The Court hands Argentine government a corrective

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On August 18, the Supreme Court of Argentina ruled in favor of consumers by annulling price increases for natural gas dictated by the government in March. The unanimous decision by the Court simply says that the government is under a constitutional obligation to consult consumers before setting new prices. The implications of this ruling, like most things in Argentina, are less straightforward.


The ruling

The ruling is based on article 42 of the Constitution that says that consumers are entitled to receive adequate information on and participate in decisions pertaining to public services, rights that are further legislated by law 24076 that stipulates that public hearings are mandatory in the case of transportation and distribution of natural gas, because these are services delivered via natural monopolies subject to government pricing.

The Court, however, went beyond the strict interpretation of these legal obligations by including the wholesale price among the items subject to debate in the public hearings. In theory, the wholesale (or wellhead) price, which constitutes from 50-80% of the final price of gas to consumers, should not be subject of debate in a public hearing because it is set freely by the market. In practice, this price has not been set by the market since the crisis of December 2001. Since then, the price paid to producers at the wellhead has been set by the government, a procedure formalized via decree in 2004.


End to government prices: volunteers anywhere?

The problem dates back a decade and a half to the devastating economic crisis of 2001 and the measures taken to address it. The crisis brought about a major devaluation of the currency, as well as a profound recession. As a response to the twin shocks, energy (and other) prices were “pessifed”, that is, kept at the pre-crisis level in pesos, while the price of the dollar quadrupled. Distributors of energy were not allowed to increase rates to recover the differential. The government also intervened in the wholesale market, paying producers what at the time were below-market prices for oil and gas. The country recovered from the crisis, but the policy for the energy sector remained, with artificially low prices for both domestic producers and consumers, a rapidly decreasing production, and hefty subsidies once imports became necessary.

During the electoral campaign last year the government promised a “reckoning” of prices to stimulate investment and put an end to subsidies. For consumers in the Buenos Aires Metropolitan Area the day of reckoning indeed arrived some time beginning in March of this year with price increases in the range of 100 to 600%, though prices remain below the regional average, so great was the distortion that had accumulated.

These increases included higher rates for transmission and distribution companies, but also for producers at the wellhead. And here’s where the reckoning starts to look rather attractive. News sources estimate that today gas producers get US$4.6/mmbtu, well above prices in other parts of the world, and in between the US$ 3.7 that the government is paying to import gas from Bolivia and the US$ 6 it pays for LNG. The question, however, is whether gas producers will now make the corresponding investments to increase production, or they’ll be happy selling what they have at current prices and letting the consumers bear the brunt of the adjustment, permanently.


Public Hearings

Following the court ruling, the regulatory agency set a date for the public hearing for September 16. The outcome of the hearings is not binding, that is, the government does not have to accept the suggestions of the public. Nor can it ignore them completely. The law is unclear in this regard, but the courts are watching so the government better behave.

It is hard to imagine what this public hearing will look like. Here are a few proposals circulating out there that could indeed improve the government’s pricing policy.

Flat rates:  average gas use throughout the year into 12 equal payments, since residential use of natural gas is highly concentrated in the winter months. This would smooth out the increase.

Transparency and gradualism: announce a long-term schedule of reduction of subsidies in correspondence with the increases in prices. In this way, the public can see where the money is going and that it is part of a responsible fiscal policy.

Zoning: the government would tailor price increases to customers’ ability to pay estimated by place of residence.

Overall, the government has done a very poor job of explaining its policy choices to the public with clarity and empathy. Most people understand that heating your house should not cost less than a meal for two at McDonald’s. But they also know that not all households consume the same and that the burden of adjustment, like the benefit of subsidies, does not distribute evenly. Perhaps more than anything else, the public suspects that instead of setting off a wave of new investment, the price increases will go to line the pockets of producers and that taxpayers will be called upon, yet again, to revive production.


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