Mexicali natural gas franchise bid raises new questions

George Baker
Mexico Energy Intelligence
Houston

Disparity Among Bidders for Mexicali Gas LDC [20196 bytes]

Much speculation has been voiced since the disclosure of the winning bid for Mexico's first gas privatization license by a combine of Southern California Gas Co. and San Diego Gas & Electric Co. regarding the striking disparity between that bid and those of Tenneco Inc./ Westcoast Energy and Repsol SA.

Award of that license was disclosed last month (OGJ, Aug. 19, Newsletter).

The ratios between the respective bids was 1.0, 3.4, and 9.8.

The rates that were bid were for the average natural gas distribution costs (termed Average Revenue Yield) within Mexicali. The gas commodity cost and the U.S. transportation cost are additional items to be supplied on a pass-through basis.

As the infrastructure on the California side is presently governed by an asset-based rate system, it is likely to be the case that some of the incremental California-side costs for serving Mexicali will be borne by southern California rate-payers.

Alternatively, some of the overhead costs on the California side would have to be "passed on" to Mexicali industrial users.

So, the figures for the winning bids give no indication of how competitive the final price of delivered natural gas will be in Mexicali in relation to the principal competing fuels, namely, LPG, fuel oil, and geothermal power. Presumably the 7% import duty by Mexico will be passed on to Mexicali customers.

Market prospects

At present, Mexicali has a residential LPG distribution system.

As the projected customer base at the end of 5 years for all three bidders is about 26,000-28,000 (a number far exceeding potential industrial and light commercial customers) to fulfill this target, some inroads will have to be made into the market comprising the existing LDC residential customers supplied by the Zaragoza family companies.

The prospect of taking customers away for a protected family monopoly in Mexicali is not likely to be a pretty one.

The acid test of the viability of this project will come in the ease or difficulty in obtaining easement rights for laying new pipe.

The mayor of Mexicali, Eugenio Elorduy, is someone who has favored natural gas service for Baja California for years. But many, if not most, of the permitting issues are to be resolved with state and federal authorities.

Of the many large unknowns related to any gas distribution franchise in Mexico, the legal and regulatory uncertainty associated with obtaining easements for pipelines is perhaps the most weighty.