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Introduction

The institutional arrangement of the hydrocarbons reform 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 (CNH) and the Federal Energy Regulatory Commission (CRE). As soon as the political commitment was made to open the oil and gas industry up to private investment, the consideration of the regulators’ design and capacity to set up a new industry could no longer be delayed. Until the time of the reform, the industry had acquiesced to some small regulators that were attached to the Ministry of Energy (SENER) as decentralized bodies and possessed a portfolio of legal competencies that, although not immense, have not been fully performed due to budgetary and human resource limitations. Considering these circumstances, Mexico’s hydrocarbon regulators required improved conditions both in terms of their legal design as well as of the availability of human and economic resources.

The limited role of the regulators and their related weakness is particularly noteworthy with respect to the enormity in size and power of the companies that they regulate. Before the reform, since its establishment in 1995 the CRE has had a maximum number of officials of around 200 that are still concentrated in Mexico City, whereas PEMEX GAS (PGPB) had thousands of employees scattered throughout the country. In its capacity as a company regulated by the CRE, PGPB was joined by other large-scale companies that are mainly natural gas transporters and distributors. These companies, which also operate in the most remote locations of the country and have thousands of kilometers of pipelines and areas of distribution, must be subject to technical supervision by the CRE, which still has scarce human capital with training in engineering or related professions. Considering this disproportion in numbers and in presence between the CRE and regulated companies, and given the lack of studies that evaluate and determine its efficiency, it can be assumed that the regulator’s technical control capacities are compromised.

In contrast, the CNH is a newer regulator that was created under different circumstances. Here, it is important to point out that the CRE is a body whose establishment was motivated by an opening and by an increase in the number of players. The CNH, in turn, emerged with the uncomfortable role of regulating the operations of PEMEX Exploración y Producción (PEP), Mexico’s formerly exclusive operator. During the 2008 reform process, the idea arose of creating an entity that would monitor certain technical issues related to the exploration and exploitation of hydrocarbons without PEP losing total exclusivity over petroleum operations. However, in an environment without any competition, it was reasonable to ask how pertinent the creation of more bureaucracy would be for the industry when the CNH’s powers could instead be exercised by the Ministry of Energy itself. Beyond being technical review authorities, hydrocarbons regulators should be forces ordering the market in the areas of exploration and production and encouraging competition between different companies. Given PEP’s exclusivity, the CNH was impeded from carrying out the main functions of its peers worldwide. In a competitive industry, the entry or replacement of a less efficient company by one that is more efficient is an important incentive for compliance with the regulatory framework. In the words of Josefina Cortés, the CNH was a “regulator for a single regulated company.”

However, the 2013 reform would pave the way for many more companies to be regulated, by the CRE as well as the CNH. These companies will not only have to face two great powers, but rather many more. This time, they will no longer be state-owned energy giants, but rather other companies whose direction and interests will be foreign, and maybe even contrary, to those of the Mexican state. The new Mexican energy arena is already open to private and public companies whose commercial (and political) agenda might be, at least up to a certain point, indifferent to that of Mexico, with all the implications that this may have for their operations within the country. Considering these circumstances, the debate regarding the legal and institutional re-creation of the regulators had to take place simultaneously with that addressing the opening of the oil and gas industry.

The purpose of this paper is to conduct a legal analysis of the new model of the hydrocarbon regulatory bodies in Mexico. The subject matter of this study is therefore the so-called “coordinated regulatory bodies,” which was articulated in Article 28 of the Constitution at the time of the December 2013 reform and seems to be somewhat similar to the National Council of Energy Policy created by the Brazilian Hydrocarbons Act. This similarity notwithstanding, “regulative coordination” is typical of the Mexican legal system and its introduction was more the result of improvisation than of willingness to implement a strict technique of institutional design. As will be shown below, the political agreements forged “coordination” as an intermediate scheme between the constitutional autonomy granted to the Federal Institute of Telecommunications and the Federal Antitrust Commission and the much criticized administrative deconcentration. The first of these appeared to provide excessive autonomy to the regulating bodies of the energy sector, an industry that up to that point was fully controlled by the public administration, while the second was considered very insufficient for the same reason.

After reconstructing the history of how this typically Mexican form came about, it will be possible, by understanding its design and assessing some of its competencies, to draw preliminary conclusions on how functional and necessary it might be in the future. Here, it is important to underscore that these conclusions are highly speculative due to the fact that the implementation of the reform is still at an embryonic stage.

One of the main aspects that will be addressed by this study is an assessment of whether the new coordinating structure helps to build an industry in a country with proper governance and rule of law. As broad as the different meanings of this term may be, we have elected the rather narrow definition of “rule of law” provided by attorney and scholar Thomas Wälde, which refers to the capacity of the rules and organizations to provide legal certainty both for the old and new players in the industry. The legal security of the new players must be one of the bases for the regulators’ decision-making processes. In this regard, Wälde’s concern has focused on whether the law and the organizations that apply it are sufficiently solid to withstand the forces that could often compromise the soundness of their decisions. Therefore, the assessment of the “coordinated regulatory bodies” will be carried out in light of the following question: through its new structure, have the regulators been strengthened with the means to issue stable contracts, ensure fair bidding rounds, and avoid bottlenecks in order to facilitate competition? A negative answer could significantly affect sustainable openness and should lead to a new public policy proposal. However, this chapter puts forth the following conclusion: coordination that is properly articulated between the regulatory bodies is very conducive to fostering the success of the new model under the conditions that will be discussed at the end of this paper.