Mexico – Another Amendment to the Hydrocarbons Law Would Eliminate Asymmetric Regulation for Pemex

Mayer Brown - Energy Forward

Another proposed reform to the Hydrocarbons Law has gone through a hasty legislative process. On April 29, 2021, the Mexican Senate approved a reform bill ending the powers of the Energy Regulatory Commission (“CRE”) to enforce asymmetric regulation in the hydrocarbon, petroleum products and petrochemical markets (the “draft amendment”).

Currently, the Hydrocarbons Law grants broad powers to CRE to regulate the terms and conditions of the activities of the hydrocarbons sector, but this general power is limited with respect to the regulation of prices and tariffs since these should be dictated by the market. Article 82 of the Hydrocarbons Law provides that, unless the Federal Economic Competition Commission (“COFECE”) rules that there are conditions of effective competition in the market, price regulations must consider the opportunity cost and the conditions of competitiveness in the international market.

Article 82 provides that sellers of goods that are not traded in the international market will set their prices according to CRE´s methodology, which has to consider efficient cost estimates and a reasonable rate of return on the investment. Alternatively, if there are effective conditions for competition, market conditions shall determine the price of the good in question. This should be how prices are fixed in the retail sale of liquefied petroleum gas, gasoline, and diesel, according to the aforementioned article.

However, these and other activities are subject to temporary “asymmetric” regulation. Under the current regulatory framework, CRE can regulate the retail prices of most goods in the hydrocarbon, petroleum product and petrochemical markets, which includes the activities of retail sale of liquefied petroleum gas, gasoline and diesel.

The thirteenth transitory article of the Hydrocarbons Law, which the draft amendment would repeal, suspended the full application of Article 82 and, instead, granted CRE the necessary powers to exercise the asymmetric regulation. The most important regulatory tool of this regulation is the Firsthand Sales (“Ventas de Primera Mano” or “VPM”) regime, which requires the first transfer of ownership of Pemex´s products to competitors to take place in strategic locations such as the exit points of processing plants, refineries, import injection points and international pipelines.

Currently, Pemex and the other state-owned companies must set their prices through the VPM regime. In these transactions, the price offered by Pemex must be the result of a regulated and transparent methodology, which must consider internationally accepted practices in the petrochemical and hydrocarbon markets. Under these regulations, the price calculated by Pemex is subject to CRE’s approval.

This temporary asymmetric regulation regime is applicable to all hydrocarbons, petroleum products and petrochemicals produced or imported by Pemex. In the last seven years, the CRE has issued specific guidelines for the VPM of each market. But from the perspective of the regulator, this is no longer necessary because the objectives of the regulation have been achieved.

In this respect, some directives on specific activities had already been repealed. For example, through Directive A/043/2019, the CRE repealed Directive A/057/2018, which established a maximum price cap for the VPM of Pemex Transformación Industrial products and its storage services. Additionally, CRE repealed Directive A /022/2019 on asymmetric regulation regarding the retail sale of natural gas.

The termination of the asymmetric regulation of certain activities, as indicated above, did not repeal the general provisions on matters such as resolution RES/156/2016, which establishes general principles to avoid potentially anti-competitive behaviors, such as the refusal to deal with (negativa de trato), and the prohibition of bundling sales of a product with the purchase of a different product. The draft amendment would eliminate the rest of the asymmetric regulation directives.

If the draft amendment is approved, CRE will not apply regulations on VPM anymore. Consequently, the remaining directives regarding asymmetric regulation, whose legal basis was the thirteenth transitory article, will be repealed.

Among the directives, the following stand out:

  • directive A/055/2017, which established price caps for sales made at alternative selling points when it is not technically feasible to enter into VPM contracts at exit points;
  • directive A/075/2017, by which CRE established the criteria regarding the publication of information on discounts and conventional prices of liquefied petroleum gas and petroleum products; and
  • directive RES/156/2016, which established asymmetric regulation provisions applicable to VPM in the retail sale of diesel and gasoline.

The repeal of the asymmetric regulation regime would be reasonable if competitive market conditions existed in the regulated sectors. But the information explaining the reasoning for the draft amendment which purports to prove that asymmetric regulation is no longer necessary uses the number of existing permit as its basis. The problem is that the existence of many permits does not automatically translate into effective conditions for market competition. In fact, the COFECE has reported that in 2021, 81 percent of the gasoline supply market belongs to Pemex.

It is worth noting that the principles of economic competition contained in the Federal Law on Economic Competition and the Hydrocarbons Law will remain in force, although, in practice, their enforcement could be limited by the lack of regulation that prevents anti-competitive conduct by Pemex.

The draft amendment has been approved by both legislative chambers, so it will come into effect the day after it is published.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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