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Mexico’s CRE Approves Unified Zone for Natural Gas Distribution

The Mexican energy regulator has authorized the first of several measures intended to update local regulations for natural gas distribution.

The Comision Reguladora de Energia (CRE) last week approved an accord that creates a unified zone for gas distribution, encompassing the entire Mexican territory.

The ruling is intended to streamline operating permit reviews and approvals for local distribution companies (LDC) and to remove barriers to expand their pipeline networks. The ruling also does away with the final vestiges of a geographical LDC concession model that predates the 2013-2014 Mexican energy reforms.

“This new model will allow distribution activities to be carried out throughout the country without any geographic limitations,” Commissioner Guillermo Zuniga said at a CRE meeting on Dec. 18. “This scheme evolves from today’s model for the natural gas distribution sector, one which was designed in a totally different context from the one brought about by the energy reforms.”

Prior to the reforms, Mexican regulators issuedLDC concessions that included exclusive rights to operate in a specific area of the country. These exclusivity periods were for up to 12 years, with the option to extend, and were granted in exchange for investment commitments by the operators.

The energy reforms eliminated the exclusivity rights, but they left in place the geographic concessions. As such, CRE has had to go through the motions of designating a distribution zone for each new permit, even though it no longer has any meaning under the current legal regime.

“Now that the exclusive geographic zones no longer exist, distributors will be able to offer services in the regions which they deem most beneficial to their business plans, providing end-users with a broader range of supply options,” the CRE said.

“Given that distributors will no longer have to request a delimited geographic zone to do business, this will simplify the paperwork for granting as well as modifying permits, which translates to great flexibility and lower administrative and financial costs to initiate operations.”

CRE officials have said the LDC market overhaul is to include two additional pieces of regulation: open access rules for pipeline networks would separate the sector’s distribution and marketing activities, and a more flexible methodology would be used to calculate distribution tariffs.

The unified distribution zone is to take effect 20 business days after the CRE accord is published in Mexico’s official gazette, something which had yet to occur as of Thursday (Dec. 28). Last week, CRE also approved an accord to carry out consultations with municipal and other state-level authorities to implement the unified zone.

The regulator released a draft of the accord at the end of October. The approved final version is mostly unchanged.

One of the more substantial modifications relates to CRE’s technical criteria for distribution systems, which it classifies as any pipeline network operating at a pressure of up to 21 kilograms/square centimeter. That technical specification remains in the final accord, but as a “complementary definition” to the terms set out in Mexico’s existing oil and gas laws.

The CRE ruling also left in place the exclusivity periods for six LDC permits issued prior to the energy reforms. Once those periods expire, the service areas are to be incorporated into the unified distribution zone, according to the new regulation.

To date, liquefied petroleum gas (LPG) remains the fuel of choice among Mexican households. The distribution market makes up a relatively small part of the Mexican natural gas industry.

Spain’s Gas Natural Fenosa and France’s Engie SA, among a handful of other firms, have set up shop as LDCs in Monterrey, Mexico City and a few other areas, but residential and small commercial users still account for only a fraction of national gas demand.

CRE expects the new LDC market model, once the two pending regulations are finalized, would allow distributors to compete with LPG and other fuels and expand their coverage into new regions of Mexico.

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