Mexico moves ahead to cap LPG prices: Update2

Adds reaction from Cofece.

Mexican regulators can cap retail LPG prices for six months after the government argued that market conditions created an emergency that threatens national security.

Mexico's energy regulatory commission (CRE) now has three days to enact regulation for methodology that will set maximum retail prices of LPG, after a notice the energy ministry (Sener) published in Mexico's official gazette today.

The national regulatory improvement commission (Conamer) cleared the ministry to declare the emergency without the country's competition watchdog (Cofece) certifying that anti-competitive conditions exist in the domestic LPG market. Cofece has challenged the moves of President Andres Manuel Lopez Obrador to favor state-owned energy companies.

It also called this move to cap prices illegal, saying that there is no way to circumvent the hydrocarbon law provision that requires a ruling from Cofece before taking such actions.

"The logic behind this mechanism is that price limits should only be set in markets in which competitive condition do not exist," Cofece said today. "Otherwise, price regulation could have the opposite consequence of the intent of the emergency declaration, such as LPG shortages."

The investigation that Sener requested earlier this year to determine if there are competitive conditions in the LPG market continues, Cofece said. It also highlighted that the government has not followed any of its recommendations for improving market conditions, such as easing some restrictions on how and where LPG can be sold.

Sener had argued that the Cofece determination might take too long for an issue that requires immediate attention. LPG retailers in Mexico have divided territories and customers and are undertaking monopolistic practices, leading to turf wars and even injuries, deaths and damage to private property, Sener said.

"This ministry sees the need to create a protective framework to address ... a social and national security problem," Sener said in the request.

The planned price caps come after the president called for creating a new state-owned LPG retail company that would distribute tanks at what it says would be "fair prices." Pemex now only sells LPG as a wholesaler to private-sector distributors.

International LPG price benchmarks increased by 131pc on average in the first half of 2021, from the same first six months of 2020, according to Mexico's private-sector LPG retail association (Amexgas). The group argued that the effect was pronounced in Mexico as 62pc of the LPG demand is imported, and only 38pc is produced domestically.

But average retail prices increased less than Pemex's wholesale prices — responsible for 60pc of national wholesale supply — the group countered.

And the imposition of a price limit will distort the market and create a bigger illegal trade that would end up affecting consumers even more than today's higher prices, the association said yesterday.

CRE's regulation will have to determine the precise date by which LPG retailers have to follow the methodology and limit prices.

The regulation could still be subject to injunction requests and challenges on a constitutional basis as Sener bypassed Cofece's authority to rule over the competitive conditions of a market.

By Sergio Meana