Pricing Natural Gas Distribution in Mexico

We examine regulation of distribution tariffs in the Mexican natural gas industry. Average revenue in each period is constrained not to exceed an upper bound and is calculated as the ratio of total revenue to output in the current period. This regime implies incentives for setting two-part tariffs strategically. The usage charge is typically dropped to its lowest feasible level while the fixed charge is raised to compensate for the loss of profit. The regime also creates a stochastic effect that implies decreased values of consumer surplus for lower levels of risk aversion and uncertainty.