Colombia update – investors face policy shifts in Colombian energy sector

Investors in the Colombian Energy Sector Face Regulatory Challenges

Introduction

Investors in the Colombian energy sector are facing evolving challenges, as regulatory actions are being implemented by the Colombian government. Regulatory actions taken by the Colombian government since late 2022 in the electricity regulatory framework heighten the uncertainty and may threaten the basic premises upon which investors invested in Colombia.

Sustainable Development Goals (SDGs)

The following significant aspects of the enacted and anticipated regulatory changes warrant consideration by investors in the energy sector:

• The tariff option.

In an attempt to hold back inflationary pressure and the negative effects of the COVID-19 pandemic, the Colombian government provisionally implemented in 2020 a regulatory instrument called “Opción Tarifaria” to control tariff increases.¹ This measure was aimed at preventing suppliers from charging end users with tariff increases in the short run, with the possibility of recovering the balances in the long run. ASOCODIS, the union representing energy distributor companies in Colombia,² highlighted that the accrued receivables of energy suppliers amount to COP 7.2 trillion and warned that absent urgent and decisive action by the Colombian government, investors and their investments will face further significant losses.

• The independence of the Regulatory Commission of Energy and Gas (“CREG”).

Independence has long been a cornerstone of the Colombian energy regulatory agency, CREG. However, the CREG has seen material and structural changes over the past months, and the Colombian government has signaled that more changes to Colombia’s energy industry are forthcoming, especially in the reduction of energy tariffs. While no full-time independent experts — as required by Article 21(d) of Law 143 of 1994 — have been appointed during 2023, four out of the six experts appointed earlier this year are government officials that took on the positions temporarily but simultaneously holding other positions within the Colombian government.³

• The implementation of Decree 929 of 2023.

Despite significant criticism⁴ from certain unions representing energy generators, on June 7, 2023, President Gustavo Petro enacted Decree 929 containing policy guidelines to lower electricity prices.⁵ This set of guidelines, which need to be implemented by the CREG, may have a significant impact on the wholesale market, fostering concerns among experts and investors.⁶

Navigating the Impact on Energy Sector Investments

In light of these developments, investors engaged in the energy sector would be well advised to consider available options. Companies can take a variety of steps, including risk-mitigating measures, taking timely steps to increase the likelihood of a negotiated solution, and/or ensure the international protection of their investments, including through possible claims against Colombia under international investment treaties.

In particular, Colombia’s changes to the energy regulatory framework could potentially impair rights protected under international treaties, including bilateral investment treaties, multilateral treaties, and free trade agreements with investment chapters. It is worth noting that Colombia has entered into more than 20 such investment treaties, including with the United States, Canada, the United Kingdom, China, and France, among others.⁷

These investment protection treaties grant foreign investors a series of rights aimed at protecting their investments in Colombia including, among others:

• Fair and equitable treatment:

This standard is usually found to prohibit States from frustrating legitimate expectations created to induce an investor to invest, as well as arbitrary and unjust conduct. While a violation of this standard is fact-specific, tribunals have found that this standard is breached when a State fails to afford due process and observe fundamental principles of its regulatory framework; conducts itself in a way that is arbitrary, grossly unfair, or unjust, or involves a lack of due process, or fails to respect the foreign investor’s legitimate expectations.

• Non-discrimination:

This standard is usually found to prohibit States from discriminating among investors/investments and seeks to ensure that investors in similar circumstances are treated equally, regardless of nationality.

• Legal expropriation:

Expropriation entails a State’s interference with private property for a public use. Both physical items (such as infrastructure, land, natural resources) and intangible rights associated with ownership (such as debts, shares in companies, contracts, and intellectual property) may be expropriated. While States have the right to expropriate private property — including through nationalizations — that right is subject to certain conditions and must at a minimum be: (i) non-discriminatory; (ii) done for a public purpose; and (iii) be accompanied by the payment of prompt, adequate, and effective compensation.⁸

Ultimately, the specific actions that a particular investor should take depend on the particular facts and available rights in each situation. Investors faced with recent changes in the Colombian energy sector should take active steps to protect both their legal and commercial interests. These should notably include actions to minimize disruption to their investment, preserve critical data and information, as well as consultation with experienced practitioners.

Cristian Torres (White & Case, Associate, Mexico City) has contributed to the development of this publication.

SDGs, Targets, and Indicators in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 7: Affordable and Clean Energy
• SDG 9: Industry, Innovation, and Infrastructure
• SDG 16: Peace, Justice, and Strong Institutions
• SDG 17: Partnerships for the Goals

The issues highlighted in the article are related to the energy sector in Colombia, which is connected to SDG 7 (Affordable and Clean Energy) and SDG 9 (Industry, Innovation, and Infrastructure). The article also mentions the regulatory changes and potential legal actions, which are connected to SDG 16 (Peace, Justice, and Strong Institutions) and SDG 17 (Partnerships for the Goals).

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 7.2: Increase the share of renewable energy in the global energy mix
• SDG 9.4: Upgrade infrastructure and retrofit industries to make them sustainable
• SDG 16.6: Develop effective, accountable, and transparent institutions at all levels
• SDG 17.16: Enhance the global partnership for sustainable development

Based on the article’s content, the specific targets that can be identified are increasing the share of renewable energy in the global energy mix (SDG 7.2), upgrading infrastructure and retrofitting industries to make them sustainable (SDG 9.4), developing effective, accountable, and transparent institutions at all levels (SDG 16.6), and enhancing the global partnership for sustainable development (SDG 17.16).

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, there are indicators mentioned or implied in the article that can be used to measure progress towards the identified targets. However, the article does not provide specific quantitative indicators. To measure progress towards the targets, indicators such as the percentage increase in renewable energy generation, the number of infrastructure upgrades and retrofits, the level of transparency in energy regulatory institutions, and the number of partnerships for sustainable development can be used.

Table: SDGs, Targets, and Indicators

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Source: lexology.com

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