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Gas
Regulation
SYNOPSIS
A.
THE GAS INDUSTRY IN ARGENTINA
1. Background 22.101
2. Restructuring of the Gas Sector
22.110
2.1.
Gas Exploration and Production. YPF
22.113
2.2.
Transmission and Distribution Regulation
22.118
3.
Regulatory Framework
22.132
3.1. General Principles 22.134
3.2.
Objectives 22.138
3.3.
Principle of Subsidiarity 22.140
3.4.
Scope of the Law 22.143
3.5.
Limitations 22.144
4.
Tariffs
22.149
5.
ENARGAS
22.150
A.
THE GAS INDUSTRY IN ARGENTINA
1.
Background
22.101
Gas
users or consumers are the customers of
the gas industry. However, the delivery
or supply of gas to consumers is the
final stage in a process that requires
the proper execution of several previous
stages - exploration, production,
treatment, storage, transport and lastly
distribution.
22.102
Before
the reform of the State sector which
began in 1989, exploration, production,
transport, refining and distribution of
natural gas in Argentina was monopolized
by the Argentine Government through a
state owned corporations established
under Law 13,653 (State Companies) and
Law 20,705 (State Corporations).
22.103
One
of the features of these companies was
that they were subject to private law on
all matters relating to their specific
activities, and to public law as regards
all matters relating to the Public
Administration or the public service for
which they were responsible. In
addition, some of these companies could
not be declared bankrupt.
22.104
On
the matter of gas production, Law 12,161
had granted YPF exclusive rights to the
development and production of all new
hydrocarbon reserves in Argentina. In
addition, this legislation established
that all hydrocarbons recovered,
including those recovered by private
companies that held concessions granted
by the State, were to be sold to YPF.
22.105
Although
subsequently Law 17,319 (the
Hydrocarbons Act) was passed, the spirit
of which favored the insertion of the
private sector in the industry, in
practice the industry developed with a
high degree of state intervention
channeled through the participation in
production of YPF.
22.106
This
being the case, the involvement of the
private sector was restricted to
activities contracted by state
companies.
22.107
From
1946 and until 1992, Gas del Estado S.E.
was the owner and operated virtually all
the services for the transport and
distribution of natural gas in
Argentina.
22.108
Natural
gas was carried by Gas del Estado S.E.
along high-pressure gas pipelines with a
length of approximately 10,590 km from
the production basins located mainly in
the west, northwest and south of
Argentina to the distribution areas for
supply to customers. Thus the transport
and distribution of natural gas operated
as a totally integrated system and as a
single business unit.
22.109
Gas
del Estado S.E. did not invest in the
gas production business, as it bought
natural gas from producers in the five
basins (Norte, Neuquina, Cuyana, San
Jorge and Austral). Using this system
service was provided to 4.4 million
users nationwide, although with a high
concentration in the city of Buenos
Aires (which accounted for approximately
40% of total demand).
2.
Restructuring of the Gas Sector
22.110
The
dramatic state of affairs, of which
state companies in the gas sector were
no exceptions as financial losses, lack
of resources, depressed tariffs,
declining investment and increasing
political influence in administration
resulted in Law 23,696 (the State Reform
Act) and Law 23,697 (the Economic
Emergency Act) which attempted to put an
end to State interventionism and recover
efficiency in the administration of
state owned companies.
22.111
In
the context of this reform, and with the
objective of achieving full deregulation
of the industry and the privatization of
natural gas carrying services,
distribution and sale, the entire gas
industry in Argentina was restructured
by means of the privatization of Gas del
Estado that favored participation of the
private sector and competition.
22.112
Exploration
and production activities were also
involved in this process, as YPF was
also restructured.
2.1.
Gas Exploration and Production. YPF.
22.113
In
the face of the extremely limited
production of YPF and the need to
incorporate modern technology and the
economic and financial capability that
could be provided by the private sector,
in August 1989 decrees 1055/89 and
1212/89 were issued establishing the
guidelines for the increase in
production and policies for deregulation
respectively.
22.114
The
exploitation contracts under which the
private sector participated in the
sector were transformed under the new
regulations.
22.115
In
addition, under Law 24,156 on
Federalization, the public domain of the
hydrocarbon fields held by the National
Government was transferred to the
Provinces regarding the territories in
which they were located, including those
located off-shore up to a distance of
twelve nautical miles (art. 1).
22.116
As
a result , YPF was granted exploration
permits for the areas assigned and the
areas it held at that time were
transformed into exploitation
concessions under the regime established
by Law 17,319.
22.117
In
addition, under decree 2778/90 YPF was
transformed into a Corporation governed
by Private Law.
2.2.
Transmission and Distribution Regulation
22.118
Within
the framework of the process of state
reform, the first stage of the
privatization of Gas del Estado took
place in accordance with the terms of
decree 48/91 which approved the general
outlines of the strategic plan for the
restructuring of the state company.
22.119
This
restructuring was based on the following
precepts: (i) an open market,(ii)
diversity of producers, and (iii)
separation of the transport and
distribution functions.
22.120
As
such a radical transformation would
require a gradual process, a transition
period of one year was established,
extendible for a further year, during
which the following was to take place:
-
The
state would set the prices of
natural gas to producers and to end
consumers;
-
A
regulatory framework would be drawn
up for the industry, to be approved
before the call to tender for the
privatization (1st. month of the
transition period);
-
The
Bid Documents were to be drawn up
for the concession of integrated
projects or the tender for the
distribution and sale service (2nd.
month of the transition period);
-
Preparation
of a study and proposal for
privatization of the transportation
system (3rd. month of the transition
period).
22.121
At
the end of the transition period the
price of natural gas to end users was to
be deregulated, the deregulation of
producer prices being subject to the
existence of several sources of supply.
22.122
Under
the new system the roles previously held
by Gas del Estado in a fully integrated
system for the purchase, processing,
transporting and distribution and sale
of gas was to be replaced by the
creation of ten new companies which were
to be authorized and regulated by the
new regulatory framework to be designed
as per the proposed plan.
22.123
In
the case of transportation, the five
trunk gas pipelines in the gas
transmission system were to be divided
into two systems on a wide geographical
basis (north and south trunk gas
pipeline systems), designed to provide
access by both systems to the sources of
gas and to the main centers of demand.
The systems were to be transferred to
two new carrying companies
(Transportadora de Gas del Sur S.A. and
Transportadora de Gas del Norte S.A.).
22.124
The
distribution service was to be divided
among eight regional distribution
companies that would not compete
geographically, as each company was to
have a specific area, without any
overlapping.
22.125
To
provide increased guarantees under the
law in early June 1992 the Gas Act (Law
24,076) was passed which, together with
its regulatory decree and the
corresponding licenses that were to be
granted to the awardee companies, have
made up the "Regulatory Framework
for the Gas Industry".
22.126
The
Argentine government issued a Public
International Call to Tender for these
ten new companies, under which a
majority of each was sold to various
consortia of bidders. Each consortium
was required to include a qualified
technical operator with prior experience
as an operator of a gas carrying system
or distribution facility.
22.127
In
December 1992 the Argentine Government
successfully concluded the privatization
of Gas del Estado through the sale of
controlling interest in all the gas
transport and distribution companies.
22.128
By
1993, one year after privatization,
operation of the system showed positive
signs as demand was met without
difficulty, even at peak moments when up
to then, in cold winter days demand was
always unsatisfied.
22.129 As an example, there was a
significant increase in the number of
household users (13% higher compared to
1990) and a sharp rise in the total
volume supplied (up 17% compared to
1990).
22.130
Argentina
is currently considered to be a mature
gas producer within the Mercosur, and as
such it has been able to undertake
various gas-exporting projects: Gas
Andes, Methanex, exports to the north of
Chile, exports to Brazil along the Santa
Cruz-Sao Paulo-Porto Alegre pipeline,
exports to Paraguay, the Mercosur
pipeline for direct export to Brazil and
the pipeline that will run from Buenos
Aires to supply gas to Montevideo.
22.131
On
the domestic front, the five-year
tariffs established for the licenses
awarded to the carriers and distributors
which will be in force for the period
1998-2002 are currently under review,
and public hearings have been held with
the participation of all the parties
involved in the gas market: carriers,
distributors, user associations and all
the entities acting on behalf of users
and consumers.
3.
Regulatory Framework
22.132
The
process of privatization of the natural
gas service and the opening-up of the
economy was accompanied by regulations
for the gas industry in line with the
new principles that have been
established.
22.133
In
line with the new structure of the gas
market, the regulatory framework for the
gas industry is based on two laws
governing two well-defined sectors:
*
Law 17,319 (the Hydrocarbons Act). This
law regulates production, collection and
treatment of gas ("upstream").
In general terms this law, passed in
June 1967, is based on the structure of
mining law: a) regime of state dominion
over the fields (sect. 1) ; or b) regime
for concessions or permits for
individuals to carry out exploration,
exploitation and transport activities
(sects. 2 and 4); and c) private
dominion over hydrocarbons extracted by
companies (sect. 6).
*
Law 24,076 (the Regulatory Framework).
Together with Decree 1738/92 and its
modifications, other regulatory decrees,
the Bid Terms and Conditions, the
corresponding transfer agreements and
the licenses of each of the privatized
gas companies, these set the legal
framework as a public service for the
carrying and distribution of gas in
Argentina under a competitive and
partially deregulated system.
3.1.
General Principles
22.134
The
current regulatory framework attempts to
balance the rights of the various
parties involved in the industry by
setting the rules of the context in
which the gas sector is to develop.
22.135
The
Hydrocarbons Act is founded on the
following principles:
a)
The complementary participation by the
private sector is encouraged without
undermining the powers of the State to
regulate exploration, exploitation,
transportation, industrialization and
sale, as both the setting of policies on
the matter and the management and
control of their application is kept
fully in the hands of the Executive
Branch.
b)
Concessions are established as the way
in which the private sector can
participate in the development,
providing substantial benefits such as
access to the internal market for
industrialization and sale, and
eventually export, as well as the
virtual opening up of the domestic
market to potential competitors.
22.136
In
addition, Law 24,076 seeks to establish
that gas carrying and distribution
companies should operate in a
non-discriminatory "open
access" system whereby producers
and certain third parties, including
distributors, have the right to open and
equal access to the gas-carrying
pipelines and distribution networks.
22.137
Although
the Hydrocarbons Act also regulates all
matters concerning natural gas carrying
and distribution concessions, it should
be noted that it will only be applicable
to natural gas carrying and distribution
stages when the Gas Act (Law 24,076)
specifically refers to it, so that the
two regulations complement each other in
the regulation of all the activities
carried out within the gas industry.
3.2.
Objectives
22.138
The
following objectives are established
with regard to the carrying and
distribution of natural gas:
-
To
provide adequate protection of
consumer rights;
-
To
promote competition in markets for
the supply and demand of natural gas
and encourage investments to ensure
long-term supply;
-
To
encourage improved operation,
reliability, equality of access,
unrestricted and non-discriminatory
access and widespread use of the
services and installations for the
carrying and distribution of natural
gas;
-
To
regulate natural gas carrying and
distribution activities to ensure
that tariffs applied to services are
fair and reasonable as required by
the law;
-
To
encourage the rational use of
natural gas, ensuring the protection
of the environment;
-
To
ensure that the price of natural gas
supplied to industry is equivalent
to those in force internationally in
countries with similar availability
of resources and conditions.
22.139
These
objectives will be implemented and
controlled by the National Gas
Regulatory Entity (ENARGAS), created for
the purpose under the terms of this law.
3.3.
Principle of Subsidiarity
22.140
It
is important to note the express
enshrining in law of the principle of
subsidiarity whereby the National
Government and the Provinces, themselves
or through any of their entities or
dependent companies, shall only be able
to provide carrying and distribution
services once all tender procedures
foreseen under the law have been
fulfilled and there was no bidder to
whom the services might be awarded.
22.141
Thus
carrying and distribution of natural gas
should be performed by legal persons
under private law authorized by the
National Executive Branch by means of
the granting of an appropriate
concession, license or permit, after due
selection by public tender.
22.142
In
relation to production, collection and
treatment of natural gas, areas may be
explored by natural or legal persons
fulfilling the requirements laid down in
the regulations who have been awarded
permissions or concessions by bids
according to the procedures laid down in
section 5 of Law 17,319.
3.4.
Scope of the law
22.143
Carriers,
distributors, sellers, storers and
consumers contracting directly with
producers are subject to this law.
-
Producers:
All natural or legal persons holding
hydrocarbon exploitation concessions
or whom on the basis of some other
legal title extract natural gas from
fields located within Argentina,
with the right of disposition of
same.
-
Carriers:
All those responsible for carrying
natural gas from the intake of the
carrying system to the point where
it is received by distributors,
consumers contracting directly with
producers or storers.
-
Distributors:
All service providers responsible
for receiving gas from the carrier
and supplying consumers by means of
a distribution network up to the
consumption meter within a zone, it
is understood to be a unit within
the geographical limits. The
distributor is able to enter into
transactions for the purchase of
natural gas directly with the
producer or the seller.
-
Seller:
Whoever purchases and sells natural
gas on behalf of others.
3.5.
Limitations
22.144
Law
24,076 prohibits gas carrying companies
from participating in the sale of gas
except for the acquisitions they may
make for their own use and the natural
gas necessary to keep the carrying
system in operation.
22.145
It
is also forbidden (i) for producers,
storers, distributors and gas consumers
to contract directly with producers or
to hold a majority interest in a
carrying company; (ii) for producers and
carriers to own a majority interest in a
distributor; and (iii) for sellers of
gas to own a majority interest in a
distributor or in a carrier.
22.146
Contracts
between related companies participating
in different stages of the natural gas
industry must be approved by ENARGAS.
ENARGAS may reject these contracts only
if it establishes that they have not
been entered into at normal market terms
as arm’s length transactions.
22.147
Excluded
from the above-mentioned limitations are
producers who have the right to obtain a
carrying concession under the terms of
the Hydrocarbons Act, except as referred
to participations in distribution
companies.
22.148
In
addition, the regulatory framework rules
on the regime for extensions to the
system, exports and imports and gas
pipeline easements.
4.
Tariffs
22.149
For
the purpose of establishing tariffs for
carrying and distribution services, the
regulatory framework establishes the
following principles to be followed:
-
Tariffs
should cover all reasonable
operating costs for the service,
taxes, depreciation and a reasonable
profit;
-
They
should take into account the
differences that might exist between
the various types of service as to
manner provided, geographical
location, distance from fields or
other such aspects;
-
The
sale price from the distributor to
consumers shall include the
acquisition cost determined by
contracts reached subsequent to the
coming into force of the regulatory
framework.
-
Tariffs
should ensure the minimum cost to
consumers that is compatible with
the safety of the supply.
5.
ENARGAS
22.150
The
Gas Act and the corresponding licenses
establish that ENARGAS is to be the
Regulatory Authority responsible for the
administrating and enforcing of the
terms of Law 24,076, regulatory decrees
and other regulations.
22.151
ENARGAS
is an independent entity established
within the sphere of the Ministry of
Economy and Public Works and Services
which has full legal capacity to act in
the areas of public and private law.
22.152
ENARGAS
regulates natural gas carrying, selling,
storage and distribution. It is
responsible for carrying out all the
measures necessary to protect the rights
of customers, for promoting competition
in the supply and demand of gas and for
stimulating long-term investment in the
gas industry. In addition, it should
ensure that energy prices are similar to
prices in other economies comparable to
that of Argentina.
22.153
From
an economic point of view, ENARGAS has
its own assets, made of assets that were
transferred to it and those that it may
acquire by any means in the future. The
Entity’s budget must be included in
the National Budget and submitted to
Congress for approval.
22.154
ENARGAS
is administered by a five-member board
of full-time directors who are named by
the Government (after it has informed a
Congressional Committee, which has 30
days to confirm the nomination). Board
members serve for alternate periods, the
initial appointees may be named for a
period of one and five years. They may
be removed by the Government, on the
basis of a duly grounded decision
confirmed within 30 days by a
Congressional Committee.
22.155
The
functions and attributes of the ENARGAS
include the following:
-
to
ensure compliance with the terms of
law 24,076, regulations in force and
the licenses of the privatized
companies;
-
to
advise the Government regarding the
assigning, renewal or cancellation
of licenses;
-
to
issue regulations, decrees or
publications on the results of its
investigations in relation to
certain matters submitted to the
Entity;
-
to
issue and control compliance with
regulations relating to technical
and safety aspects, uniform
accounting, metering and billing and
disconnection procedures.
-
to
prevent discriminatory or
un-competitive behavior by companies
covered by the Gas Act;
-
to
approve tariffs and their
adjustments;
-
to
issue guidelines to be met by
licensees in relation to open access
to the system, guaranteeing fair and
equitable distribution of available
transport capacity, taking into
account the priority assigned to
non-interruptible service.
-
to
issue approvals for the transfer of
majority holdings in gas
distribution and carrying companies;
-
to
approve the construction of
significant new facilities, and the
extension or abandonment of existing
installations;
-
to
inspect and approve installations
and order the suspension of the
service and the repair or
replacement of facilities and
equipment;
-
to
issue regulations on the maintenance
of the installations, informing on
the requirements to be fulfilled by
the licensees in this regard;
-
to
be responsible for the protection of
the environment and the public
service;
-
to
request the regulated entities to
provide information and
documentation to verify compliance
with the corresponding regulations
and to inspect carrying companies;
-
to
apply sanctions, including warnings
and fines as foreseen by the Gas Act
and the licenses; and
-
to
appear before Civil and Criminal
Courts to enforce compliance with
the Gas Act and the regulations
issued on the basis of that law.
22.156
One
of the most notable aspects of the
regulation performed by the ENARGAS is
that its decisions are subject to
judicial review. Conflicts between two
regulated entities or between a
regulated entity and a third party that
arise out of the distribution, storage,
carrying or sale of natural gas must be
submitted in the first instance to the
ENARGAS for a ruling. The decisions of
the ENARGAS may be appealed by means of
the filing of administrative recourses
with the Ministry of Economy and Public
Works and Service, or directly before
Argentine federal courts.
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