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Designing natural gas distribution concessions in a megacity: tradeoffs beetween scale economies and information disclosure in Mexico City

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  • Rosellon, Juan
  • Halpern, Jonathan

Abstract

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 characteristicsof 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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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2538.

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Date of creation: 01 Jan 2004
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Handle: RePEc:wbk:wbrwps:2538

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Keywords: Business Environment; Economic Theory&Research; Markets and Market Access; Consumption; Environmental Economics&Policies; Consumption; Environmental Economics&Policies; Economic Theory&Research; Access to Markets; Markets and Market Access;

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  1. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
  2. Laffont, Jean-Jacques, 1992. "The New Economics of Regulation Ten Years After," IDEI Working Papers 22, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Klein, Michael, 1996. "Competition in network industries," Policy Research Working Paper Series 1591, The World Bank.
  4. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
  5. Juan Rosellón, 1998. "Price and Rate Regulations for the Mexican Natural Gas Industry: Comments on Policy Decisions," Economia Mexicana NUEVA EPOCA, , vol. 0(2), pages 267-308, July-Dece.
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