TOGY talks to
The right kind of regulationsMay 2, 2017
TOGY talks to Guillermo Ignacio García Alcocer, chairman of the Energy Regulatory Commission (CRE), about the process of opening various markets. The CRE regulates, promotes competition and ensures quality and supply in Mexico’s natural gas, LPG, refined oil products and electricity markets.
Strengthened by the energy reform legislation passed in 2013 and 2014, the commission is now one of three regulatory bodies governing hydrocarbons in Mexico. The CRE oversees energy industry activities such as permitting transportation, distribution, storage, compression, liquefaction, decompression, degasification, regasification, and marketing and sale of oil and natural gas. Promoting open and fair competition and providing a clear regulatory framework to foster a better investment environment are other CRE roles.
• On the reformed gas market: “Pemex was the only company offering gas in Mexico, so 100% of the market was in its hands. Through our asymmetric regulation, Pemex must give up 70% of its clients in the gas market to third parties through a gas release programme aimed at increasing competition. We are also working on a new regulation for distribution, because once we have the means of transport, we’ll need smaller facilities to get the gas into industries and households.”
• On market competition: “Each household can decide whether they want their water heated by electricity, natural gas, LPG or even with solar energy. Our four markets are in competition, which is shifting the way we view distribution and the industry overall. Consumers can change their energy source very easily, and we’ll see this convergence trend deepen in the following years.”
García also discussed the shifts in energy consumption and incorporating internationally established best practices in Mexico’s new regulatory framework. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Guillermo Ignacio García Alcocer below.
What is the role of the CRE and what has the institution been doing to facilitate the energy reform?
The CRE regulates four types of products: refined oil products, natural gas, LPG and electricity. We aim to promote a more competitive environment and new opportunities for investment in these markets.
The opening of the market had initially been set for 2018, but Congress approved a law stating that the CRE should set the schedule for the opening, and that it had to happen in 2017. This is happening a lot faster than we expected.
The CRE established a fuel price liberalisation strategy divided into five stages during 2017. For instance, we liberalised fuel prices in the northern border states of Baja California and Sonora on March 30.
Why did the CRE decide to open northern markets first?
We started in the markets with alternative means of supply or distribution, as well as import points where there could be more competition. We will gradually open the other regions throughout 2017, considering, among other variables, the composition of the supply of service stations per vehicle. For instance, in Baja California there is one marine terminal, one pipeline system, three storage systems, 10 distributors and 560 service stations. On the other hand, in Sonora there is one marine terminal, one pipeline system, six storage systems, 28 distributors and 523 service stations.
In June, we will open the rest of the border states. In the fall, prices will be liberalised in the central and southern regions of the country. The opening of markets will end with the Yucatán Peninsula at the end of 2017. Mexico will have a fully open market by 2018 through a smooth process.
What progress has been made in the auctions for Pemex’s excess storage and transportation capacity?
For the first time, we are running an open season auction, which allows companies to access Pemex’s infrastructure. It is a process run by Pemex, but we are the authority supervising it. Soon, the auction will reach the states of Baja California and Sonora. The auction has been rescheduled and the winners will be announced by May 2.
How has new legislation changed the way prices are set?
With the exception of Sonora and Baja California, maximum prices are currently set by the Secretariat of Finance and Public Credit, and we inform the public about the prices in different regions through our webpage. This is a big change. We used to have a national price, but it was bad for investment, so the prices have been adjusted to reflect opportunity costs in each region. We have 90 prices in the country. Now conditions are right for investment.
When prices are fully liberalised throughout the country by the end of 2017, the Secretariat of Finance and Public Credit will no longer determine prices and every gas station will be able to compete and set its own prices.
How is the private sector reacting to the opening of the fuel market?
Every day, or every other day, we hear from a company that really wants to enter Mexico. The most recent was Glencore, which has been very public about its alliance with the G500 group [the largest domestic consortium of service stations].
In Q1 2017, we have seen the first BP service station opened, which has a very interesting model in which petrol is taken from Pemex and an additive is introduced to produce a different product.
We now have eight brands positioning themselves to compete with client benefits. They are also willing to get a different kind of marketer, such as a wholesale marketer.
How will the private sector capitalise on existing infrastructure developed by Pemex and the Federal Electricity Commission (CFE)?
Right now, Pemex is the only wholesale marketer, but a lot of companies are trying to compete. So much is changing in terms of space offered to third parties.
The CFE, the public electricity utility, announced that its storage facilities were recently repurposed because it had changed its feedstock from fuel oil to natural gas. Because its fuel oil facilities were no longer in use, it will offer these to third parties, both as partners and as customers. In consequence, this will allow for Mexico’s storage capacity to almost double towards 2030.
The mix is like a puzzle, and piece by piece, the new market will be built.
How has the natural gas market evolved in the past 12 months?
We are running the open season with the system operator, Cenagas [National Centre for Natural Gas Control], and there has been a lot of interest in gas transportation capacity. There was an offering of 2 bcf [56.6 mcm] and a demand for 3 bcf [85 mcm]. The capacity will exist because the pipelines are already being built.
In 2012, the situation was critical, and operators were telling users that they needed to reduce gas consumption. There was a big programme for infrastructure growth designed by the Secretariat of Energy, and most of those pipelines are in the final stages of construction or are already operational.
On February 17, 2017, Cenagas conducted the first annual auction of import pipeline capacity. A total capacity of 718 mcf [20.3 mcm] per day was offered, of which, 29.2%, or 210 mcf [5.95 mcm] per day, was allocated. In this auction, BP Energía won the right to transport 5.38 mcm [190 mcf] of gas per day, becoming the third-largest marketer for natural gas in Mexico, after Pemex and the CFE.
Pemex was the only company offering gas in Mexico, so 100% of the market was in its hands. Through our asymmetric regulation, Pemex must give up 70% of its clients in the gas market to third parties through a gas release programme aimed at increasing competition.
We are also working on a new regulation for distribution, because once we have the means of transport, we’ll need smaller facilities to get the gas into industries and households.
How is the commission’s approach to regulation evolving?
The commission is transitioning from regulating monopolies to regulating open markets. This entails a broader mandate and requires a new regulatory approach in a fast-changing industry. For example, in terms of energy distribution and supply, each household can decide whether they want their water heated by electricity, natural gas, LPG or even with solar energy.
Our four markets are in competition, which is shifting the way we view distribution and the industry overall. Consumers can change their energy source very easily, and we’ll see this convergence trend deepen in the following years.
How is the opening of the LPG market progressing?
Congress decided to open the LPG market in January 2017. Right now, there is a regulation stating that we have to review what distributors are doing, and that they have to report their prices to us on a daily basis.
We are doing what many other countries do: signing MoUs with the consumer protection agency, the competition commission and with the SAT [Tax Administration Service]. We share the information we receive from distributors with them, and we all run tests on what prices look like and how they are behaving in this market. While we’re shifting from a very controlled system to an open market, there is a set of penalties for actors who are not behaving well.
What steps is the CRE taking to establish competition?
For instance, we are dividing permits. Until 2016, you were required to have a large area for your distribution plant and the garage for the trucks. Now, you can get a permit to have them separate or together. This way, a plant can offer open access to any permitted trucks that come. We think this measure will promote new arrivals.
We’re also doing a lot of work with the social development ministry, which has 22,000 distribution points throughout the country. We are doing test runs: Distributors are exchanging used LPG tanks for new ones.
We have many measures taking place. We are also going to reveal the prices that each distributor offers to households, so that everyone can see who offers what products at what prices in their city. We started doing this in April 2017, and we think it will help companies enter the market and distribute at an efficient scale. In Mexico City, we have more than 33 competitors that are just starting to understand the new market environment.
How is the electricity market changing as a result of the energy reform?
In the past, we didn’t have a proper market. The rules that changed everything were written in 2015. This breakthrough empowered companies to get electricity from whomever they wanted.
They can sign a bilateral contract, and the market will dispatch only the most efficient utilities or generation facilities in the country. If the generator is not dispatched and the client needs to get their electricity from the market, the generator must now pay for the difference in price between what was agreed upon in the contract and what was paid. That’s how it works in Pennsylvania, Texas, California and in European countries.
The way we’re setting up the market is very aligned with best practices. We signed an MoU with the North American Electric Reliability Corporation, NERC, which is overseen by the US Federal Energy Regulatory Commission. The regulation we approved in 2016 also incorporated 10 of NERC’s best practices.
How have the power auctions helped to activate new projects?
There have been two power generation auctions, adding 5 GW to Mexico’s current generation base, with projects in 15 out of the 32 states. The auctions were a way to allocate these projects competitively, while taking into account wind and solar resources. This marks a big change in how electricity is generated and developed in Mexico.
Another big breakthrough are regulations that were published in February 2017 for distributed generation. They set very clear rules for households and small industries that want to use solar roofs for their needs and to connect with the system. The net value of the electricity can be sold to the market, and if there is surplus energy after a year, that energy will be bought by the market.
Small households [that generate under 500 kW] won’t require a generation permit. They just need to make a request to the company that provides the solar roof, and the operator has to provide an interconnection within 18 days.
We now have 20,000 solar roofs in Mexico, and according to the industry, and we estimate that we can have up to 200,000 in 2021 and 500,000 by 2024. We have more than 85 companies right now in this market and we think that number will grow. In California, there is more employment derived from solar roofing than hydrocarbons. It is very labour-intensive, and there is no robotic machinery involved, so we view it as a very good opportunity. For example, in Sonora, which is a desert area, utilising 1% of the territory as a solar park could generate all the electricity demanded by Hermosillo, the state capital. The potential is huge.
Of course, there is intermittence, but a lot of technologies are becoming cheaper. In the near future, we will have a lot of storage and interconnections for renewable energy.
Our job is to understand the barriers of the past and to set new rules that are easy to understand and apply. The key issue is pace. We’re arriving at this point late, but we can build on the experiences of others, which has enabled us to thrive during this roller-coaster year.
What is the key to institutional management?
The key is to correspond with international best practices, then to evaluate results. The regulations we’re setting need to be assessed in a few years and adjusted so that they work better.
Previously, the system was set up so that the population had fuel and electricity no matter the cost. The first priority was to supply it and the second was to minimise cost. This is how monopolies work, but we need to shift our thinking. We need to understand how much it costs to get the petrol, electricity, natural gas and LPG to households, so that inhabitants stop using energy irrationally and because that is the way investment will work sustainably into the future.
What are the CRE’s main objectives for the next three to five years?
The CRE’s objectives are to have successful markets in our four areas of focus, with a large group of participants. We currently have more than 85 new companies in Mexico, with more than 30 in the upstream sector and more than 40 in the power sector. There is a lot of movement and we expect to respond to this changing environment with swift and effective regulation.
For more information on Mexico’s Energy Regulatory Commission, such as its approach to opening midstream and downstream markets, see our business intelligence platform, TOGYiN.
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