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Energy policy & infrastructure Guillermo Zúñiga, National Commissioner Energy Regulatory Commission May, 2013 Key messages Mexico can achieve higher competitiveness by fostering public policies oriented to the introduction of competition in energy markets The main pillar of in-depth energy reform lies in the improvement of market structures Competition policy has a positive impact in how a country develops its infrastructure Further sector-wide procompetitive efforts in energy must be carried out to develop infrastructure. Mexico faces the burden of being perceived as an inefficient and crony economy… "There are three 'economic Mexicos'. The first one is under the old control style of government. The second is the Mexico of vested interests, with power groups and firms that seek to capture rents from domestic consumers, mainly due to lack of domestic or international competition. The third one is a modern and progressive Mexico. This Mexico blossomed with NAFTA and still has great potential, but it is forced to pay rents to the other two 'Mexicos‘." “Mexico still faces persistent structural challenges that will need to be addressed in order to continue improving the competitive edge of the economy. The lack of effective competition, especially in some key strategic sectors, also hinders the efficient allocation of resources that spills over into most sectors of the economy.” “Every nation has its big tycoons, but to a rare degree Mexico is owned by them. Cornered markets mean the oligopolists have little incentive to invest and innovate: domestic productivity growth has been virtually stagnant since the financial crisis of 1994. If competition increases and undermines the abnormally high profit margins of the large companies, that could lower consumer prices, raise overall productivity, and boost the country’s growth potential.” “If you’re a Mexican entrepreneur, entry barriers will play a crucial role at every stage of your career. These barriers can be either insurmountable, keeping you out of lucrative areas, or your greatest friend, keeping your competitors at bay. The difference between the two scenarios is of course whom you know and whom you can influence – and yes, whom you can bribe.” "The lack of competition and excessive regulation have represented a burden to the Mexican economy for several years and has contributed to great income disparities. The product market regulation in Mexico is among the most restrictive and it obstaculizes competition. This, in consequence, reduces productivity and puts a brake in economic growth." Sources: Claudio Loser y Harinder Kohli (coords.), Futuro para todos: acciones inmediatas para México, p. 48-49; Foro Económico Mundial, The global competitiveness report 2012-2013, p. 33; 3 Ruchir Sharma, Breakout Nations, 2012, p. 73-83; Daron Acemoglu y James A. Robinson, Why nations fail: The origins of power, prosperity, and poverty, p. 39, 396; OCDE, México: Mejores políticas para un desarrollo incluyente, p. 44 … situation that has been analized throughly by expert economists Main policies that could foster investment in México Survey carried out by asking expert economist of the private sector Mobile average (six months) 25 Fiscal Reform 20 Energy Reform Labor Reform Public Security Competition and regulation 15 10 Law Enforcement Infrastructure Macroeconomic stability 5 Jun-12 Feb-12 Oct-11 Jun-11 Feb-11 Oct-10 Jun-10 Feb-10 Oct-09 Jun-09 Feb-09 Oct-08 Jun-08 Feb-08 Oct-07 Jun-07 Feb-07 Oct-06 Jun-06 Feb-06 Oct-05 Jun-05 Feb-05 Oct-04 Jun-04 0 Fuente: Banco de México, Encuestas sobre las expectativas de los especialistas en economía del sector privado 2003-2012 44 Increasing agreement that lack of competition distorts economic sectors Regulatory restrictions Concentration in selected sectors, 2010 Herfindahl-Hirschmann Index Constitutional restraint Oil Production Constitutional restraint Electricity Generation Underuse of spectrum Closed to FDI, local barriers Telecommunications Local regulatory restraints Construction 4025 1858 2233 1297 1721 1147 Mexico 1684 1445 Banking Perfect competition 5994 1059 Road transportation Travel by Air 6382 3043 Media Slots, closed skies Inequal access to switches, ratings 7445 363 EXAMPLES Weak regulator 10000 1358 0 2000 USA 4000 6000 8000 Most of these sectors require large investments in infrastructure Source: CIDAC, ¿Qué tan abierta es en realidad la economía mexicana? (data); CFC analysis (restrictions) 10000 Monopoly 5 Key messages Mexico can achieve higher competitiveness by fostering public policies oriented to the introduction of competition in energy markets The main pillar of in-depth energy reform lies in the improvement of energy market structures through competition. Competition policy has a positive impact in how a country develops its infrastructure Further sector-wide procompetitive efforts in energy must be carried out to develop infrastructure. Market Structure: description • Oil and Gas – State exclusivity over “oil industry”: it covers all upstream activities as well as downstream activities linked to oil and gas. – Private investment has been allowed only to storage, transport, distribution and sales of natural gas and LPG. – The prevailing market structures are vertically integrated monopolies. Market Structure: associated problems • Oil and Gas – Exclusivity of state through only one operator leads to restrictions in terms of: • • • • Investment Execution capacity Access to new technologies Development of activities which are less profitable than oil – These restrictions maximize risk to State and Society – The absence of potential competition: • Reduces Mexico’s competitiveness • Generates inefficiencies and waste of resources • Limits the growth of state-owned company due to lack of incentives Market Structure: description • Electricity – Private participation is only allowed for energy generation and capacity sales to Comisión Federal de Electricidad (CFE, the state-owned energy utility), self-supply (including cogeneration) and exports. Imports of energy for self-supply are also allowed. – CFE is in charge of public service provision and it owns the transmission and distribution lines. – The structure is that of vertically and horizontally integrated state-owned utility with a high degree of market power. Market Structure: associated problems Electricity • This quasi-monopoly structure generates the following problems: – It limits most benefits to big consumers and generators, as well as to CFE as energy buyer, due to lack of incentives. – It constraints full and flexible competition in those activities most able to sustain it (generation and marketing), which would benefit users and CFE itself. – It limits the necessary investment in less profitable activities (such as distribution) and transfers monopoly inefficiencies to the users who don’t have the option of self-supply. – In general, it does not generate the proper incentives to achieve efficiency in our industry. Introduction of competition and regulation in some sectors has shown positive results Objectives Legal and Regulatory Actions (examples) Independent regulatory agencies Institutional effectiveness Use of private financing and infrastructure for public interest goals Separation between policy formulation (Ministry) and enforcement of regulation (CRE) Market–oriented energy project definition • e.g. Natural Gas Distribution Networks originating from private initiative instead of authority Better risk allocation • e.g. Granting a fix duration of exclusivity in some energy projects in order to guarantee financial return Using PPP in order to complement public investment • e.g. Private generators of electricity can sale electricity surplus to the State Owned Company • Reduction of barriers to entry, allow FDI Results Independent and technical decisions Prevention of regulatory capture Increase of Private Investment in Energy Infrastructure • Prohibit vertical integration in order to avoid market dominance. Enhanced competitiveness of the whole economy • Open Access obligation to take advantage of network economies. Better conditions for consumers Procompetitive regulation • Regulation of SOC and private parties transactions Key messages Mexico can achieve higher competitiveness by fostering public policies oriented to the introduction of competition in energy markets The main pillar of in-depth energy reform lies in the improvement of energy market structures through competition. Competition policy has a positive impact in how a country develops its energy infrastructure Further sector-wide procompetitive efforts in energy must be carried out to develop infrastructure. Energy sector has been benefited from procompetitive interventions Total Generation Capacity of the National Electric System, 2012 Exports 1,330 2.1% Own Usage 435 0.7% Small Production 0.30 0.0% Cogeneration 2,908 4.6% Comisión Federal de Electricidad 40,461 63.7% Self Supply 4,745 7.5% Independent Production 13,616 21.4% Total capacity: 63 496.3 MW 13 Energy sector has been benefited from procompetitive interventions Estimated Private Investment in Electricity generation 37,214.7 37,073.7 36,217.9 $40,000 MMUSD $35,000 32,735.4 31,179.1 $30,000 28,214.1 24,620.2 $25,000 22,605.3 20,639.9 19,738.0 $20,000 17,285.5 15,063.5 13,823.7 12,041.2 $15,000 $10,000 6,177.3 4,180.9 $5,000 3,184.5 $2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 14 Energy sector has been benefited from procompetitive interventions Private Investment in liberalized markets of Natural Gas Accumulated Investment (MMUSD) 3,500 3,000 2,500 2,000 1,500 1,000 500 Transport Storage 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 - Distribution 15 Key messages Mexico can achieve higher competitiveness by fostering public policies oriented to the introduction of competition in energy markets The main pillar of in-depth energy reform lies in the improvement of energy market structures through competition. Competition policy has a positive impact in how a country develops its energy infrastructure Further sector-wide procompetitive efforts in energy must be carried out to develop infrastructure. The “Pact for Mexico” intends to address much needed market structure reforms The “Pact for Mexico” intends to deepen the procompetitive effort in energy markets … 2.1 Economic competition will be intensified in all sectors of the economy, with special emphasis in strategic sectors such as telecommunications, transport, financial services and energy 2.5 Carry out an Energy Reform that fosters investment and development. Reforms needed to create a new competitive framework for the economic processes of refining, petrochemicals, and hydrocarbons transportation … through a Energy Policy that would lead to higher productivity and growth Energy Policy Institutional framework To foster a new structure of energy markets in Mexico, a New Energy Policy shall be instrumented (The recently approved National Energy Strategy follows this path). The institutional framework must give force and permanence to the energy policy 17 Source: Pact for Mexico Thank you very much [email protected]