Teaching ResourcesElectricity Reform in Mexico: Challenges for an Integrated North American Market Electricity Reform in Mexico: Challenges for an Integrated North American Market
Case Synopsis
This case offers a high-level overview of the regulatory issues involved in integrating Mexico's electricity supply system with that of North America and suggests a number of pressing issues for Mexican authorities and NAFTA partners to resolve.
During the 1990s, Mexico along with other OECD and Latin American countries re-regulated their electricity supply industries (ESI). The aim was to end the capital misallocation that the previous system of state monopoly regulation often caused and to improve the efficiency of electricity pricing. Since then, the International Energy Agency (IEA) suggests that there has been convergence on a general format: the separation of generation and transmission capacities from the vertical coordination provided by state-owned monopolies, and the opening up of national and international energy pools or grids to competitive supply and transmission to final sale to the customer. This, however, raises a number of regulatory issues around competitive market design and price.
This case examines Mexico's progress in liberalizing its ESI market and integrating it with that of the rest of North America. The discussion in particular relates the bifurcated Mexican regulatory regime's lack of sector dynamism and need for massive investment to the challenges of participation in the continental market.
Dr. Ibarra closes by suggesting that the NAFTA SPP process may provide some of the incentive and support needed to successfully accomplish Mexican ESI liberalization.
Educational Objectives
This case provides students with a thorough examination of the regulatory issues facing Mexico in moving towards ESI liberalization. In doing so, it encourages students to think critically using game modelling and analysis of incentives, among other tools, to recognize and address the issues faced. More broadly, this case can be used to explore the impact of the SPP on technical regulatory problems and build on a foundational knowledge of regulatory economics.
Teaching Plan
While it is in no way mathematically demanding, this case is compactly written and would probably need some unpacking for use in Canada or the US. Happily, there is a wealth of useful background material readily available online, some of it indicated in the case bibliography. For example, the US Energy Information Network publishes a useful backgrounder on electricity in Mexico and the IEA publishes a very accessible guide to Energy liberalization in the OECD that is also a useful starting point for the discussion in this case: Market Reform: Competition in Electricity Markets. Beyond that, it may be useful to consult David M. Newbury 2001, Privatization, Restructuring and Regulation of Network Industries: The Walras Pareto Lectures, MIT Press, esp. chapter 6 "Restructuring the Electricity Supply Industry".
The case also raises a technical issue known as "loop flow" or "parallel flow" in its discussion of pricing issues. Loop flow occurs when electricity sent from a supply source to a market demand flows around its anticipated route creating unanticipated surges on the route it chooses to follow. (see the Electrical Engineering Encyclopedia)
Steering Questions
The background material would permit the instructor to lead the class through the basic ideas and issues associated with regulating market supplied ESI. Then students will probably require prompting before they grasp the underlying issues. Sample prompts would include:
- How is ESI currently regulated in Mexico?
- Comment on the rise in co-generation
- Impact of the constitutional ban on private sector participation in utilities;
- Failures to invest adequately in generation and transmission in the main ESI markets (whom does lack of capacity benefit?)
- Do marginal prices cover investment costs?
- What is the dissuasive effect of poor market design combined with loop flow problems?
- Is Mexican electricity a competitor or complementer to the natural gas market?
- Can the SPP process enable Mexico to handle market design issues at the sub-market levels?
Students may then be asked to address the case issues in a memo to the SPP energy working group. The decisive question-how much energy should SPP devote to this issue: is it a high, medium or low priority for NAFTA?
Questions for Discussion
- How does Mexican liberalization of its ESI compare with, say, that of California, or Ontario?
- What priority does Mexican ESI have for NAFTA? How does that compare, say to natural gas?
- What are some of the ways suppliers and transmission operators can "game" an ESI regulation system to raise their returns and/or the total cost of energy?
Relevant Courses
Regulatory Economics, International Political Economy (upper years) segment on energy, Economic Development, especially market liberalization in middle income developing countries as well as NAFTA and trade policy courses.
Useful Links from PNA
- Guide to Federal Regulation of Sales of Imported Electricity in Canada, Mexico and the United States
- Green Electricity Market Development in the United States: Policy Analysis and Case Studies
- North America: The Energy Picture II
- North American Energy: At Long Last, One Continent
- The Quiet Reality of North American Energy Interdependence
- Mexico: The Cost of Outdated Nationalism
- Mexico's Energy Policy Options in North America's Continental Energy Markets
- Shortcomings of Energy Policy in the Western Hemisphere
- "Three Strikes and You're Out?" The Security and Prosperity Partnership and the Future of North American Economic Integration
Suggested Bibliography
Hall, David, Emanuele Lobina and Robin de la Motte (2005). "Public Resistance to Privatization in Water and Energy." Development in Practice June: 286-301.
Hartley, Peter. "Privatization and Reform of the Electricity Industry: How Mexico Can Learn from the Mistakes of Others." James A. Baker III Institute for Public Policy, Rice University, available from http://www.rice.edu/energy/publications/docs/Hartley_PrivatizationReformElectricityMexico.pdf.
"IEA-OECD 2000 Market Reform: Competition in Electricity Markets,"available from http://www.iea.org/textbase/nppdf/free/2000/compet2001.pdf.
Laffont, Jean-Jacques, and David Martimort (2005)."The Design of Transnational Public Good Mechanisms for Developing Countries." Journal of Public Economics 89: 159-196.
Morales, Isidro. "Mexico's Energy Policy Options in North America's Continental Energy Markets." American University Working Paper, available from http://www1.american.edu/ia/cnas/pdfs/workingpaper3_energy.pdf.
Newbury, David M. (2001). Privatization, Restructuring and Regulation of Network Industries: The Walras Pareto Lectures. MIT Press.
OECD (2004). "Mexico: Progress in Implementing Regulatory Reform." OECD Publishing, available from http://books.google.ca/books?id=AjbZCSKxoPgC.
Murillo, Maria Victoria and Cecilia Martínez-Gallardo (2007). "Political Competition and Policy Adoption: Market Reforms in Latin American Public Utilities." American Journal of Political Science January: 120-139.
Pastor, Manuel and Carol Wise (2005). "The Lost Sexenio: Vicente Fox and the New Politics of Economic Reform in Mexico." Latin American Politics and Society Winter: 135-160.
Rosellon, Juan (2007). "An incentive mechanism for electricity transmission expansion in Mexico." Energy Policy May: 3003-3014.
Victor, David G and Thomas Heller, eds. (2007). The Political Economy of Power Sector Reform: The Experiences of Five Major Developing Countries. Cambridge University Press.
Suggested Web Resources
Institute of Electrical Research (IER) / El Instituto de Investigaciones Eléctricas (IIE)
Security and Prosperity Partnership of North America (US): http://www.spp.gov/.
Security and Prosperity Partnership of North America (Canada): http://www.spp-psp.gc.ca/eic/site/spp-psp.nsf/eng/home.
Security and Prosperity Partnership of North America (Mexico): http://www.aspan.gob.mx/.
Note: PNA is committed to encouraging intelligent discourse among our members. Comments are moderated by PNA, in accordance with the PNA Comment Policy. PNA does not necessarily endorse any of the views posted below.
2 Comments
In economic terms, electricity is a commodity capable of being bought and sold. An electricity market is a system for effecting the purchase and sale of electricity, using supply and demand to set the price. Wholesale transactions in electricity are typically cleared and settled by the grid operator or a special-purpose independent entity charged exclusively with that function. (Comment edited by site administrator)
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