• Freer markets,
    better rules
  • Guillermo Zúñiga
    Commissioner at the Energy Regulatory Commission
  • The title of this article paraphrases the name of the book “Freer Markets, More Rules”, wrote by Steven K. Vogel to analyze regulatory reforms in industrialized economies. One of the most powerful insights that Vogel´s work has to offer is the fact that, in a counterintuitive approach, economic liberalization of regulated sectors carried out by different countries did not entail a “retreat” of the State; since the government and the markets are not linked by a zero-sum relationship, he argues that a modern regulatory reform is a reorganization of the governmental tools used to better align the development of private activities with public interests.

    The dominant trend of the use of economic regulation policies to substitute old approaches in governmental intervention in the markets is one of the major economic shifts worldwide. Moreover, when it comes to analyzing the energy industry, in recent years we have witnessed the most important developments in the history of this sector: legions of new market structures and creative business strategies, from non-conventional hydrocarbons to offshore wind farms, have challenged the traditional business-government relationship.

    In this context, in order to reap the benefits of the new realities, Mexico chose to take an important part of this new dynamic in the global energy industry. For decades, the status quo of Mexico´s energy industry had proven to be resilient against any reforming attempts. However, the 2013 Energy Reform represents a deep commitment to update the underlying structures of our energy markets in order to reach our full potential for growth. The underperforming monopolistic arrangement of our hydrocarbons and electricity industries, reserved to Petróleos Mexicanos (PEMEX) and Federal Electricity Commission (CFE) respectively, was completely replaced by market liberalization, based on the following principles:

    Elimination of entry barriers to private parties.
    Corporate overhaul of PEMEX and CFE, now stripped from any government authority in order to assure a leveled plain field with new entrants.
    A new governmental architecture.

    When it comes to analyzing the energy industry, in recent years we have witnessed the most important developments in the history of this sector: legions of new market structures and creative business strategies

  • However, before just laying all hopes at the door of the removal of entry barriers, the Reform followed the best international experiences, which showed that the market complexities that remained implicit in energy industries - presence of dominant enterprises, asymmetric information, agency problems, high concentration, natural monopolies, etc.- demanded the creation of agencies with the necessary technical capabilities to deal with the core of those complexities in a balancing act: providing conditions to attract and reward investments, while taking care of the efficient performance of the new markets as a whole, including looking after the interest of the users and other stake holders.

    In the specific cases of hydrocarbons midstream activities (transportation, storage, distribution, trading and end-users sales of petroleum, gas and fuels) and electricity activities (generation, transmission, distribution, trading and supply), the Reform created the Energy Regulatory Commission (CRE) as the agency in charge of regulating those markets, all strategic in terms of economic growth as well as social development. In terms of authority, the CRE was given broad economic tools, such as capacity to issue terms and conditions to which its regulated activities must be subject to, including open access obligations; determination of the applicable considerations, prices and tariffs for all regulated activities and issuance of technical regulation in quality and metering matters, as well as powers to shape market structures, including regulation and oversight of vertical and horizontal integration between regulated companies.
    Additionally, the CRE was vested with budgetary autonomy and an institutional design that promotes technical oriented priorities and isolation from political cycles, including a strict contacts regulation with permit holders that promotes transparency and avoids discrimination. All the features of the CRE represent the pinnacle of a government arrangement wired to create the best conditions to foster encourage investments and benefits to the economy in terms of the balancing act above referred.
    Finally, even though relying on sound regulatory agencies to orientate industries can help unleash the productive power of markets, addressing the vast investment opportunities in Mexico requires the involvement of all economic stakeholders, often having to bridge ideological stands and overcome pressures from vested interests. Dissemination of information plays a key role in this arena, by creating trust and educating about the benefits of this new reliance on competition in open energy markets, not only policymakers, but also citizens and businessmen alike.