Regulatory Reform in Mexico's Natural Gas Industry : Liberalization in the Context of a Dominant Upstream Incumbent
The natural gas industry combines activities with natural monopoly characterisitics with those that are potentially competitive. Pipeline transport and distribution, which have natural monopoly characterisitcs, require regulation of price and non-p...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/01/891732/regulatory-reform-mexicos-natural-gas-industry-liberalization-context-dominant-upstream-incumbent http://hdl.handle.net/10986/19726 |
| Summary: | The natural gas industry combines
activities with natural monopoly characterisitics with those
that are potentially competitive. Pipeline transport and
distribution, which have natural monopoly characterisitcs,
require regulation of price and non-price behavior.
Production is a contestable activity, but in a few countries
(including Mexico) it remains a state monopoly. Gas
marketing is also contestable, but the presence of a
dominant, upstream, vertically integrated incumbent may pose
significant barriers to entry. Market architecture
decisions--such as horizontal structure, regional
development, and the degree of vertical integration--are
also crucial. The authors report that Mexico has undertaken
structural reform in the energy sector more slowly than many
other countries, but it has introduced changes to attract
private investment in natural gas transport and
distribution. These changes were a response to the rapid
growth in demand for natural gas (about 10 percent a year)
in Mexico, which was in turn a response to economic
development and the enforcement of environmental
regulations. The new regulatory framework provides
incentives for firms to invest and operate efficiently and
to bear much much of the risk associated with new projects.
It also protects captive consumers and improves general
economic welfare. The continued vertical integration of the
state-owned company Pemex and its statutory monopoly in
domestic production posed a challenge to regulators. Their
response in liberalizing trade, setting first-hand sales
prices, and regulating natural gas distribution makes the
Mexican case an interesting example of regulatory design. As
the first phase of investment mobilization and competition
for the market in Mexican distribution project concludes,
remaining challenges include consistently and transparently
enforcing regulations, coordinating tasks among government
agencies, and ensuring expansion of gas transport services
and domestic production. A key challenge in the near term
will be fostering competition in the market. In
strengthening the role of market forces, one issue is
Pemex's discretionary discounts on domestic gas and
access to transport services, made possible by its monopoly
in domestic production and marketing activities and its
overwhelming dominance in transport. The main instrument
available to the regulator is proscribing Pemex contract
pricing, but more durable and tractable instruments should
be considered. |
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