Energy policy & infrastructure

1. Energy policy & infrastructure Guillermo Zúñiga, National Commissioner Energy Regulatory Commission May, 2013

2. 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… “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.” "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‘." “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.” "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." Sources: Claudio Loser y HarinderKohli (coords.), Futuroparatodos: accionesinmediataspara México, p. 48-49; ForoEconómico Mundial, The global competitiveness report 2012-2013, p. 33; Ruchir Sharma, Breakout Nations, 2012, p. 73-83; DaronAcemoglu y James A. Robinson, Why nations fail: The origins of power, prosperity, and poverty, p. 39, 396; OCDE, México: Mejorespolíticaspara un desarrolloincluyente, p. 44

4. … situationthat has beenanalizedthroughlybyexperteconomists Mainpoliciesthatcouldfosterinvestment in México Surveycarriedoutbyaskingexperteconomist of theprivate sector Mobile average (sixmonths) Fiscal Reform EnergyReform Labor Reform Public Security Competition and regulation LawEnforcement Infrastructure Macroeconomicstability 4 Fuente: Banco de México, Encuestas sobre las expectativas de los especialistas en economía del sector privado 2003-2012

5. Increasing agreement that lack of competition distorts economic sectors EXAMPLES Concentration in selected sectors, 2010 Herfindahl-Hirschmann Index Regulatory restrictions Constitutional restraint Constitutional restraint Weak regulator Underuse of spectrum Closed to FDI, local barriers Slots, closed skies Local regulatory restraints Mexico Inequal access to switches, ratings USA Perfect competition Mono- poly Most of these sectors require large investments in infrastructure Source: CIDAC, ¿Qué tan abierta es en realidad la economía mexicana? (data); CFC analysis (restrictions)

6. 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.   

7. MarketStructure: description • Oil and Gas • Stateexclusivityover “oilindustry”: itcoversallupstreamactivities as well as downstreamactivitieslinkedtooil and gas. • Privateinvestmenthas beenallowedonlytostorage, transport, distribution and sales of natural gasand LPG. • Theprevailingmarketstructures are verticallyintegratedmonopolies.

8. MarketStructure: associatedproblems • Oil and Gas • Exclusivity of statethroughonlyoneoperatorleads torestrictions in terms of: • Investment • Executioncapacity • Access to new technologies • Development of activitieswhich are lessprofitablethanoil • TheserestrictionsmaximizerisktoState and Society • Theabsence of potentialcompetition: • Reduces Mexico’scompetitiveness • Generatesinefficiencies and waste of resources • Limitsthegrowth of state-ownedcompanyduetolack of incentives

9. MarketStructure: description • Electricity • Privateparticipationisonlyallowedforenergygeneration and capacity sales to Comisión Federal de Electricidad (CFE, thestate-ownedenergyutility), self-supply (includingcogeneration) and exports. Imports of energyforself-supply are alsoallowed. • CFE is in charge of publicserviceprovision and itownsthetransmission and distributionlines. • Thestructureisthat of vertically and horizontallyintegratedstate-ownedutilitywith a highdegree of marketpower.

10. MarketStructure: associatedproblems Electricity • Thisquasi-monopolystructuregeneratesthefollowingproblems: • Itlimitsmostbenefitstobigconsumers and generators, as well as to CFE as energybuyer, duetolack of incentives. • Itconstraints full and flexible competition in thoseactivitiesmostabletosustainit (generation and marketing), whichwouldbenefitusers and CFE itself. • Itlimitsthenecessaryinvestment in lessprofitableactivities (such as distribution) and transfersmonopolyinefficienciestotheuserswhodon’thavetheoption of self-supply. • In general, itdoesnotgeneratetheproper incentives toachieveefficiency in ourindustry.

11. Introduction of competition and regulation in some sectors has shown positive results Objectives Legal and Regulatory Actions (examples) Results Institutional effectiveness Independent regulatory agencies Separation between policy formulation (Ministry) and enforcement of regulation (CRE) Independent and technical decisions Prevention of regulatory capture • 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 Use of private financing and infrastructure for public interest goals Increase of Private Investment in Energy Infrastructure • Reduction of barriers to entry, allow FDI • Prohibit vertical integration in ordertoavoidmarketdominance. • Regulation of SOC and privatepartiestransactions • Open Access obligationtotakeadvantage of networkeconomies. Procompetitive regulation Enhanced competitiveness of the whole economy Better conditions for consumers

12. 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.    

13. Energy sector has been benefited from procompetitive interventions Total GenerationCapacity of theNational Electric System, 2012 Total capacity: 63 496.3 MW

14. Energy sector has been benefited from procompetitive interventions EstimatedPrivateInvestment in Electricitygeneration MMUSD

15. Energy sector has been benefited from procompetitive interventions PrivateInvestment in liberalizedmarkets of Natural Gas

16. 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.   

17. The “Pact for Mexico” intends to address much needed market structure reforms 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 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 CarryoutanEnergyReformthatfostersinvestment and development. Reformsneededtocreate a new competitiveframeworkfortheeconomicprocesses of refining, petrochemicals, and hydrocarbonstransportation 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). Energy Policy Institutional framework The institutional framework must give force and permanence to the energy policy Source: Pact for Mexico

18. Thank you very much gzuniga@cre.gob.mx