Article by Carlos A. de Kemmeter and Juan Carlos Sanguinetti.

"Argentine Business Law Watch" is a periodic news service provided free of charge to clients and friends of Negri, Teijeiro & Incera.

This edition of Argentine Business Law Watch reports on a recent directive released by the Secretariat of Energy. The directive represents the Government’s latest response to the current Argentine energy crisis. In our March issue, we outlined the Government’s plans to curtail exports of natural gas and gas-generated electricity, as well as other measures to reduce domestic consumption, embodied in Decrees 180/04 and 181/04.

Directive 385/04

Emergency decrees 180/04 and 181/04 issued by the Government in March endow the Secretariat of Energy with the power to take "all measures as it may deem necessary" to assure natural gas service in the event of a shortage. While vesting it with broad authority, the Secretariat’s power to declare measures is limited to responding to actual shortages or other emergencies. In addition, the measures must terminate once the crisis justifying the measures ends.

In the exercise of these powers, on May 3rd the Secretariat of Energy released Directive No. 385/04 to establish a "natural gas allocation system." Under the terms of the Directive, this system assures supply to certain consumers, particularly residential users, acquiring gas from distributors. In the event of a gas shortage, the system reassigns gas purchased by industrial users directly from the wellhead and delivered on an interruptible basis to other consumers. Thus, in more or less elegant terms, the Directive confiscates natural gas purchased by the interruptible user to assure supply of other users whose supply is deemed to have priority.

As of today, the Directive has not been published in the Official Gazette. Unless and until it does, it is not considered effective. Nonetheless, on May 4th ENARGAS ordered distributors to implement the allocation system "immediately." Indeed, the last several days have witnessed an actual reduction in gas supplies to certain users that acquire fuel directly at the wellhead. The absence of publication after more than two weeks of conjecture is curious, especially because it provides another basis for an affected party to question the Directive’s validity.

The Squeaky Constituency Gets the Gas

To understand the policy behind the Directive, one must first understand the difference between those purchasing gas at the wellhead and other consumers. The vast majority of users—basically all residential customers and medium-size industrial consumers—contract the delivery of natural gas through the public utility servicing their geographical area. These public utilities (gas distributors) charge a tariff that reflects (i) the price of gas, (ii) the cost of transporting the gas and (iii) the distributor’s margin for the service. While, in theory, any user may elect to purchase gas directly from a gas supplier (in which case the distributor would eliminate this component from the tariff), in practice, only large industrial users contract their gas supply directly from the wellhead.

In addition, gas service is supplied on "firm" and "interruptible" bases. Residential consumers receive gas on a firm (i.e., non-interruptible basis). Other users, benefiting from an alternative fuel source and desiring less-expensive service, contract their gas supply on an "interruptible" basis. The Directive subordinates this latter segment’s gas supply to the much larger, albeit diffuse, residential demand.

The Directive also points to another policy choice made by the Government—this time with a nod toward the Chilean purchasers of exported gas. The Directive announces that the export curtailments approved by the Sub-Secretariat of Fuels (discussed in our March issue) apply only if the natural gas allocation system fails to assure supply to residential and other preferred consumers. Nonetheless, domestic users suffering from shortages are unlikely to watch idly as gas is exported to Argentina’s neighbors. Local affected industries or individual large users will undoubtedly use regulatory and constitutional guarantees to support their contention that domestic consumption should enjoy priority.

The Directive sunsets the gas allocation system on August 31, 2003, subject to amendment by the Secretariat of Energy based on its monitoring of results. If shortages become acute and industry users are unable to pass through the cost to consumers, look for a proliferation of claims to enjoin the allocation system and renewed pressure to halt exports. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.