industrial) and potential operating volume. This would permit each distribution franchise zone to realize economies of scale and scope that attract investor interest.

- In the Federal District–urban municipalities and Northwest-Southeast options, it is technically feasible to define distribution assets that will be transferred to each private distributor.

- In the Federal District–urban municipalities option, the selection of distribution franchise zone coincides with political jurisdictions.

This assessment suggested that the Federal District–urban municipalities option was the best. This was supported by consultations with interested public and private parties.<sup>10</sup> Consultations centered on three issues: the viability of each partition option, the desirability of promoting competition in related services, and making best use of the existing distribution infrastructure. The consultations revealed that the two distribution franchise zones presented different conditions. The Federal District has less potential for growth and greater development complexity. But it has greater population concentration and potential to generate positive net cash flows in the short term. The urban municipalities of the State of Mexico have better potential for expansion, pose less difficulties for construction, and cover a larger area. It was also stressed that specific interconnection agreements should be negotiated when part of the infrastructure that is relevant for one distributor lies in the zone of the other distributor.

# **Results to Date**

Unlike other privatizations in Mexico, in the natural gas distribution bids the government only establishes the number of consumers that must be covered at the end of the first five years. When applicable, it sets the value of the preexisting distribution facilities to be acquired by the winning bidder. It also requires that two-thirds of total investment must be financed by capital owned by the firm; restricting debt financing to one-third. These features, together with the specifics of the regulatory framework (such as the average revenue methodology used to regulate distribution tariffs) and the technical characteristics of the project, define the allocation of risk for distribution activities and how they may be financed (Rosellón and Halpern 2000). The terms and conditions, operation and maintenance obligations, service standards, and other obligations are set by the Energy Regulatory Commission (CRE) at the outset of the tender process. The market study presented by the winning bidder defines the coverage goals, tariffs, volumes, and investment commitments. Service standards are defined in official Mexican standards (NOMs) and relevant international standards. The final price to consumers is regulated by the acquisition price methodology (Rosellón and Halpern 2000).

> 10 Parties to the consultations included, among others Asociación Mexicana de Gas Natural (AMGN), Controladora Comercial e Industrial, Gaz de France, Gaz Metropolitain, Gobierno del Distrito Federal, Gobierno del Estado de México, Gutsa-Noram-Transcanada Pipelines, Pacific Enterprises International, Pemex Gas y Petroquímica Básica, Repsol México, and Tribasa.

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