Price and Rate Regulations for the Mexican Natural Gas Industry: Comments on Policy Decisions.

After the regulatory reform experienced in the Mexican gas sector, three areas with market power remained. Production is a legal monopoly of Pemex. Transportation and distribution are natural monopolies. Distributor’s gas sales to (mainly residential) customers are potentially monopolistic in case of lack of competition from marketers or substitute fuels. This paper presents the theoretical concepts and international lessons considered during the design of the price and rate regulations to limit these areas of market power. Benchmarking is used to control Pemex gas prices, while a sophisticated revenue cap methodology is employed to regulate transportation and distribution rates. MI of these mechanisms provide incentives for productive efficiency, take care of allocative efficiency, and minimize the cost of regulation. The paper also points out lessons from the policy design process and some of the potential pitfalls of regulations as well. [ABSTRACT FROM AUTHOR]