or huge price increases for consumers. Tariffs, Cost Recovery and Subsidies Tariffs During the last decade, average electricity tariffs in Mexico have been held below cost with the aim of maintaining macroeconomic and social stability. For all tariffs, an interagency group composed of CFE (Federal Electricity Commission, or Comisión Federal de Electricidad), LFC (Central Light and Power, or Luz y Fuerza del Centro), SHCP (Ministry of Finance and Public Credit, or Secretaria de Hacienda y Crédito Público), SENER (Ministry of Energy, or Secretaria de Energia), CRE (Regulatory Commission of Energy, or Comisión Reguladora de la Energía), and CNA (National Water Commission, or Comisión Nacional del Agua) meet regularly and once a year they prepare a tariff proposal for the subsequent year. Tariffs are approved by SHCP and not by the energy sector regulator. Except for the tariff set for the agricultural sector, average electricity prices have followed an upward trend since the year 2002. In 2008, average tariffs for the different sectors were: Residential: US$0.106/kWh Commercial: US$0.255/kWh Services: US$0.172/kWh Agriculture: US$0.051/kWh Industrial: medium industry US$0.153/kWh, large industry US$0.118/kWh The average tariff, US$0.137/kWh, was 16.5% higher in 2008 when compared to 2007. Subsidies For the industrial and commercial sectors, electricity supply is priced on a rational cost basis for large firms. As a result, they receive no government subsidy, while subsidies for small firms are relatively small. On the other hand, agricultural and residential customers have traditionally received large subsidies since the electricity they consume is significantly underpriced. Extensive subsidies have contributed to a rapid growth in demand. In 2000, the average residential tariff covered only 43% of the costs, while the average tariff for agricultural use covered 31%. Total subsidies amounted to 46% of total electricity sales. In addition, residential subsidies were mostly captured by medium and high income classes as the amount of the subsidy raised with consumption. In 2002, a restructuring of residential tariffs significantly raised the infra-marginal tariffs paid by middle and especially high consumers of electricity. Currently, billing schedules vary by temperature, season and consumption level. In spite of this reform, price/cost ratio was still under 40% in 2002, even after the 21% increase in price due to the reform. In addition, the share of subsidies going to the non-poor population remained high, estimated at 64%. Agricultural tariffs were also modified in 2003, when a fixed price per kWh was fixed. These new tariffs sought charging