Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process. The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.

The events of this month have offered a window into the methods, intentions and contradictions of the energy policy of Mexico President Andrés Manuel López Obrador. 

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In the domestic political arena, an “open parliament” conducted in Congress has brought several experts to explain why they oppose the government initiative that changes the constitution to strengthen state power utility Comisión Federal de Electricidad (CFE). 

These expositions do not provoke a technical discussion on the part of the defenders of the government’s position. Rather, proponents of the legislation offer flagrant alterations of fundamental concepts. For example, they accuse the private power generation sector of being “a monopoly” which abuses the CFE. They argue that an alteration of electricity dispatch that eliminates the economic merit of efficiency and gives priority to the fuel oil plants of CFE will bring lower electricity rates for end users. 

The communication strategy of CFE in this open parliament appeals to the emotions of the public. Their central message is defending the legacy of nationalist social principles that allowed CFE to bring electricity to the homes of the most poor. Consequently, those who offer contrary arguments are lobbyists who betray the interests of the people, according to CFE 

CFE is seeking to foment distrust among citizens of private companies involved in the energy sector. The current legal framework, the government argues, is not adequate because it emanated from corrupt politicians who are now board members of the same companies that participate in the power sector. This argument leaves out any discussion of efficiency, energy security or the use of clean energy.  

On the foreign relations front, the president has begun to lose control of the agenda. In this area his popularity is insufficient to communicate his fallacious arguments effectively.  

On the one hand, the president has accused Spanish companies of colluding with the governments of Mexico and Spain in economic promiscuity. With specific accusations against Iberdrola SA as an agent that threatens the interests of CFE and that has benefitted from past corruption, López Obrador has suggested putting a “pause” on relations between Mexico and Spain. 

Spain’s foreign minister has said he will defend the interests of Spain in any circumstance and against any country. Spain accounts for 9.1% of foreign direct investment in Mexico, a distant second behind the 50.8% share of the United States.

Repeated attempts by Mexican officials to downplay the impact of López Obrador’s counter reforms on North American interests appear insufficient to quell the concerns of the Biden administration. In the framework of the United States-Mexico-Canada Agreement (USMCA), the argument of sovereignty cannot serve as a pretext to tip the scales in favor of state-owned companies and distort competition.

Changing rules in the power sector to burn more fuel oil directly contradicts the U.S. strategy of investing in renewable energy to mitigate climate change. U.S. Energy Secretary Jennifer Granholm, Ambassador to Mexico Ken Salazar and Special Presidential Envoy for Climate John Kerry have had recent meetings with the Mexican government. Kerry said it was to express the Biden administration’s “concerns with Mexico’s current proposal for the energy sector, and to collaborate on a vision for growing renewable energy and fighting the climate crisis.” 

In their visit this week, Kerry and Salazar expressed “the imperative to bolster open and competitive economies, consistent with USMCA.” However, Mexico’s current energy policy has little to do with opening the economy or promoting competition.

CRE Ruling Favors CFE

Meanwhile, the Comisión Reguladora de Energía (CRE) last Friday (Feb. 4) approved Resolution 163/2022. The measure modifies Resolution 968/2016, which was designed to promote competition in the Sistrangas natural gas pipeline network operated by Centro Nacional de Control del Gas Natural (Cenagas). 

The idea of Resolution 968 was to prevent the dominant state-owned Mexican companies from receiving preferential treatment over the interests of end users, and to promote the entrance of new natural gas shippers. 

In a balance of considerations and in accordance with the law, CRE ensured the continuity of strategic activities conducted by CFE and state oil company Petróleos Mexicanos (Pemex). In the case of CFE, the company enjoyed priority status in allocating capacity on the Sistrangas to transport the gas it needed for power generation. Pemex, meanwhile, also received an initial capacity allocation for its refining, petrochemical and oil production activities. 

This initial capacity was not to be used for marketing natural gas. The idea was to avoid risking the vital activities of the state-owned firms, but force them to compete in the marketing segment.

Under the energy policy framework of strengthening the state-owned firms and achieving energy sovereignty, the new CRE resolution allows CFE subsidiary CFEnergía to use its excess capacity for purposes other than power generation. 

The decision allows CFE, without going through a competitive process of capacity allocation and without any transactions in the secondary capacity market, the contractual flexibility to use its excess capacity on the Sistrangas for natural gas marketing. The capacity is available because CFE is now supplying its power plants with a separate pipeline network developed by the private sector over the last several years. As a result, private marketers will face a new formidable rival in meeting the needs of their industrial clients.

With its latest decision, CRE contradicts the principles, objectives and mechanisms laid out in the open access rules (known by their Spanish initials DACG) that the same regulator emitted previously. CFEnergía will be able to substantially increase its marketing activities in Mexico without competing in an open season process to obtain more capacity. Not even Pemex had enjoyed such advantages. Before the opening process of 2014, Pemex marketing activities were regulated, given the institutional monopoly that it controlled. 

The DACG open access rules are a counterweight to ensure a competitive environment in the use of gas pipelines, based on a “use it or lose it” principle. According to the Cenagas electronic bulletin board, CFE is only using about one-third of the capacity it received as a result of Resolution 968/2016. According to the current legal framework, CFE should release said capacity so that another agent with needs for space on the pipeline can achieve continuity in its services. 

The latest resolution is no small event in terms of defining the North American energy strategy. The consolidation of a state energy marketer displaces multiple companies interested in direct transactions with Mexican users. 

The border with Mexico is becoming an enormous and increasingly opaque citygate. The flow of gas from Texas will undoubtedly continue south of the Río Grande. But having one large purchaser tied to flimsy public finances, politicized business decisions, and with little interest in clean energy, will eventually create a problem of efficiency and sustainability for the North American energy balance. The region’s economic and geopolitical security require that the neighboring countries maintain open and competitive energy markets.

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). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.