Energy policy & infrastructure

Guillermo Zúñiga, National CommissionerEnergy Regulatory Commission

May, 2013

Key messages

Mexico can achieve higher competitiveness by fostering public policies oriented to the introduction of competition in energy markets

The main pillar of in-depth energy reform lies in the improvement of market structures

Competition policy has a positive impact in how a country develops its infrastructure

Further sector-wide procompetitive efforts in energy must be carried out to develop infrastructure.

3

Mexico faces the burden of being perceived as an inefficient and crony economy…

"There are three 'economic Mexicos'. The first one is under the old control style of government. The second is the Mexico of vested interests, with power groups and firms that seek to capture rents from domestic consumers, mainly due to lack of domestic or international competition. The third one is a modern and progressive Mexico. This Mexico blossomed with NAFTA and still has great potential, but it is forced to pay rents to the other two 'Mexicos‘."

Sources: Claudio Loser y Harinder Kohli (coords.), Futuro para todos: acciones inmediatas para México, p. 48-49; Foro Económico Mundial, The global competitiveness report 2012-2013, p. 33; Ruchir Sharma, Breakout Nations, 2012, p. 73-83; Daron Acemoglu y James A. Robinson, Why nations fail: The origins of power, prosperity, and poverty, p. 39, 396; OCDE, México: Mejores políticas para un desarrollo incluyente, p. 44

"The lack of competition and excessive regulation have represented a burden to the Mexican economy for several years and has contributed to great income disparities. The product market regulation in Mexico is among the most restrictive and it obstaculizes competition. This, in consequence, reduces productivity and puts a brake in economic growth."

“Mexico still faces persistent structural challenges that will need to be addressed in order to continue improving the competitive edge of the economy. The lack of effective competition, especially in some key strategic sectors, also hinders the efficient allocation of resources that spills over into most sectors of the economy.”“Every nation has its big tycoons, but to a rare degree Mexico is owned by them. Cornered markets mean the oligopolists have little incentive to invest and innovate: domestic productivity growth has been virtually stagnant since the financial crisis of 1994. If competition increases and undermines the abnormally high profit margins of the large companies, that could lower consumer prices, raise overall productivity, and boost the country’s growth potential.”

“If you’re a Mexican entrepreneur, entry barriers will play a crucial role at every stage of your career. These barriers can be either insurmountable, keeping you out of lucrative areas, or your greatest friend, keeping your competitors at bay. The difference between the two scenarios is of course whom you know and whom you can influence – and yes, whom you can bribe.”

… situation that has been analized throughly by expert economists

4Fuente: Banco de México, Encuestas sobre las expectativas de los especialistas en economía del sector privado 2003-2012

Main policies that could foster investment in México Survey carried out by asking expert economist of the private sectorMobile average (six months)

4

Jun-04Oct-

04Feb

-05Jun-05

Oct-05

Feb-06

Jun-06Oct-

06Feb

-07Jun-07

Oct-07

Feb-08

Jun-08Oct-

08Feb

-09Jun-09

Oct-09

Feb-10

Jun-10Oct-

10Feb

-11Jun-11

Oct-11

Feb-12

Jun-120

5

10

15

20

25

Energy Reform Fiscal Reform

Labor Reform

Law Enforcement

Macroeconomic stability

Competition and regulationPublic Security

Infrastructure

Increasing agreement that lack of competition distorts economic sectors

Oil Production

Electricity Generation

Telecommunications

Media

Road transportation

Travel by Air

Construction

Banking

0 2000 4000 6000 8000 10000

10000

7445

6382

5994

4025

2233

1721

1684

1358

363

3043

1059

1858

1297

1147

1445

5

Concentration in selected sectors, 2010Herfindahl-Hirschmann Index

Source: CIDAC, ¿Qué tan abierta es en realidad la economía mexicana? (data); CFC analysis (restrictions)

Perfect competition

Mono-poly

MexicoUSA

Constitutional restraint

Constitutional restraint

Weak regulator

Underuse of spectrum

Closed to FDI, local barriers

Slots, closed skies

Local regulatory restraints

Inequal access to switches, ratings

Regulatory restrictions

EX

AM

PLE

S

Most of these sectors require large investments in infrastructure

Key messages

Mexico can achieve higher competitiveness by fostering public policies oriented to the introduction of competition in energy markets

The main pillar of in-depth energy reform lies in the improvement of energy market structures through competition.

Competition policy has a positive impact in how a country develops its infrastructure

Further sector-wide procompetitive efforts in energy must be carried out to develop infrastructure.

Market Structure: description• Oil and Gas

– State exclusivity over “oil industry”: it covers all upstream activities as well as downstream activities linked to oil and gas.

– Private investment has been allowed only to storage, transport, distribution and sales of natural gas and LPG.

– The prevailing market structures are vertically integrated monopolies.

Market Structure: associated problems

• Oil and Gas

– Exclusivity of state through only one operator leads to restrictions in terms of:

• Investment• Execution capacity• Access to new technologies• Development of activities which are less profitable than oil

– These restrictions maximize risk to State and Society– The absence of potential competition:

• Reduces Mexico’s competitiveness• Generates inefficiencies and waste of resources• Limits the growth of state-owned company due to lack of

incentives

Market Structure: description

• Electricity

– Private participation is only allowed for energy generation and capacity sales to Comisión Federal de Electricidad (CFE, the state-owned energy utility), self-supply (including cogeneration) and exports. Imports of energy for self-supply are also allowed.

– CFE is in charge of public service provision and it owns the transmission and distribution lines.

– The structure is that of vertically and horizontally integrated state-owned utility with a high degree of market power.

Market Structure: associated problems

Electricity • This quasi-monopoly structure generates the

following problems:– It limits most benefits to big consumers and

generators, as well as to CFE as energy buyer, due to lack of incentives.

– It constraints full and flexible competition in those activities most able to sustain it (generation and marketing), which would benefit users and CFE itself.

– It limits the necessary investment in less profitable activities (such as distribution) and transfers monopoly inefficiencies to the users who don’t have the option of self-supply.

– In general, it does not generate the proper incentives to achieve efficiency in our industry.

Institutional effectiveness

Independent regulatory agencies

Separation between policy formulation (Ministry) and enforcement of regulation (CRE)

Independent and technical decisions

Prevention of regulatory capture

ResultsObjectives Legal and Regulatory Actions (examples)

Introduction of competition and regulation in some sectors has shown positive results

Use of private financing and infrastructure

for public interest goals

Market–oriented energy project definition •e.g. Natural Gas Distribution Networks originating from private initiative instead of authority

Better risk allocation•e.g. Granting a fix duration of exclusivity in some energy projects in order to guarantee financial return

Using PPP in order to complement public investment•e.g. Private generators of electricity can sale electricity surplus to the State Owned Company

Procompetitive regulation

• Reduction of barriers to entry, allow FDI • Prohibit vertical integration in order to avoid

market dominance.• Regulation of SOC and private parties

transactions• Open Access obligation to take advantage of

network economies.

Increase of Private

Investment in Energy

Infrastructure

Enhanced competitiveness

of the whole economy

Better conditions for consumers

Key messagesMexico can achieve higher competitiveness by fostering public policies oriented to the introduction of competition in energy markets

The main pillar of in-depth energy reform lies in the improvement of energy market structures through competition.

Competition policy has a positive impact in how a country develops its energy infrastructure

Further sector-wide procompetitive efforts in energy must be carried out to develop infrastructure.

Total Generation Capacity of the National Electric System, 2012

Comisión Federal de Electricidad

40461.2263.7%

IndependentProduction

13,616 21.4%

Self Supply4,745 7.5%

Cogeneration2,908 4.6%

Exports1,330 2.1%

Own Usage435 0.7%

Small Production0.300.0%

Total capacity: 63

496.3 MW13

Energy sector has been benefited from procompetitive interventions

Estimated Private Investment in Electricity generation

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

3,184.5

4,180.96,177.3

12,041.213,823.7

15,063.517,285.5

19,738.020,639.922,605.3

24,620.2

28,214.1

31,179.132,735.4

36,217.937,073.7

37,214.7

14

MMUSD

Energy sector has been benefited from procompetitive interventions

Private Investment in liberalized markets of Natural Gas

15

Energy sector has been benefited from procompetitive interventions

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Accumulated Investment (MMUSD)

Transport Storage Distribution

Key messages

Mexico can achieve higher competitiveness by fostering public policies oriented to the introduction of competition in energy markets

The main pillar of in-depth energy reform lies in the improvement of energy market structures through competition.

Competition policy has a positive impact in how a country develops its energy infrastructure

Further sector-wide procompetitive efforts in energy must be carried out to develop infrastructure.

The “Pact for Mexico” intends to address much needed market structure reforms

17Source: Pact for Mexico

2.1 Economic competition will be intensified in all sectors of the economy, with special emphasis in strategic sectors such as telecommunications, transport,

financial services and energy

2.5 Carry out an Energy Reform that fosters investment and development.

Reforms needed to create a new competitive framework for the economic

processes of refining, petrochemicals, and hydrocarbons transportation

The “Pact for Mexico” intends to deepen the procompetitive effort in

energy markets …… through a Energy Policy that would lead to higher productivity and growth

Energy Policy

To foster a new structure of energy markets in Mexico, a New Energy Policy shall be instrumented (The recently approved National Energy Strategy follows this path).

Institutional framework

The institutional framework must give force and permanence to the energy policy

Thank you very much

gzuniga@cre.gob.mx