OUR CONTEXT
The 2021
Economic Environment
2021 was a year marked by uncertainty related to the evolution of the pandemic, the emergence of new variants and new waves of infections, the energy crisis, and disruptions to global supply chains. However, the world economy displayed resilience to the adversities of the year and in fact displayed important signs of recovery, in which vaccination campaigns in most of the world played an important role, because it enabled lifting the containment measures and the return to activities that had been hard-hit all over the world one year earlier.
The US economy displayed a strong recovery in 2021, following a 3.4% contraction in 2020. This recovery was driven by the reopening of activities and fiscal support that stimulated the economy through an increase in private consumption. The above was possible thanks to an ambitious vaccination campaign that began in December 2020. However, inflation, driven mainly by disruptions in the supply chains and the energy crisis, partially slowed down the country’s economic growth and increased consumer concerns in view of their diminished purchasing power.
During 2021, the average international price of Brent oil increased by 63.5% compared to the previous year. The rise in oil prices was due to compliance with the cuts mandated by OPEC+ and the progress made in the vaccination campaign against COVID-19, which sparked an increase in demand in the United States, the European Union and China.
In this international context, the Colombian currency closed at COP 3,981 per dollar, equivalent to devaluation of 15.98% compared to year-end 2020. This behavior is due to high global inflation, a deeper energy crisis, the change in expectations of a possible rate hike by the Fed, and the increase in the country risk premium at the local level, amidst socio-political uncertainty, which in mid-year led to a downgrade of the country credit rating from investment grade by Standard & Poor’s and Fitch Ratings.
mainly thanks to the reactivation of the economy, featuring growth in internal demand driven by an increase in household consumption. Economic growth in Colombia could have been higher, but the speed of recovery was slowed down by restrictions in mobility and a national wave of protests.
During 2021, Colombia was no exception to the global inflation phenomenon, reporting inflation of 5.62%, which is above the target range set by the Colombian Central Bank. This increase in inflation was due to factors such as the container crisis and disruptions in the global supply chains, high commodity prices, a semiconductors shortage, and excess demand due to pent-up savings during 2020.
On the fiscal front, in 2021 a Social Investment Bill was introduced in view of the country’s need for structural revenues to curtail the high deficit produced by the economic crisis, and to ensure the sustainability of the country’s finances in the long-term. Even though this reform was not technically desirable, it was the option that was politically feasible following the tabling of the failed Sustainable Solidarity Bill. On the other hand, the fiscal accounts have displayed a substantial recovery thanks to higher tax collections driven by economic growth.
The pandemic continues to affect the global economy due to the disparities in vaccine distribution and the increase in infections due to new variants of COVID-19, which has led countries to reintroduce restrictions to mobility. The situation faced at the start of the year is highly likely to affect economic activity in the short-term. However, a recovery process is expected to gradually take hold, with less emphasis on consumption and more on investments and exports.
In 2022, oil prices are expected to be lower than in 2021, in a context of over-supply of oil, where OPEC+ and the US decide to increase production in view of growing global demand for crude oil.
Colombia’s economy is expected to grow by 4,6% in 2022, thanks to good performance of household consumption, higher investment and more suitable global financial conditions. However, a new tax reform and new COVID-19 variants could slow down the economic recovery in 2022. Inflation is expected to remain above the Colombian Central Bank’s target throughout 2022. This inflationary pressure is due to the following factors: the gradual and lagged transmission of cost increases to final prices, high level of indexing of major components to the CPI, and a 10% increase in the minimum wage in 2022. In particular, high inflation is expected in the first half of the year, reaching a peak in the third quarter, to then gradually decrease by the end of the year, mainly due to contractive interest rates implemented by the Colombian Central Bank.
The exchange rate is expected to increase in the first months of 2022 due to the loss of the investment grade rating, the political uncertainty associated with the presidential elections, the drop in oil prices due to increased supplies by countries that do not belong to OPEC, and the appreciation of the dollar at the global level due to curtailment of the monetary stimulus program by the Fed. In view of the above, the dollar exchange rate is expected to fluctuate between COP 3,850 and COP 4,000 in the first half of the year, with less volatility and a downward trend by the end of 2022,
reaching a level between COP 3,710 and COP 3,750.
The Social Investment Bill is a key component of the fiscal strategy in 2022, to the extent that it will enable the continuity of the expansionist policies and raising the additional revenues to finance them.
This proposed Social Investment Bill would ensure the continuity of certain social spending and reactivation programs in 2022, with the objective of reducing the incidence of poverty to levels similar to those found before the pandemic, and sustaining the economic recovery process.
Consumption in the residential sector increased thanks to the growth and penetration in new populations that have been maintained in recent years.
Due to the fact that the vehicles have had a conversion to VCNG, it is expected for this scenario that their consumption will be maintained and, even, that it will slightly decrease due to the changes in the commercial dynamics that occurred as a result of the pandemic.
Consumption is expected to increase for the industrial sector in the years 2021 to 2025, to a certain extent, bearing in mind the start-up of the Hidroituango power plant and the transmission projects that alleviate security generation with thermal power plants.
Law 2099,
was enacted in July 2021, which issues provisions related to the energy transition, the promotion of the energy market and economic reactivation. This law strengthens Law 1715/2014 on non-conventional energy sources by including aspects such as storage of energy and green and blue hydrogen, and broadening the scope of their application in household public utilities, public lighting and smart metering, among others. It also extends the tax benefits of Law 1715 to energy efficiency, smart metering and green and blue hydrogen, and strengthens Fenoge. It includes other provisions related to mobility, carbon capture and energy funds, among others.
law 2128,
was enacted in August 2021, which aims to guarantee the sourcing and reliability of fuel gas, and promote its continuity and coverage in the country. Some highlights include the substitution of firewood and electric power generation using this energy source. Regarding mobility, it declares that the mass use of gas fuel is a matter of national interest. To this end, it establishes incentives such as discounts in costs related to vehicles and the elimination of requirements and restrictions. It also establishes a minimum percentage of fleets powered by gas fuel.
in Peru,
Supreme Decree 004-2021-EM amended the regulations of the Energy Social Inclusion Fund (FISE, for the Spanish original). One of the aims of this adjustment was to broaden the scope to regulated users and natural gas distribution or transportation systems or means, because it previously only made reference to residential users and switch-overs to NGV. It also establishes that residential users of connection plans within the contractual commitments of the concessions may benefit from the fund. Lastly, it establishes that the FISE may be used for new investments (CAPEX), and such amounts would not be included in rate-setting calculations.
Regulatory context
Given that the natural gas and electric power sectors are regulated to ensure optimal service provision to users, Law 142/1994 sets the framework and defines the household public utilities in Colombia, including electric power and natural gas. Based on this law, the Commission for Electricity and Gas Regulation (CREG, for the Spanish original) was created, whose main function is to regulate the activities included in the natural gas and electric power value chains in the country, and establishes their supervision and control by the Superintendence of Household Public Utility Services. On the other hand, public policies related to energy are under the responsibility of the Ministry of Mines and Energy, and planning of the sector is performed by the Mining Energy Planning Unit (UPME, for the Spanish original).
During the pandemic, both the CREG and the Ministry of Mines and Energy have issued the following regulations on the adequate commercialization, service provision and bill collection of the services.
1. Gas transportation:
Discount Rate on Regulated Activities: In February, by means of Resolution 004/2021, the CREG published the final version of the procedure for calculating the regulated discount rate for gas transportation and distribution, as well as for other activities of the electric power value chain. Resolution 103 of October 2021 establishes that the discount rate for the transportation activity is 10.94% in real pre-tax Colombian pesos. This rate is expected to be updated in the first quarter of 2022, to apply the current income tax rate.
Regulatory Useful Life Processes: In October, the CREG adequately resolved the pending regulatory useful life processes for the assets of Promigas and its affiliates:
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It recognized as value as new 100% of the values of an expert appraiser.
- It confirmed 60% of the value as new for assets that remain in operation.
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This rate is expected to be updated in the first half of 2022.
Natural Gas Sourcing Plan:
In October, by means of Resolution 330/2021, the UPME defined the prioritized projects of the Natural Gas Sourcing Plan, which include the two-way flow between Barranquilla and Ballena, embedded in the transportation system of Promigas. Another project is the interconnection of the section La Mami-Ballena owned by Promigas and Ballena-Barranca owned by TGI.
Promigas submitted to the UPME and CREG the rate requests for these investments in January 2022. They are expected to be approved in the first half of 2022.
Transportation Rate-setting Methodology: In November 2021, by means of Resolution 175/2021 CREG published the methodology for natural gas transportation, which establishes the general criteria for remuneration of the natural gas transportation service and the general scheme of rates of the National Transportation System over the next five-year
period.
General aspects:
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The transporters must submit their rate requests in February 2022.
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Updating of rates in stages; starting on June 1, the rates will be updated using the weighted average cost of capital and the currency of the rate will be switched from dollars to Colombian pesos.
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In the second stage, the transporter may request changes in the configuration of sections, and the investment, AOM and demand variables were adjusted.
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It includes the methodology for the calculation of regulated revenues for Sourcing Plan projects.
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Rate reviews can be made every 2 years to include new investments.
Proposals for New Transportation Scheme in 2026: In December, the CREG published a study by Brattle Group on the proposed scheme for gas transportation in Colombia starting in 2026. The consultant recommends an “Entry-Exit” scheme.
2. Natural Gas Distribution:
One of the duties of CREG is to define the regulated rates for distribution and retail commercialization of natural gas. Resolution 202/2013 establishes the remuneration methodology for the natural gas distribution activity that is currently in effect. By means of Notice 034/2017, the Commission established that companies could request interim gas distribution rates, which are currently applied by our companies. Subsequently, the CREG published resolutions 090/2018, 132/2018 and 011/2020, in which changes were made to the methodology established in Resolution 202/2013, and by means of Notice 107/2018 companies were allowed to indicate their intention of either maintaining the interim rates or to request final distribution rates. Once the intention of final rates was defined, by means of Notice 062/2020, amended by Notice 068/2020, the Commission established the timetable for companies to submit their request for new rates, the deadline of which was September 1, 2020. The Commission is currently performing administrative processes in order to approve the new rates for natural gas distribution, to which end, during 2021 it has issued notices to the company to provide evidence, and the specific resolutions are expected to be published in 2022.
Regarding retail commercialization, the current rates are those established according to the methodology defined in Resolution 011/2003. During 2021, by means of resolutions 220/2020 and 147/2021, the Commission published for comments the new retail commercialization methodology. One of the most noteworthy aspects of this proposal is the establishment of a fixed charge to recognize expenses related to AOM and the investments made by the companies, and a variable rate, which would recognize an operating margin, accounts receivable risk and financial costs, among others. The final methodology for the natural gas commercialization activity is expected to be published in the first half of 2022.
3. Electric Power Distribution:
In the electric power distribution business, CREG defined the current methodology by means of Resolution 015/2018. During 2019, the Commission approved the OR revenues for the next rate period, which in the case of CEO were established in Resolution 141/2019.
Regarding the commercialization methodology, the current rates are established pursuant to the provisions of Resolution 180/2014. The new commercialization methodology is expected to be defined in 2022, taking into consideration that the five-year rate period has already ended.
4. Natural Gas Distribution in Peru
Public policies related to the natural gas sector in Peru are under the responsibility of the Ministry of Energy and Mines, and regulation and supervision of the industry is delegated to the Supervisory Body of Private Investment in Energy and Mines (OSINERGMIN, for the Spanish original), which defines the rates to be applied by natural gas distributors.
Natural gas distribution is performed through concession contracts with a maximum term of 60 years, for delimited areas. Once the term has expired, the companies must hand over the assets of the concession to the Government. The activity is regulated through Supreme Decree 40-2008-EM and each concession contract defines the applicable specific characteristics to perform the natural gas distribution activity.
The distribution rates of the concessions are initially set for an eight-year period, after which rates are subject to an updating process through the regulatory body. Both Quavii and GasNorp are currently in the initial eight-year rate period. Cálidda is already beyond this stage, and consequently every four years it engages in the rate updating process. The current rate period is from 2018 to 2022, and consequently in 2021 the company initiated the updating process by submitting its Five-year Investment Plan and the rate request, which once approved and published by the regulator will be applied by the company starting in May 2022.
