LEGAL ASPECTS OF THE GAS AND ENERGY SECTORS IN COLOMBIA
| Jurisdiction | Derecho Internacional |
(Mar 1999)
LEGAL ASPECTS OF THE GAS AND ENERGY SECTORS IN COLOMBIA
JOSÉ ALEJANDRO TORRES
Posse, Herrera & Ruiz
Bogota, Colombia
FOR THE ROCKY MOUNTAIN MINERAL LAW FOUNDATION SPECIAL INSTITUTE
ANTECEDENTS AND INTRODUCTION TO THE MATTER
The regulatory development of the gas and energy sectors in Colombia has been decisively influenced by the global political and economical trends. The late 1980's discredit and fall of command economies' paradigms as politically desirable means to attain conglomerate welfare, affected the economic axioms over which development planning was carried in Colombia. Formerly it was perceived that State direct action in the economic scenario served as the necessary thrust to correct market failures, which could not be dealt by private initiative alone. Under this view, the State basically acted as supply upgrader to satisfy the ever-growing demand.
In parallel the necessity of protecting infant industries lead to a closed-door model, in expectance of the development and maturity of the home market. By 1990 the Colombian economic scenario was characterized by an long term central economic planning, which varied from administration to administration, coupled with a strong State presence in a wide variety of industrial and commercial activities, with little private participation, and certainly a negligible presence of foreign direct investment.
The public utilities sector was no exception to the above. State provision of these services was not only necessary in practice due to the magnitude of the required investments, but private investment in this area was curtailed due to legal considerations as well. The substrate of State legitimacy was construed on the satisfaction of the population's basic needs, and thus the label of Welfare State. In this vein the provision of basic domiciliary services, such as energy and fuel (gas), was at the top of the list of services that the State was bound to supply. In addition as a matter of constitutional law, all subsoil resources were held in common domain by all constituents, which meant that property thereof, was held by the State as unified expression of the citizenry. The result was that
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exploration, exploitation, production, transportation and supply of natural resources was undertaken by State entities, or through State concessions.
At the turn of the present decade, the strong State presence in the economy was in itself perceived as a market failure that hindered development. High levels of inefficiency and corruption eroded efficient market performance. It surged that the goal that justified State presence was not being reached. The establishment's inability to effectively deliver the goods and services that it was supposed to provide was evidenced. Eyes then turned to private enterprise, which was reputed to be foreign to corruption and political manipulation, and above all, the champion of economic efficiency. The trend shifted towards unencumbering the State from those activities that were best carried by private initiative, via the divestiture of State assets committed to industrial and commercial concerns. The State was to be confined to basic duties of law making, justice administration and national security safeguarding. As counterpart, it was thought that the unrestricted entry of private initiative to sectors formerly reserved to the State needed to be checked through the implementation of regulation endeavoring competition and banning restrictive business practices. In result State action suffered a mutation, from a direct participation as an economic force to the watchdog of the free flow of market forces, and thus the term market economy was coined.
Notwithstanding the above a sustainable development and reliable provision of energy resources remains a crucial item within the global economic growth agenda. As such, in Colombia, the State is still legally responsible for the exploitation and supply of natural resources and public services, but the framework laid in place provides for ample instruments for the delegation such responsibility onto private parties. Foreign and national private investors have been since actively involved in the development of gas and electricity industries, albeit subjected to a heavy regulatory burden.
Parting from the above setting the purpose of this paper is to describe the constitutional, legal and regulatory framework in Colombia for the gas and energy industries; a diagnosis of the current energy market performance, to finalize with a set of conclusions which we hope will address the regulatory measures that should be implemented in order to correct present market and regulatory inconsistencies.
9.1. CONSTITUTIONAL BACKGROUND
Amidst political turmoil, Colombia enacted anew Constitution in 1991. Freedom of enterprise and responsible market competition were enshrined as cornerstones for economic legislation and regulation in article 333 as so:
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"Article 333. — Economic activity and private initiative are free, within the limitations set by common welfare. Without authorization from the law, nobody shall request previous permits or requirements.
Free competition is a right that presupposes responsibilities. (...)
The enterprise, as development nucleus, bears a social purpose that implies obligations. The State shall strengthen co-operative organizations and stimulate entrepreneurial development.
The State, through legal mandate, shall impede that economic freedom be obstructed or restrained, and shall prevent and control any abuse of national market dominant position by persons or enterprises.
The law shall limit the extent of economic freedom whenever so required by social interest, the environment and the Nation's cultural heritage".
Freedom of enterprise is far from an absolute right, and cannot be interpreted to constitute an insuperable barrier to State intervention in the economy1 . Colombia, as from the 1991 Constitution, has been instated as a Ruled by Law Social State where private property and private initiative need to serve a social function in order to attain legal recognition and protection. In the procurement of such social purpose, State intervention is justified and accepted. Moreover, the State remains as the main controller and designer of economic policies, as provided by Article 334 of the Constitution:
"Article 334. — The general direction of the economy shall be entrusted to the State. It shall intervene through legal mandate in the exploitation of natural resources, the use of the soil, the production, distribution, utilization and consumption of goods, and public and private services, in order to rationalize the economy to achieve the improvement the quality of life of inhabitants, an equal distribution of opportunities and development benefits and the safeguarding of a healthy environment. (...)"
The above two hierarchically complementary principles determine the features of the governing constitutional landscape. The coexistence of State responsibility and private initiative is exacerbated in the public utilities sector. The provision of public services is inherent to the social purpose of the State, and it is its duty to assure an efficient provision thereof to all inhabitants within the national territory. Notwithstanding, such services may be provided (i) directly or indirectly by the State, (ii) by organized communities, or (iii) by private parties. In any case the State will retain the jurisdiction to regulate, control and police these services, to the extent that it is even authorized to exclude private participation
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in certain sectors due to sovereignty or common welfare reasons, provided that persons who by virtue of such measures are deprived from the exercise of licit activities are duly and fully indemnified2 .
Finally at Constitutional level, it is left to the law to determine the competence and responsibilities of the provision of public domiciliary services, as well as its coverage, quality and financing, and the applicable tariff regime thereto3 .
In sum the Colombian 1991 Constitution instates as three basic principles that interact to delineate the applicable legal regime to the gas and electricity sectors: (i) freedom of enterprise, (ii) State's general direction of the economy, and (iii) the authorization to private parties to provide domiciliary public services. These principles allow private investors to undertake public utilities related activities, in particular those pertaining to the electricity and gas, but under the subjection to legal and regulatory normative. The next step of regulatory particulars for the gas and electricity regime is laid down by the law, to which we now turn.
2. LEGAL FRAMEWORK
By 1992, Colombia underwent a severe energy crisis due to climate phenomena. This crisis evidenced the over-reliance on hydro generated electricity and a correlative exposure to weather downturns. It was then considered imperative to expand the energy supply to other sources, namely gas and coal fired generating facilities. The foregoing drove the national government to implement exceptional measures directed towards encouraging private investment into the power generation business, the construction of new plants and the granting of the necessary Government financial guarantees4 . This crisis reactive regulatory effort thrusted the development of a number of power generating projects, through BOOM and long term power purchase arrangements (PPA).
Although the above signified an important regulatory effort, the nature of the regulations, namely governmental decrees5 , it did not provide a strong enough stability signal to attract investors to these sectors. Therefore, the National Government engaged in a decisive legislative lobbying campaign to regulate this matter through law. The result was the...
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