The Supreme Court of Justice of the Republic of Argentina has issued a decision suspending rate increases on natural gas service throughout Argentina for residential users.

The increases had been approved as a part of substantial energy and financial reforms undertaken by the Macri administration to promote investment in aging infrastructure.

The Court’s ruling delays the contemplated price increases for residential users pending a robust public hearing.

The Court limited its August 18 decision to residential users based on the limited standing of the plaintiffs (consumer associations). Accordingly, a similar decision could eventually extend the same standard to industrial and commercial users.

Background

At the end of March 2016, Argentina’s Ministry of Energy and Mining (MEM) issued various resolutions that went into effect on April 1, 2016, which would increase the price of natural gas service after prices had been frozen for more than a decade. A nongovernmental organization, which also later joined a consumer association, brought a class action against MEM challenging the rate increases.

In an extraordinary appeal before the Supreme Court, the Argentine government, through MEM, sought reversal of a previous decision of the Second Division of the Federal Court of Appeals of the Province of La Plata, nullifying the rate increases for all types of users.

A unanimous decision

The Supreme Court issued a unanimous decision suspending the rate increases for residential natural gas users. Based on the plaintiffs’ limited standing, the Court’s decision does not extend to industrial and commercial users.

The Court sided with plaintiffs in holding that the natural gas prices cannot be increased until after a public hearing is held, rejecting the government’s argument that natural gas is not a public utility and therefore not subject to the public hearing requirement. The Court insisted that robust public debate is justified to ensure that rates for end users are reasonable and to enhance the legitimacy of the decisions of public authorities.

Need for new investment in the sector

Argentina’s energy policy in recent years has disincentivized investment in the gas transportation and distribution infrastructure. In its arguments before the Court, the Argentine government stated that the new gas prices are necessary to promote investment in exploration and production of natural gas and ensure the supply of gas service to the entire population. The government argued that without an increase in rates, attracting new investment would be virtually impossible.

The Court recognized that rate adjustments were overdue. It noted, however, that the needed adjustments should be gradual and reasonable and pointed out that sudden changes may actually be counterproductive to the government’s goal of increasing investment.

The Argentine government maintains the authority to adjust rates

The Supreme Court confirmed that the power to set rates resides in the Executive Branch, even though the provision of natural gas is in the hands of intermediaries − license brokers and concessionaires. This separation is valid under current regulations to encourage investment in the sector as well as to ensure long-term supply, but to also ensure that supplies are provided at the lowest possible cost to residential consumers, given their vulnerability, since substantial rate increases could deprive them of the utility altogether.

Under the current decision, gas rate increases will proceed for industrial and commercial users. However, the possibility remains that a future decision could eventually extend the same gradual-approach standard applied to residential users to non-residential ones.

This decision has broad implications for all of Argentina, not least for the public interest in maintaining affordable natural gas prices, the government’s need to attract investment into this sector, and the ever-present need to control inflation and government spending. It is safe to say that much remains to be determined with regard to natural gas policy and the rate structure in Argentina.

Public hearings on the rate increases are scheduled for September 12, 2016.