Renegotiation of public concession contracts.
- Argentina
- 03/06/2002
- Hourbeigt Ruiz Martinez & Padilla
The National Emergency and Monetary Reform Law No. 25.561 has prohibited the indexation of public services rates as well as its expression in dollars, converting them into pesos.
In more generic terms, it has prohibited all methods of indexation. This way, it closes a precedent started by the National Treasure Procurator – Procurador del Tesoro de la Nacion – a figure similar to the Attorney General, with his Legal Opinion MIV 153/2000, and deepened recently by the Federal Administrative Appellate Court No. IV. This Federal Court had suspended the application of the article 2 Executive Order No. 2.585/91 for which the phone pulse maximum price — expressed then in dollars — could be corrected biannually in function of the U.S. Consumer Variation Index variations (CPI all items.)
Other public services (gas and electricity distribution and transport, and tolls) had similar adjustment clauses. In the specific case of electricity and gas, is needed to point out that the laws that fixed the rates general principles were enacted a posteriori to the Convertibility Law. For that reason, the rate adjustment mechanisms foreseen by the respective regulatory frameworks didn’t contravene the Convertibility Law provisions (“the later law derogates the former; the special law derogates the general one”.)
Although the analysis about the legality of the dollar adjustment clause established in the rate determination formula had lost its relevancy for the reality imposed by the new normative, it doesn’t lose interest the indexation topic (today prohibited by a public order law) and their relationship with the mechanisms of determination of regulated rates.
Regarding the cases of gas, electricity and telephones, we were not in presence of a mere prices indexation mechanism, but a rate regulation that constitutes a unique and inescindible corp. The natural consequence of the confirmation of the jurisprudence tendencies and normative signals will be the termination of the price cap system (maximum price) and the return to the return rate regulation (rate of return or cost bonus) with the disadvantages that both the experience and the economic theory have already pointed out.
The return rate system (mostly used until the ‘80s) consists on assuring a profitability on the invested capital. The prices are adjusted to maintain unaffected that return rate. The main critic to this system consists on the few incentives that offers to the regulated company to increase its efficiency, since an increment in its earnings should move like a prices discount for not altering the return rate.
In the practice, Joskow (Journal of Law and Economics, October, 1974) argues that the U.S. Regulatory Agencies didn’t tend to intervene when the companies increased their earnings provided the prices didn’t increase, but that the companies frequently requested for a rates revision when their benefits diminished. Other studies demonstrate that the public services that used this mechanism of rates determination leads to an excessive use of capital and consequently higher prices (Averch-Johnson effect.)
The cap price system was designed by English economists and applied in the privatizations carried out on Thatcher administration. It consists on to determine an initial rate and to adjust it in real terms annually according to a factor of efficiency, estimated a priori in function of the grade of evolution of the reduction of costs of the industry. This factor of efficiency X is determined by periods of years, typically five. After that period, it is revised and the new value rules for the following five-year period. Meantime, the company assumes both the risks and benefits of its profits variation, what strongly motivates it to increase its productivity above the value of X. In addition, no one enters in new discussions during an extended period of time (four years), what diminishes the uncertainty and the regulatory cost.
As it is seen, the adjustment in real terms is generally to the downside (in services with several products like the telecommunications, it can have rates that ascend and others that descend according to the discrecionality with which the regulator applies the formula.) Therefore, there is not a price boost. On the other hand, is perfectly comprehensible and necessary to maintain in real terms the reference value if one thinks that the value of X is fixed for extended periods of time, avoiding this way sterile and expensive discussions about variations of costs.
Finally, t will be more necessary to admit the maintenance of the real value of the rate in a pesificated economy with an officially estimated inflation of 15 percent for 2002.
Independently of the opinion that people could have about the rate dolarization or pesification, is important that in the future renegotiations mandated by the Emergency Law No. 25.561 they do not mistaken the rate regulation method chosen, keeping the RPI-X formula in those cases where its use contributes to motivate productivity and efficiency, driving to fairer and more sustainable results in both users and companies benefit.
