Designing Natural Gas Distribution Concessions in a Megacity: Tradeoffs between Scale Economies and Information Disclosure in Mexico City

26 Pages Posted: 20 Apr 2016

Date Written: August 1, 2003

Abstract

January 2001 Private participation in the development of natural gas distribution networks is often introduced through the award of exclusive concessions for defined geographic zones. Designing such franchises in a megacity poses a challenge in striking a balance between economies of scale (few distributors) and information disclosure for regulation (more distributors). Approaches to making these and related tradeoffs are analyzed through a case study of Mexico City.

Unlike in other privatizations in Mexico, in the tender for natural gas distribution franchises the government stipulated only the minimum number of consumers to be served at the end of the first five years. Concessions were awarded to the firms that offered the lowest initial average revenue. Where applicable, the government also set the value of preexisting distribution facilities to be acquired by the winning bidder. These features, together with the specifics of price and access regulation and the zone's technical characteristics, determine the allocation of risks and method of financing for distribution activities.

Rosellon and Halpern assess the subdivision of the Mexico City metropolitan area into natural gas distribution franchise zones. In a megacity with extensive, densely populated areas, more distribution franchise zones mean more information for regulating regional monopolies; fewer zones permit greater economies of scale. The optimal number of distribution franchises should reach an equilibrium between adequate information (to permit the regulator to optimize social welfare) and unit cost minimization.

Large distribution franchise zones - with an adequate mix of consumers - reduce the financial risk of operating distribution systems. If the number of distribution franchises in a distribution area declines, financial risks may also decline. As the number of zones increases, so does the financial impact of losing large industrial consumers. If every distributor had only a few anchor consumers, demand in a franchise zone might drop abruptly if one of the anchor consumers went bankrupt or exited the market for other reasons.

The authors analyze the empirical basis for the demarcation of distribution franchise zones in the Mexico City metropolitan area and compare outcomes with initial projections.

This paper - a product of the Finance, Private Sector, and Infrastructure Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to evaluate and disseminate lessons of experience in designing policies to improve the quality and sustainability of infrastructure services.

Suggested Citation

Halpern, Jonathan, Designing Natural Gas Distribution Concessions in a Megacity: Tradeoffs between Scale Economies and Information Disclosure in Mexico City (August 1, 2003). Available at SSRN: https://ssrn.com/abstract=636469

Jonathan Halpern

Georgetown University ( email )

Washington, DC 20057
United States

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