Senate Committees Introduce Legislation to Establish Ceiling on Domestic Prices for Natural Gas

SourceMex Economic News & Analysis on Mexico, December 20, 2000 | Go to article overview
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Senate Committees Introduce Legislation to Establish Ceiling on Domestic Prices for Natural Gas


The escalating cost of natural gas has prompted two Senate committees to seek legislation to set a ceiling on domestic prices. In a resolution introduced in mid-December, the Senate committees dealing with finance (Comision de Hacienda) and energy (Comision de Energeticos) approved legislation to set a ceiling of US$3.90 per million BTUs (British Thermal Units) on domestic prices.

Natural-gas prices have been increasing steadily in recent weeks and are soon expected to reach US$8.00 per million BTUs on international markets, the Secretaria de Energia (SE) said recently.

The legislation to establish a national ceiling for domestic gas prices was introduced by committee chairs Sens. Fauzi Hamdan and Juan Jose Rodriguez Prats of the governing center-right Partido Accion Nacional (PAN), but it also received strong endorsements from the opposition Partido Revolucionario Institucional (PRI) and Partido de la Revolucion Democratica (PRD).

Bill would remove link between Mexican prices and US market

The proposal would establish a "Mexico-only" price for natural gas, rather than linking domestic prices with those in the US market.

Alejandro Elizondo, president of the Camara Nacional de la Industria y el Acero (Canacero), has strongly endorsed the proposal, saying natural-gas prices in Mexico are so high because they are tied to the prices quoted in the South Texas market.

Some analysts agree that linking the Mexican natural-gas market to prices quoted for South Texas is unfair to the Mexican industry.

"All kinds of distortions in the US market are thrust upon Mexico, despite the lack of real integration," said David Shields, an energy expert whose column is published in the daily newspaper The News and the weekly news magazine Siempre.

But Shields said the Mexico-only price option would imply a major subsidy to several dozen major users of natural gas in Mexico.

"Subsidizing inputs for Mexican companies would bring up all kinds of contentious, protectionist trade issues under the North American Free Trade Agreement (NAFTA) and might send a bad signal regarding Mexico's intentions on free trade," Shields said.

By offering a subsidy, the government would also be admitting that the Mexican and US natural-gas markets are not really integrated. "There are no privately owned cross-border pipelines, and there is no trading of gas by private companies between the two countries," said Shields.

Energy Secretary Ernesto Martens is expected to review the initiative, with input also expected from Dionisio Perez Jacome, director of the Comision Reguladora de Energia (CRE). But Martens has already ruled out any direct subsidy to the Mexican business sector. "The country has other needs, so it is impossible to offer businesses this type of subsidy," Martens told reporters in mid-December.

Some signs suggest that the administration of President Vicente Fox is considering at least some form of the Mexico- only scheme. On Dec. 19, the SE announced an agreement with business organizations in Nuevo Leon state to establish a ceiling for gas prices in that state at US$3.50 to US$4.00 per million BTUs for a period of four months.

Meanwhile, Martens said the Fox administration is expected to announce a scheme by the end of the year to help private companies cope with the escalating price of natural gas.

High gas costs force some companies to reduce operations

Many companies involved in the manufacture of steel, glass, processed food, and other products have already shut down some or all of their operations this year because of the high cost of natural gas (see SourceMex, 2000-09-27).

High energy costs are also affecting other industries like construction that are having to pay higher prices for cement, ceramic tile, and other materials because these have become more costly to manufacture.

In early November, the organization that represents the manufacturing industry (Camara Nacional de la Industria de Transformacion, CANACINTRA) warned of an "imminent collapse" of the Mexican economy because of high prices for natural gas and other fuels.

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