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.

As of Jan. 1, 2020, users of the national pipeline system Sistrangas will have to pay for the transportation service in its different modalities with a new rate list that will remain in effect until Dec. 31, 2020. The good news is that this system, established by the energy reform of 2013, remains in place. With the collection of this fee, system operator Cenagas will have the necessary resources to comply with article 62 of the Hydrocarbons Law and manage the pipeline system.

Currently, Sistrangas is made up of seven integral systems. Each of them has an open access transport permit granted by the CRE regulator. Rates are based on a revenue requirement that includes efficient operation and maintenance costs, depreciation of assets related to the service, a reasonable return on investment, and the payment of taxes. This revenue requirement, as well as the effective capacity for users, are reviewed at the conclusion of regulatory periods that last five years and that begin with the entry into operation of new gas pipelines. Under the principle of maintaining the value of the transport fee in real terms during a regulatory period, each open access transport system can annually update its rates due to the effects of inflation and variations in the peso-dollar exchange rate. These updates partly motivate the annual changes to Sistrangas rates.

The costs of Cenagas as an integrated system manager are classified into two large items. One — by far the most important — is the revenue requirement of each of the member systems, including that of Cenagas itself as the carrier that owns the SNG system of pipes, which was transferred in January 2016 from Pemex to Cenagas as part of vertical disintegration focused on achieving effective open access. The second item is related to the costs of the actual management of the system.

According to CRE resolution RES/2513/2018, for the year that is about to conclude, the amount budgeted in the calculation of the systemic tariff for the seven integral systems totals approximately $856 million. The SNG, belonging to Cenagas, corresponds to 39% of that value. The Tamaulipas Gas Pipeline system belonging to IEnova is 4.9% of the figure. The large branch that transports gas in the manufacturing and agro-industrial region of Guanajuato and Aguascalientes, Gasoducto del Bajío, belonging to ENGIE, barely reaches 1.3% of the total. The continuation of this branch that connects the city of Aguascalientes with Zacatecas, Gasoductos del Noreste, has a 0.3% share of the total.

The systems that make up the Ramones project influence more than half of Cenagas’ payment obligations to the integrated systems. For the Gas Natural northwest system, the projection of payments to be received by Cenagas is around 103 million dollars. TAG Pipelines Norte and TAG Pipelines Sur correspond to 27.2% and 15.2% of the aggregate budget, equivalent to $232 and $130 million, respectively. The absolute values of these requirements, as well as their respective total shares, will not change in the new rates significantly. Most of the income requirements are leveled in real terms and therefore do not change radically based on the remaining value of your assets.

Although this income requirement makes up the bulk of transport fees, the other, second item that is not without complications: the cost related to management activities. The administrative costs of the operation of Cenagas as the central operator of the integrated system amount to $19 million per year. If Cenagas obtains income greater than the costs faced in the year, the applicable rates for the following year should consider a discount to compensate for the difference to Sistrangas users.

Management costs include what is necessary to ensure continuity of services. This may include the purchase of gas for balancing, which can be liquified natural gas (LNG) or gas injected into interconnection pipelines or the use of additional services to those contracted with the integrating systems. For 2019, the budget for these management costs was $26 million. Until December 31, 2017, the rates applicable to Sistrangas considered a quarterly adjustment for the socialization of the cost of LNG for balancing the system — a mechanism known as the Balance Adjustment. This LNG was acquired from CFE through the Altamira and Manzanillo terminals. This week, Cenagas announced its intention to acquire piped gas to achieve continuity of services through tenders, with the aim of avoiding the cost of buying expensive LNG.

The Sistrangas is divided into tariff zones. Users pay the fee for each zone through which their natural gas travels. If gas is carried from the interconnection with NET Mexico to the Ramones Phase 1 project to the Bajío area, the stamps of zone 3, 4, 5 and 6 must be added to the national stamp cost. The value of the stamps of the Zones 1 to 8 are determined using a Mcf-Mile (volume-distance) cost allocation methodology. The requirement of the seven integrated systems is added in a roll-in logic and is divided into each zone based on the length of all existing pipelines in the zone multiplied by the capacity that can be offered on a firm basis. Zone 9 follows an incremental rate logic, as if the pipeline from Jaltipan to Salina Cruz was an isolated system with specific costs.

The current tariff zones have resulted from a rezoning process that occurred in October 2018 that sought stability in the tariff base of 6.3 Bcf/d assigned to multiple users of the Sistrangas and a reconfiguration of the existing Gulf area in the previous list to mitigate cross subsidies. Typically in the last quarter of each year, Cenagas proposes to the CRE annual adjustments to systemic tariffs. Last Monday, December 16, in a regular session of the governing body, the CRE approved resolution RES /1729/2019 that authorizes Cenagas to apply Sistrangas rates for the period from January 1 to 31, 2020. The new data tariffs will be known once the CRE publishes said resolution in its public registry by year-end. What can be expected from that list is an increase in the value of the stamps of the zones that will range between 3% and 4% based mainly on inflation observed in 2019 and an exchange rate that has not had dramatic devaluation. The national stamp that all users pay regardless of their journey is more uncertain. However, given the high incidence of interruptible services that should have given additional income to Cenagas and the government’s austerity policy that implies reduction of administrative costs and the acquisition of related services, this component may see a decrease.

The most relevant fact is that prices remain market-based, there has been no extraordinary intervention in the determination of the tariffs, and no suggestion of price caps on natural gas has been raised. Under an objective perspective, beyond the anxieties expressed by some critics of the current government’s energy policy, the tariff management of the main natural gas transport system in Mexico follows the course established by the structural energy reform of 2014.

The existence of this market is a starting point for further discussions over whether a single manager of the Mexican gas system should be created — one that extends to the marine pipeline and the Wahalajara system too. Natural gas rules have not changed and, if progress is made in integration, it should be because Cenagas has been successful as the guarantor of income requirements, mitigating commercial risks by managing a mass of users who pay system fees.