Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column as part of a regular series on understanding this process, written by Eduardo Prud’homme.

Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas).

The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.

The Mexican senate looked over the list of names sent on Oct. 1 by President Andres Manuel López Obrador as his nominations for the new president of the Energy Regulatory Commission (CRE) and made its pick.

Two strong candidates were Alfonso López Alvarado and Leopoldo Vicente Melchi, engineers with management positions within the Energy Ministry (Sener) with previous professional experience in the hydrocarbons sector. An academic with an extensive record, Rosío Vargas also seemed a strong candidate to chair the CRE. However, among the list of her publications is a book co-authored with the current CFE CEO, Manuel Bartlett, an open opponent of structural change in the electricity sector. This was brought to light by the media and seems to have weighed in the decision.

In the end, Melchi was appointed president with 95 votes from 128 senators. Melchi has degrees in business management, environmental policy and water use. At Petroleos Mexicanos (Pemex), he implemented industrial safety measures and worked at the operational level in refining and petrochemical plants. He also has experience in auditing and monitoring environmental, occupational health and sustainable development issues.

Given his long experience at Pemex and his senior management position at Sener, many of the central issues in the energy sector should be familiar to Melchi. Surely in the days to come, his apparent lack of experience in electrical matters will be discussed. However, reproaches of this style tend to lose sight of the fact that collegiate bodies are composed of complementary experiences and visions, and expecting a single person to be an expert in each energy issue is foolish.

The more important question will revolve around Melchi's interpretation of the Hydrocarbons Law, which was created in 2014 to promote free markets. Beyond political affinities, CRE commissioners have specific mandates, regulatory instruments to be issued, tasks to be performed and public policy objectives that they must meet or enforce, and it is important that this job does not slow.

Since the departure of Guillermo García Alcocer in June, the CRE has been at loose ends. Its technical autonomy is being questioned given the political profile of the four newly appointed commissioners. Only one previously appointed commissioner remains.

However, in the natural gas industry a degree of normality persists: the permitting of transport, distribution and commercialization of gas continues to operate without interruptions, and other everyday affairs continue as before. And, as before, progress has not been made on pending regulatory changes.

Five years after the publication of the Hydrocarbons Law, the regulation on integrated systems has still not yet been issued and that is no small matter. Two-thirds of the length of the Mexican gas network and three-quarters of the gas consumed in the country are associated with Sistrangas, the national pipeline system.

According to Article 61 of the Hydrocarbons Law, the provision of services in this system is subject to the general conditions issued by the CRE. The services in the Sistrangas have been under the responsibility of Cenagas since January 2016. But as of today, there is no clarity on how an integrated system can be created, extended, or even reduced. Concepts such as systemic benefits, improvements in safety conditions, continuity and efficiency lack a timely definition and an applicable metric.

The new Cenagas management has called for a single capacity manager at the national level, and it wants pipelines anchored by the CFE to be integrated into the Sistrangas. This is a good opportunity for the missing regulation to be drafted in a timely manner. Almost four years of operation of Cenagas have passed so there is enough knowledge about how pipeline owners, shippers and Cenagas work in an integrated system. This will help in the drafting of secondary regulation.

Article 67 requires Cenagas not privilege the use of its transport infrastructure to the detriment of other licensees, and that the CRE will determine the terms to which Cenagas will be subject. In this area there are also pending tasks for the CRE.

Cenagas has managed the capacity of seven different transport licensees without trouble. But without some rules of functional separation determined by the CRE referred to in Article 63, how do we determine if equipment management is adequate to comply with the principles of continuity of service? How can anomalous behavior associated with a conflict of interest be identified and measured?

What exists today are simple transportation contracts that were signed by Pemex, not by Cenagas, and that conceived of a business model different from that of an integrated system. Clearly, there is a contractual scaffolding that is not in harmony with the principles of an integrated national system that the Hydrocarbons Law aimed to change.

Ideally, the CRE should convene all agents in both the gas and electricity sectors to define the principles and objectives of the new CRE. In that dialogue, the government, through Sener, must participate as another interlocutor. It is up to the CRE to agree on the drafting of operating rules that start from recognizing the operational complexity of maintaining the continuity of services, the risks inherent in large-scale investments, the aspiration to achieve economic efficiency and the dilemmas that arise from seeking energy security.

The list of technical and economic issues around integrated systems and their managers in which CRE has to define guidelines is long and intricate. This includes rate issues discussed in Article 62 of the Hydrocarbons Law, which holds managers responsible for the payment obligations of transport and storage systems.

Without a directive in this regard it is difficult to measure the financial risk that a manager must take on and therefore the investment decisions associated with the Sistrangas cannot be rigorously evaluated. In a vacuum of rules, cost socialization can also be abused, and managers can recover resources beyond what is reasonable and efficient. Put that way, a tender for a strategic project that Cenagas arranges will lead to endless questions for which there will be no easy or consistent answer.

If Cenagas wants to be the sole manager of the system, according to the Hydrocarbons Law, the CRE must give coherence to this initiative. If the European centralized operator model with vertical disintegration is opted for, it is important that regulation is in place for this option. The drafting of the rules of operation of the Sistrangas cannot occur without first making a rigorous analysis of the implications of any changes to the system.

This is where Melchi’s direction will be key. As head of the CRE, he has the opportunity to define the regulation of the emerging natural gas market. If he does a good job, he will put in place the right conditions conducive to investment, industry growth and the creation of a robust market. He can begin by resuming the pending tasks as laid out in the law.