Establishing the first economic regulation of the Mexican rail concessions

Abstract

On February 2020, the Federal Economic Competition Commission (COFECE) issued a resolution on lack of effective competition in 20 routes of freight railway transportation of chemical products originating in southern Mexico. As a response, the Mexican rail regulator, the Regulatory Agency of Rail Transport (ARTF) responsible for overseeing different aspects of rail transportation, such as the economic regulation regarding tariffs, established the regulation and determined maximum rates for the provision of the rail service concerning three different concessionaires in twenty origin-destination pairs for the transportation of chlorine, ethylene oxide, anhydrous ammonia, and caustic soda.

The model used in the economic regulation consisted of establishing a maximum rate per tonne-kilometre for each combination of route and product. The maximum rate was calculated from the average total costs plus a reasonable profit given by the rate that allows a reasonable return on assets, determined through the Weighted Average Cost of Capital that allows the concessionaires to invest in a sector that is particularly capital intensive. Thus, the maximum regulated rate is equal to the rate where the concessionaire breaks even, that is makes zero profit (average cost pricing or “second best”), plus the Weighted Average Cost of Capital.

The results of the rate regulation of the Mexican rail concessions showed a significant reduction of the rates actually charged in 66% on average and 77% with respect to the registered rates. Although the implementation is not complete, as the regulation is being analyzed in the tribunals, the economic regulation showed that the rates are very far from the average cost in the absent of effective competition. More research needs to be done to evaluate the real impact of the first economic regulation of the Mexican rail concessions.