After a very hard discussion between the regulator with the Government and the industry, CREG has finally issued a new set of rules for the natural gas market in Colombia, which involves crucial changes for the Colombian economy in general, particularly for the industrial sector.
From the institutional point of view, it is a very interesting case of study, that shows how the regulator was pushed to negotiate the terms of the original version of the resolution, with the government, that took the industry side in the discussion.
The regulator came out with a new approach, trying to get the same objectives, with a less intrusive set of rules that still being very complex, but certainly are a lot nearer to the industry point of view.
The original idea of making a gas auction the main instrument for the natural gas producers to sell their gas, was changed to a mechanism in which UPME (the planning institution for the sector) determine a balance for the next five years between supply and demand. If it reflects no deficit, the parties are free to negotiate, bilaterally, contract terms and conditions, with the exception of those things specifically ruled, such as the nature of the contracts, the term, the liability exceptions, etc.
If the balance reflects a deficit, then an auction is mandatory, with the same set of rules originally proposed by CREG. However this change of avoiding the auction when balance reflects a surplus, and letting producers to set prices in bilateral contracts, seems to force the consumer to pay a high price when is plenty of gas to meet the demand, getting prices even higher when there is shortage.
Natural gas prices are going to be settled freely by producers, which means that ECOPETROL, who is without any doubt a dominant seller in the market, will define other producers revenue, and of course natural gas prices.
This is a real shame, not only because the original CREG proposal was intended to protect the consumers, but also, against all logic, because the industrial consumers attack the measure. Without the auction, there is no way to know if the price defined by the producers is the “market price”, or if it’s a materialisation of their market power.
Despite the apparent defeat of the regulator, it manage to come with a very interesting set of measures, that theoretically can be a step towards the right direction; for instance, although the producers are free to settle price of natural gas to be sold, they have to previously announce the gas quantity to be sold for any specific year; another very important limitation, is that selling, including negotiation, will have to take place within a period of time determined by the regulator, which aim to induce producers to determine prices to facilitate natural gas negotiations.
On the other hand, the secondary market was improved, in comparison with the original version; and of course it had to be accommodated to the primary market changes; the original intention of upgrading this market by forcing the agents to become professional marketers, was maintain in essence, with the only exemption of the industrial users who are able to sell their surplus directly, but not buy any quantities. Also, the regulator is to put some limitations to those professional traders that meet small users, yet to be issued.
Finally, the “use it or sell it” system is almost the same of the original proposal, and is aimed to improve the flexibility signs within the market, however, agents will need a lot of time to understand it and to get used to the new rules, mainly because of their complexity.
There is no doubt that the new set of rules will give a new impulse to the independent commercial agents, which have to embrace the new measures, and try to give value to the market, and to the different agents.
One final remark, that catch the eye of curiosity, is the position expressed by the “Superintendencia de Industria y Comercio” or “SIC”, which is the institution within the government in charge of protecting the competition in general, they attacked the original version of CREG, defending an interest group that was precisely against the measures intended to enhanced the competition framework.
It is evident that is not enough that a law calls an institution such as the SIC the advocate of competition, but it is necessary that the institution itself is fully aware of the market imperfections, and the regulatory scope to solve them, before they even comment on any draft or resolution; apparently, the political view of the SIC may have influenced its position towards the proposed resolution, against the general expectancy of the institutional performance.