Designing Natural Gas Distribution Concessions in a Megacity: Tradeoffs between Scale Economies and Information Disclosure in Mexico City
2004
Rosellon, Juan | Halpern, Jonathan
In 1995 the Mexican government initiated structural reform of the natural gas sector-reform that permitted private investment in transportation, storage, distribution, trade and marketing while maintaining a State monopoly in production. It prepared a detailed regulatory framework to implement the sector liberalization, including an element to develop distribution systems through concessions in specific geographic areas. The concessions are bid and the winner is permitted physical exclusivity for 12 years in gas distribution but not in gas marketing. In each concession award process a distribution geographical area is defined and minimum consumer coverage targets are established. Bidders present technical and financial proposals, including a market demand study. The winning proposal must be technically sound and offer the lowest average revenue for the first five-year period. Densely populated geographic areas pose a problem for exclusivity in distribution. If the concession is granted to a single firm, scale economies might be very attractive, but regulating a mega-monopoly would be difficult. If the distribution area is subdivided, economies of scale decrease while information for comparative regulation increases. These and such elements as technical characteristics of the geographic area and potential for competition in related services were considered when designing natural gas distribution franchises for the Mexico City Metropolitan Area.
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