Price and rate regulations for the Mexican natural gas industry: comments on policy decisions

Abstract

This paper describes the conomic relationale of the new price and rate regulations for the Mexican natural gas industry. These regulations are policy instruments of the regulatory reforms recently applied to this industry. The reforms maintain the state’s monopoly over production but allow private investment in transportation, storage and distribution of natural gas. The basic goal of the regulations is, of course, limiting market power and fairly allocating monopolistic rents between monopolistic firms and consumer. After regulatory reform of the natural gas sector in Mexico, three main áreas with market power remained: prodction (the state owned company Petróleos Mexicanos (PEMEX) legally mainteined its monopoly), transportation and distribution (activities with naturally monopolistic characteristics), and distributor’s gas sales to captive customers. The ways in which the price and rate regulations limit market power are varied. While benchmarking is used to control PEMEX gas prices, a sophisticated revenue cap methodology was designed to regulate transportation and distribution rates. However, al lof the mechanisms share the common feature of being incentive regulatiosn. The paper presents the theoretical concepts and international lessons that, from my point of view, were considered in Mexico during a policy making process immersed in rapidly changing events. Among other things, the intention here is to assits policy makers who confront similar challenges. The paper may also be of interest to economists of other profesional not familiar with theoretical or applied aspects of the economics of reglation.