The Law that “Amends the Gas Service Law and other legal provisions” (hereinafter, the “New Law” ) entered into force on February 9, 2017.
The purpose of the New Law is to fill in the legal gaps existing in a market that, according to the parliamentary discussion, needs to improve the level of competition among their different actors.
Therefore, the New Law introduced significant amendments to Decree Law N°323 and to Law 18,856 which regulated, among other elements, the provision of gas related services (hereinafter, the “Gas Law”).
A brief description of the most significant amendments follows:
1. Free-fare setting with a maximum profitability limit:
According to the New Law, the gas distribution companies subject to concessions granted by the State (hereinafter, the “Concessionary Companies”) are allowed to freely set their fares, provided that the maximum profitability limit referred to in section 2 is observed.
The National Commission of Energy (hereinafter, the “NCE”) is the public entity in charge of monitoring compliance with the maximum profitability limit through an annual profitability check.
The free-fare setting does not apply to Concessionary Companies located in the Magallanes and Antarctic Regions which are subject to a fixed–fare regime.
2. Reduction of the maximum profitability limit allowed to Concessionary Companies:
The New Law maintains the structure of the maximum profitability limit, calculated over the Cost of Capital Rate (hereinafter, “CCR” ) which has a minimum profit of 6%.
However, the New Law reduces the profitability spread allowed over the CCR, from five to three percentage points.
As a result, the profitability limit is reduced, by the New Law, from 11% to 9%.
The implementation of the new limit is subject to a transitory and gradual implementation which considers the age of the facilities and related elements described in the transitory provisions of the law.
3. Application of an automatic fixed price regime in the event Concessionary Companies exceed the profitability limit:
Before the New Law entered into force, breaching the maximum profitability limit was only a condition for the submission of a request before the Antitrust Court (hereinafter, “FCC”) as to whether it was proper or not to impose a fixed-fare regime on offending companies.
The New Law, in contrast, provides for a fixed-fare regime process which automatically applies every time the NCE is able to determine that a Concessionary Company has exceeded the maximum profitability limit by more than 0.2%.
The Concessionary Company to which the fixed fare regime is imposed has the right to action before the FCC, in order to return to a free-fare setting regime again. If the FCC considers, following a report by the Economic Prosecutor’s Office, that competitive conditions do exist in the market, it will order the Minister of Energy to declare the end of the fixed-fare regime applicable to the Concessionaire Company.
4. Procedure and methodology to implement fixed-fare regimes:
The procedure and methodology to apply a fixed-fare regime considers two elements (i) the value of gas at the moment of being introduced to the distribution system; and (ii) the additional value for the distribution activity.
The first element represents the prices of the sale and transport contracts.
The second element is determined based on the information provided by a real company, but corrected by efficiency requirements, which only considers the costs and incomes that are a direct consequence of the distribution activity. Nevertheless, the cost arising from the connection of new clients to the distribution system will be depreciable within a period of 10 years.
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