Spanish utility Gas Natural in mid-March said it is suing the Colombian government after it seized one of its companies, electricity provider Electrificadora del Caribe, known as Electricaribe. Colombian authorities announced they were liquidating Electricaribe, despite objections from Gas Natural, arguing that the company’s inadequate distribution network, which provides electricity to Colombia’s Caribbean coast, was responsible for frequent blackouts. Gas Natural has accused Colombia of “expropriation.” What is behind the dispute, and why could the parties not come to an agreement before going to arbitration? Will the case, which Gas Natural is bringing to the United Nations Commission on International Trade Law, dissuade other international energy companies from investing in Colombia? What will it take to bring Colombia’s electrical grid up to higher standards?

John Padilla, managing director, and Maria Claudia Diaz, senior consultant, at IPD Latin America:

“Colombian authorities may have had their reasons to liquidate the company, including a long history of poor service and failure to invest a required $370 million on grid improvement. But Electricaribe is also owed more than $1.3 billion from end users who simply haven’t paid. The culture of non-payment stems not just from its large portion of poor customers, but also public institutions, including local government  buildings, hospitals and schools. An electric distribution company, Electricaribe serves seven Caribbean states in northeastern Colombia. Although many believed the government needed to intervene at some level, the decision to go directly to liquidation was largely political.

Upcoming elections and President Juan Manuel Santos’ obsession with trying to keep all factions happy played a signifi cant role. Liquidation is the government’s right over a public utility, but the details as to why and how it made that move will matter. That information should emerge in the United Nations tribunal. Equally important is who will take over the troubled utility and how service will be maintained. Ultimately,  whether liquidation was justified or not, the decision does not send a good signal to the market. It is just one of many recent, troubling government choices that have also affected the exploration and production and mining sectors.

The decision to yank oil company Hupecol’s environmental permit from its Serranía block stands as an example. Colombia has long been considered to have strong rule of law. But the Electricaribe decision will not encourage investors. While the country may have certain strong arguments in this case, it has begun to build a discouraging track record.”

We are pleased to contribute IPD’s opinion to this week’s Latin America Energy Advisor.  To read more, please download the edition here: