Pricing Natural Gas in Mexico: An Application of the Little Mirrlees Rule: The Case of Quasi-Rents

12 Pages Posted: 17 Jul 2010

See all articles by Dagobert L. Brito

Dagobert L. Brito

Rice University - Department of Economics

Juan Rosellon

Centro de Investigacion y Docencia Economicas

Date Written: June 2010

Abstract

In 1997, the Comisión Reguladora de Energía of Mexico implemented a netback rule for linking the Mexican natural gas price to the Texas price. At the time, the Texas price reflected a reasonably competitive market. Since that time, there have been dramatic increases in the demand for natural gas and there are various bottlenecks in the supply of natural gas. As a result, the price of natural gas in Texas now reflects the quasi-rents created by these bottlenecks. We address the optimality of the netback rule when the price of gas at the Texas market reflects the quasi-rents created by bottlenecks in the supply of natural gas to the United States pipeline system. In this paper, it is shown that it is optimal for the Mexican government to use the netback rule based on the Texas price of gas to set the price of natural gas in Mexico even though the Texas market cannot be considered a competitive market, and the Texas price for natural gas reflects quasi-rents created by various bottlenecks.

Keywords: Natural gas, welfare, pricing, Mexico, regulation

JEL Classification: Q40, L51

Suggested Citation

Brito, Dagobert L. and Rosellon, Juan, Pricing Natural Gas in Mexico: An Application of the Little Mirrlees Rule: The Case of Quasi-Rents (June 2010). DIW Berlin Discussion Paper No. 1027. Available at SSRN: https://ssrn.com/abstract=1641025 or http://dx.doi.org/10.2139/ssrn.1641025

Dagobert L. Brito (Contact Author)

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States

Juan Rosellon

Centro de Investigacion y Docencia Economicas ( email )

Carretera Mexico Toluca 3655
01210 Mexico, D.F.
Mexico

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