Fluvio Ruiz Alarcón
Senate of the Republic
Expert Contributor

Hydrocarbons Law: The Other Reform

By Fluvio Ruiz Alarcón | Tue, 05/18/2021 - 09:10

At the end of the last ordinary session, the Congress of the Union amended the Thirteenth Transitory Article of the Hydrocarbons Law. This article subjected "the firsthand sales of Hydrocarbons, Petroleum or Petrochemicals to asymmetric regulation principles with the objective of limiting the dominant power of Petróleos Mexicanos (PEMEX), while a greater participation of economic agents is achieved to promote the efficient and competitive development of the markets."

According to the amendment approved by Congress, this article now establishes that since "a greater participation of economic agents that favor the efficient and competitive development of the markets has been achieved, the power granted to the Energy Regulatory Commission to subject to asymmetric regulation principles the firsthand sales of Hydrocarbons, Petroleum or Petrochemicals, as well as the commercialization carried out by persons controlled by Petróleos Mexicanos or its subsidiary companies, is no longer in effect."

It also defines that the "sale carried out by Petróleos Mexicanos, its subsidiary productive companies, or a legal entity, on behalf and order of the State, will be considered as commercialization in terms of the provisions of this Law and its Regulations, for which reason the principles of generality and non-undue discrimination set forth therein must be observed."

Regarding the means, it is striking that if the material conditions were already in place to dispense with the asymmetric regulation of PEMEX, this article would not have been simply and plainly repealed. The first paragraph of the article in question could have been part of the statement of reasons for the repeal and the second paragraph could have been one of the transitory paragraphs of the respective decree. Something like this alternative route was done in the last legislation during the discussion of the economic package for 2017, when the Fourteenth Transitory Article of the same Hydrocarbons Law was repealed, with the purpose of advancing the process of liberalization of fuel prices.

The argumentation to promote this reform was based on a series of data that are summarized in the statement contained in the approved opinion, that the "competitors of the state-owned productive company have strengthened and have the capacity to cover 30 percent of joint sales of gasoline and diesel, a condition imposed to reverse the asymmetric regulation."

From a political perspective, the approved reform can be placed in the context of the following points of the "Presidential Memorandum" of July 22, 2020:

  • Maintain the policy of not increasing, in real terms, the price of gasoline, diesel, gas and electricity.
  • Stop granting permits or concessions to individuals in the energy sector.
  • Support PEMEX and CFE in the distribution of energy, so that they do not lose market share or become financially weak.

The financial, industrial and operational difficulties of Pemex Transformación Industrial have led to an accelerated loss of market share for fuels imported or produced by the state-owned company.

In addition to containing this loss of market share suffered by PEMEX, the combination of the two reforms made to the Hydrocarbons Law last April, is also designed to give the federal government more room to maneuver in complying with its commitment not to increase, in real terms, fuel prices. In this sense, the restrictions on the granting of oil import and marketing permits to private operators, together with the elimination of asymmetric regulation of PEMEX, will strengthen the dominant position of the state-owned oil company in the fuel market, making it a more efficient instrument for moderating prices, in line with the government's policy in this area.

So far, the government has been able to fulfill its price commitment because, after the world oil market crisis of April 2020, demand has not fully recovered and international prices, which were down for several months, are just beginning to recover as the economy recovers too. In this context, the only direct mechanism available to the government to counteract the recovery of international reference prices is the "stimulus" to the IEPS.

However, this tax subsidy would be limited in the event of a significant increase. The Hydrocarbons Law does not foresee the possibility of returning to a scheme of maximum prices established by agreement of SENER or SHCP. Article 82 establishes that gasoline and diesel prices in retail outlets will be determined according to market conditions (international prices).

That mean that if the government wants to increase its capacity to comply with the presidential commitment regarding fuel prices, in addition to the reform made to the Transitory Thirteenth, the Hydrocarbons Law must be amended to provide for the possibility of the government setting maximum prices by agreement with SENER or CRE, without having to wait for the entire process established in article nine of the Federal Economic Competition Law, which grants such generic power to the Ministry of Economy, but only once COFECE has declared the non-existence of effective competition conditions.

Another possibility would be to add an article 43 to the Law of Coordinated Energy Material Regulatory Bodies, so that CRE could intervene when it has evidence that the evolution of domestic fuel prices deviates significantly from that of international reference prices, as has been done in the past, but through the Federal Revenue Law, which by its nature only applies to a given fiscal situation. The objective would also be to establish mechanisms to prevent a drop in international fuel prices from generating extraordinary income for distributors, without such reduction being adequately reflected in final consumer prices.

In any case, it is important to note that, according to the experience of recent years, in the face of a sharp increase in reference prices, the government has opted to sacrifice state revenues by subsidizing the IEPS on fuels, thus weakening public finances. In 2017, for example, due to the social reaction provoked by the so-called "gasolinazo," the fiscal subsidies granted by the government to fuel consumption, reached MX$ 70 billion (US$3.5 billion) which, in that year, was equivalent to the sum of the budgets of UNAM, IPN and the University of Veracruz.

It is worth asking how far should the government go in regulating consumer prices and what should be the optimal taxation to distribute the cost of the country's energy security equitably?

Photo by:   Fluvio Ruiz