Pricing Natural Gas in Mexico: an Application of the Little-Mirrlees Rule

The Comision Reguladora de Energia has implemented a netback rule for linking the Mexican market for natural gas with the North American market. This paper describes the economic analysis that supported this policy.The Comisión Reguladora de Energía has implemented a netback rule for linking the Mexican market for natural gas with the North American market. This paper describes the economic analysis that supported this policy. We show that the netback rule is the efficient way to price natural gas and it is in fact an application of the Little-Mirrlees Rule. We also study the implications of this new regulatory framework on Pemex’s marketing activities in the forward market for gas. We argue that PEMEX should be permitted to enter into spot contracts or future contracts to sell gas, however, the price of gas should always be the net back price based on the Houston Ship Channel at the time of delivery. This arrangement is transparent, it is easy to enforce and does not eliminate any legitimate market options for any of the parties involved. PEMEX or consumers of gas can use the Houston market for hedging of speculative transactions