Paper: Regulatory system governing Mexico’s oil and gas industry needs enhancement

One of the goals of Mexico’s energy reform was to create a regulatory system that would foster competition in a very complex political environment. That system is in place but needs enhancement, according to a new paper from the Mexico Center at Rice University’s Baker Institute for Public Policy.

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“Coordination of the Regulators of the Hydrocarbon Sector: Is It Optimal for the Rule of Law?” was authored by Miriam Grunstein, chief energy counsel at Brilliant Energy Consulting, nonresident scholar at the Mexico Center and professor and researcher at the Universidad Autonoma de Nuevo Leon.

The regulatory framework, known as “coordinated regulatory bodies,” was established in Article 28 of the Mexican Constitution and is intended to oversee and regulate the hydrocarbons sector. Grunstein’s paper assesses whether the new coordinating structure helps to build an industry in a country with proper governance and rule of law.

“The institutional arrangement of the hydrocarbons reform in 2013 in Mexico cannot be understood without analyzing the design and the basic position of its industry regulators, in this case the National Hydrocarbons Commission and the Federal Energy Regulatory Commission,” Grunstein wrote.

“After analyzing the coordinated regulatory bodies, we observe the following: At this very early stage of the implementation of the reform, it cannot yet be stated with any accuracy the direction the industry will take under this new system,” she wrote. “Because it remains very much undefined in the legislation, the Council of Regulatory Agencies of the Energy Sector could have positive effects if it serves as a true channel of communication between the authorities involved in the hydrocarbons sector; it could likewise serve as a means to pressure regulators if inconvenient resolutions are issued. However, it must be emphasized that the law does not authorize this council to instruct the regulators. In any case, if there is any pressure on the regulators, it could happen with or without the actions of the council.”

Grunstein said that at this point in the implementation of the reform, the new organization of the regulatory bodies has an uncertain future that depends to a great extent on how coordination is used over the medium and long term. “It remains to be seen whether this council effectively meets the goals for which it was created and, even more importantly, reviews the types of issues that they address and sets precedents regarding their effects,” she wrote. “Now, at a time when new investment is yet to arrive and there are no data regarding the functioning of the council, it would be difficult and premature to venture any conclusions regarding its functionality.”

The paper was written for a Mexico Center research project examining the rule of law in Mexico and the challenges it poses to implementing the country’s energy reform. The project’s findings are compiled in a Spanish-language book and are being posted on the Baker Institute’s website in English.

Mexico’s energy sector had been under strict governmental management since 1938. This changed in 2013 and 2014 when Mexico amended its constitution and passed legislation overhauling its energy sector to allow private and foreign investments.

“For the time being, we can conclude that some steps have indeed turned out to be positive for the regulatory agencies,” Grunstein wrote. “The fact that they now have legal personality and can submit a budget independently puts them in a more advantageous position compared with the earlier model. However, at the time of writing this chapter, the substantial increases in budget and human capital that they require to comply with their greatly expanded powers and functions have not yet fully materialized.”