Reform of the Mexican Energy Sector Guillermo Zúñiga Martínez Commissioner Energy Regulatory Commission September, PDF Free Download

Reform of the Mexican Energy Sector Guillermo Zúñiga Martínez Commissioner Energy Regulatory Commission September, 2015 *The opinions and facts are sole responsibility of the speaker

During 2013 and 2014, Mexico enacted much needed market reforms Implementing Legislation introduces new elements in every aspect of the energy sector (9 new laws) 1. Hydrocarbons Act 2. Electricity Industry Act 3. Geothermal Energy Act 4. Productive Enterprises of the State Act 5. Energy Regulatory Commissions Act 6. HSE Agency Act 7. Mexican Petroleum Fund Act 8. Fiscal Decree 9. Budgetary Decree Modifications of 12 Laws: the rest of the legal system is harmonized with the reform (Examples) The reform of the Foreign Investment Act removes entry barriers to foreign companies There is a new tax regime oriented to incentivize oil and gas investments The reform of the Public Administration Act provides that the Regulatory Bodies will have Independent Status 2

which have already been enforced in all levels of legal instruments Energy Reform is the 1st Structural Reform to be approved in 70 years in this sector now that oil and gas energy markets have been liberalized, they are not longer isolated from competition and regulation Constitutional Reform (December, 2013) Articles 25, 27 & 28 Federal laws (August, 2014) 12 new laws, 9 ammended Executive regulations (October, 2014) Midstream and Downstream Hydrocarbons activities are liberalized (p.e. transportation, distribution, refining, processing, retail) Administrative regulations (ongoing)

and have imposed a new government structure to create a framework in line with market liberalization. Former Energy Institutional Framework Keys: Policy Maker Regulator Operator Independent Agency

and have imposed a new government structure to create a framework in line with market liberalization. Current Energy Institutional Framework Keys: Policy Maker Regulator Operator Financial Entity Independent Agency

and have imposed a new government structure to create a framework in line with market liberalization. Upstream INDEPENDENT REGULATORY AGENCIES HAVE BEEN CREATED Constitutional Powers and Authority Independence from central government Vested with financial independence Government board consists on 7 Commissioners appointed by the President and confirmed by the Senate. Staggered board with an appointment of 7 years for each Commissioner. Every act and decision is subject to the principle of maximun transparency. Subject to strict contact and transparency rules. Electricity + midstream and Downstream

CRE is vested with relevant regulatory powers in the hydrocarbons downstream industry ECONOMIC REGULATION Granting of permits for comercialization, transport, storage, distribution and supply; Open acces to transport and distribution pipelines and storage facilities; Tariff and service regulation; Performance regulation; Distribution zones bidding processes; Own usage determination; Transport and Storage system integration; Metering First hand sale Price (Only for Pemex). MARKET STRUCTURE Authorization and limits to vertical integration; Limits to crossed corporate participation; Limits to market concentration; Vertical divestment of activities; Rules of conduct between related companies; Opinion on planning and energy policy.

which is likely to gain more economic importance due to increasing demand of natural gas and other fuels Million cubic feet daily Source: Pemex, annual average 1997-2014.

which is likely to gain more economic importance due to increasing demand of natural gas and other fuels 900 800 764 Gasoline Consumption 789 (100%) Thousands of barrels per day 700 600 500 400 300 515 (100%) 388 (75%) Gasoline Production 472 Gasoline Imports 438 (56%) 350 (44%) 200 127 (25%) 100 54 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* * January-September, 2014 Source: Pemex, annual average 1997-2014. 12

so the economic environment must be adequate for the entry of new competitors and capacity development. Energy Ministry CRE CRE FUELS MARKETS Energy Regulatory Commission Issues permits for: Sales, transportation, storage, distribution and retail of oil, LP gas, other kind of fuels and petrochemicals. Establishes: Tariffs for regulated activities. Regulation to guarantee open access on non discriminatory conditions. Regulation regarding horizontal/vertical integration to avoid abuse of market dominance. Asymmetric regulation for Pemex to avoid abuse of its dominant position SENER Ministry of Energy Issues permits for: Oil refining Natural gas processing Oil and other hydrocarbons imports/exports

so the economic environment must be adequate for the entry of new competitors and capacity development. Gradual Liberalization of Gasoline and Diesel Markets Gasoline and diesel prices will be liberalized in 2018 (ceiling prices are in force since 2015) Open importation will enter into force on 2017. From 2016, gas stations will be able to carry any brand (Pemex or any other). As of September, 2015, CRE has granted the first over 1100 gas station permits. 2014 2015 2016 2017 2018 Controlled monthly price increases. Price ceilings for gasoline and diesel set according to inflation. Prices set by market conditions. Open imports 2017 onwards Final sales: CRE issues permits to Gas Stations of different brands not only Pemex Imports: exclusively by Pemex 2016 onwards 2014-2016 14

so the economic environment must be adequate for the entry of new competitors and capacity development. Gradual Liberalization of LP Gas Markets 2016: Regulation and permit granting transferred from SENER to CRE, 2016: SENER starts issuing import permits to private companies 2017: Prices determined by the market. 2014 2015 2016 2017 Controlled price increases. Open imports 2016 onwards Prices set by market conditions. LP Gas Regulation and permit regime: Carried out by the Energy Minister 2014-2015 LP Gas Regulation and permit regime: Carried out by CRE 2016 onwards 15

so the economic environment must be adequate for the entry of new competitors and capacity development. The New Natural Gas Model Natural Gas Imports/Production ( Contracts scheme) Transportation and System Operation: Functional Separation Storage, Distribution and Commercialization Independent Gas Operator of the National Natural Gas System Objectives Enhanced energy security. Promote Infrastructure development. Open access to producers and users. Provide for competitive gas pricing. New Rules As of february 19th, 2015, CRE authorized the cession of the national gas system operation from Pemex to Cenagas, so this ISO is now in charge of the operation of 8700 Kms of natural gas transportation pipelines. ISO in order to prevent monopolistic behavior in gas transportation and eliminate conflict of interest of Pemex in commercialization and transportation activities. 16

so the economic environment must be adequate for the entry of new competitors and capacity development. New Natural Gas Infrastructure Development Current Infrastructure 2018 LNG regasification terminals, 2015 Operating pipelines, 2015 Pipelines in construction Projected pipelines NG liquefaction/compression plant proposals NG regasification/decompression plant proposals New Opportunities NG maritime supply routes 6,449 Km of additional pipelines by 2018 (20,000 km total); 13 billion USD in investment.

The new market structure will be enforced through new regulations prepared by CRE Developing regulations Following the issuance of new federal laws, CRE must develop 154 new regulations by December 31st, 2015. 45 regulations related to hydrocarbons, fuels and petrochemicals; 109 related to the electricity industry; Such regulations will enforce at an administrative level- the mandates found in the implementing legislation.

The new market structure will be enforced through new regulations prepared by CRE Developing regulations Some of the subjects to be covered through new regulations related to hydrocarbons, fuels and petrochemicals: Transport and storage in regulated systems; Open Season procedures; Regulated tariffs and prices Requirements to be filed when applying for a permit Transactions registry First-hand sales / asymmetric regulation for Pemex (transitorily)

in a way that investments in new capacity will be aligned with the public interest and avoid market dominance situations. All projects (strategic or not) carried out by Pemex and CFE are to be awarded through bidding processes. CRE is in charge of the approval of the bidding rules for those projects, taking into acocunt several key aspects, such as: Effective Open-access obligations; Enough capacity to match present and potential demand (Open Season); Adecuate redundancy when needed to provide certainty; Supply security; Overall consistency with new legal framework and competitive conditions.

in a way that investments in new capacity will be aligned with the public interest and avoid market dominance situations. Main principles to be developed in new regulations: Open access Permit holders have to grant non-discriminatory open access to their systems; Open access will be granted as long as it is technically feasible. Economic feasibility will be determined by the applicant Through open access regulation, CRE will adress certain important market issues, such as: Limits to participation in the capital stock Maximum participation that economic agents can hold in the market; Percentage of reserve capacity in transport and storage facilities

in a way that investments in new capacity will be aligned with the public interest and avoid market dominance situations. Main principles to be developed in new regulations: Open Season Procedures Under the new legal framework, an Open Season is a procedure regulated by CRE, in order to provide a leveled plain-field and transparency in the allocation or acquisition of available capacity to any interested parties. An Open Season instructed by the CRE also provides valuable information of potential demand that can give support investment to increase capacity during the planning stage of a new project. When? When a new project is developed; In case of an expansion/extension of an existing system; When there is unused capacity that needs to be reallocated.

in a way that investments in new capacity will be aligned with the public interest and avoid market dominance situations. Main principles to be developed in new regulations: Controls on Vertical Integration In order to limit undertakings market power, CRE will issue regulations on vertical integration (with support from the antitrust authority); Regulations will seek the strict legal, functional, operational and accounting separation between regulated activities; Crossed corporate participation between regulated activities will be subject to CRE s approval, and only be accepted when: Clear legal and corporate mechanisms are provided Activities are carried out in independent systems Prior favorable opinion of the Federal Competition Commission

in a way that investments in new capacity will be aligned with the public interest and avoid market dominance situations. Main principles to be developed in new regulations: Transparency and maximum publicity Regulations must go through a public consultation process, held by COFEMER; Regulations mandate the publication of permits and authorizations though electronic means; CRE officers are subjetc to a Code of Conduct, which regulates: Rules for public hearings with regulated parties; Rules to participate in academic/difussion events, as well as in fórums and public events The prohibition to accept gifts, tickets for traveling and other valuable From regulated enterprises.

Conclusions The Energy Reform in Mexico has deeply changed the economic structure of energy markets and has complied with a very strict and demanding timetable. The Energy Reform has opened up practically every aspect of the hydrocarbons industry following the best international practices. The institutional framework of the Mexican government has changed in order to cope with the challenge of regulating the new markets. One of the main goals is to attract private investment in a context driven by market competition and liberalization, in which every participant will have a leveled plain field.

Thank you very much gzuniga@cre.gob.mx