the Bolsa Mexicana de Valores (Mexican
 Stock Exchange) and further permits investment in preferred stock, but the
 stock carries limited voting rights and are to be considered neutral.
 Investment in preferred stock is subject to prior authorization by SECOFI, but
 if the stock is quoted on the Mexican Stock Exchange by the Comision Nacional
 de Valores (National Securities Commission), then the Comision provides the
 authorization.
   Neutral investment in holding companies of financial groups, commercial
 banks, and brokerage houses is also possible through fideicomisos (trusts).  In
 these cases, SECOFI approves the investment once it obtains *71 the prior
 approval of the Secretaria de Hacienda y Credito Publico (Secretariat of
 Finance and Public Credit) and the Comision Nacional de Valores (National
 Securities Commission).
   Finally, the new Foreign Investment Law introduced a major change
 regarding ownership of real property.  Companies interested in foreign
 investment are now permitted to freely own real property in Mexico, provided
 that it is not within the Restricted Zone (within 100 kilometers of the U.S.-
 Mexico border or within 50 kilometers of the coasts).  If the real property is
 located within the Restricted Zone, companies interested in foreign investment
 may acquire the real property if it is to be used for non-residential
 activities, as long as the acquisition is registered with the Secretaria de
 Relaciones Exteriores (Secretariat of Foreign Affairs).  If the property is to
  be used for residential purposes, it may be acquired through a trust only.

                                VIII. CONCLUSION
   The discussion presented in this article highlights recent developments in
 the law and administrative regulations in Mexico.  In the future, the
 application of these laws and regulations will provide interesting and
 challenging opportunities for legal practitioners both in the United States and
 in Mexico.

 FNa. Partner, Sanchez, Mejorada, Velasco y Valencia, Mexico City;  Foreign
 Resident Attorney, Johnson & Wortley, Dallas, Texas;  Assistant Professor,
 Administrative Law, Escuela Libre de Derecho, Mexico City, 1985-Present;
 Author, La Propiedad Immobilaria en la Nueva Legislacion Urbanistica Mexicana.
 Licenciado en Derecho, Escuela Libre de Derecho;  M.C.J., University of Texas
 at Austin, 1987;  admitted to Mexican bar, 1985.

 FN1. Ley General del Equilibrio Ecologico y la Proteccion al Ambiente [General
 Law of Ecological Equilibrium and Environmental Protection], DIARIO OFICIAL DE
 LA FEDERACION [OFFICIAL GAZETTE OF THE FEDERATION--hereinafter D.O.], at 23-57
 (Jan. 28, 1988) (Mex.).

 FN2. See Lic. Leopoldo Burguete-Stanek, Regulations to Protect the Environment
 in Mexico.  U.S.-MEX.L.J. 73 (1994) (article in this publication).

 FN3. The amendments were published in the Diario Oficial.  See D.O., at 2-4
 (Jan. 6, 1992) (Mex.).

 FN4. Ley Agraria [Agrarian Law], D.O., at 2-35 (Feb. 26, 1992) (Mex.).

 FN5. Ley de Fomento y Proteccion a la Propiedad Industrial [Law for the
 Promotion and Protection of Industrial Property], D.O., at 4-31 (June 27,
 1991) (Mex.).

 FN6. Ley de Invenciones y Marcas [Law of Inventions and Trademarks], D.O., at
 13-20 (Feb. 10, 1976) (Mex.).

 FN7. Ley Sobre el Control y Registro de la Transferencia de Tecnolgia y el Uso
 y Explotacion de Patentes y Marcas [Law on the Control Registration of
 Technology Transfer and the Use and Exploitation of Patents and Trademarks],
 D.O., at 23-28 (Jan. 11, 1982) (Mex.).

 FN8. Ley Federal de Competencia Economica [Federal Economic Competition Law],
 D.O., at 6-15 (Dec. 24, 1992) (Mex.).

 FN9. Id. art. 9.

 FN10. Id. art. 10.

 FN11. Ley de Comercio Exterior [Law of Foreign Commerce], D.O., at 49-74 (July
 27, 1993) (Mex.).
 
FN12. Ley para Promover la Inversion Mexicana y Regular la Inversion
 Extranjera [Law to Promote Mexican Investment and Regulate Foreign Investment],
 D.O., at 5-9 (Mar. 9, 1973) (Mex.).

 FN13. See Reglamento de la Ley par Promover la Inversion Mexicana y Regular la
 Inversion Extranjera [Regulations of the Law to Promote Mexican Investment and
 Regulate Foreign Investment], D.O., at 11-37 (May 16, 1989) (Mex.).

 FN14. Ley de Inversion Extranjera [Foreign Investment Law], D.O., at 92-99
 (Dec. 27, 1993) (Mex.).

 FN15. Id. tit. 5, ch. II, art. 19.

 FN16. See Article Transitory Tenth of the Foreign Investment Law.  The
 approximate amount of 27.3 million dollars is based upon the Mexican interbank
 rate of exchange of December 28, 1993 ($3.1080 new pesos per U.S. dollar) as
 reported by the newspaper "El Economista."