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.

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; and
• 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.

1 Administrative Decision 12 of 2020 (Resolución CREG 12 de 2020) Alejandría - Resolución 12 de 2020 CREG and Administrative Decision 58 of 2020 (Resolución CREG 58 de 2020) Alejandría - Resolución 58 de 2020 CREG.
2 "En dura carta, comercializadoras de energía alertan al Gobierno de un posible 'apagón' por problemas financieros," available at https://www.elcolombiano.com/negocios/asocodis-comercializadoras-alertan-a-ministerio-de-minas-y-energia-y-gobierno-de-colombia-problemas-financieros-y-apagon-EE22262314.
3 "Gremios del sector energético pidieron al Gobierno revisar la coyuntura institucional," available at https://www.larepublica.co/economia/gremios-del-sector-energetico-pidieron-al-gobierno-revisar-la-coyuntura-institucional-3661029; "Cuatro nuevos expertos comisionados (e) llegan a la CREG," available at https://creg.gov.co/publicaciones/15581/cuatro-nuevos-expertos-comisionados-e-llegan-a-la-creg/.
4 "Colombian President Signs Decree Aimed At Lowering Electricity Prices Despite Union Opposition," available at https://bnn.network/breaking-news/colombian-president-signs-decree-aimed-at-lowering-electricity-prices-despite-union-opposition/
5 "Expiden nuevos lineamientos para la prestación del servicio de energía," available at https://www.portafolio.co/economia/gobierno/expiden-decreto-con-los-nuevos-lineamientos-para-la-prestacion-de-energia-electrica-en-el-pais-584064
6 "Polémica por firma de decreto que busca reducir las tarifas de electricidad," available at https://www.rcnradio.com/economia/polemica-por-firma-de-decreto-que-busca-reducir-las-tarifas-de-electricidad
7 Colombia has enforceable Investment Promotion and Protection Agreements ("IPPAs") with the following countries: France, India, United Kingdom, Japan, Switzerland, Peru, China, and Spain. Colombia has also signed free trade agreements ("FTAs") that contain investment protection provisions with Canada, United States, Israel, Korea, Costa Rica, Chile, Mexico, Venezuela, El Salvador, Guatemala, and Honduras.
8 It should be noted that the public interest of a regulatory measure does not necessarily exonerate the State of its international responsibility in cases of expropriation.