Subsidies and cross-subsidy
Subsidies and cross-subsidy law, all urban areas in Colombia are classified from one to six on the socioeconomic scale, a classification that is used to determine the level of tariffs for electricity, water and other services. Under this system, consumers who live in areas considered poor – and consumers who use low amounts of electricity – receive electricity and natural gas at subsidized rates. These cross-subsidies are funded almost entirely (approximately 98 percent) of consumers living in areas considered relatively affluent and those who use more electricity. Cross-subsidies cover about 25 percent of the electricity bill and gas from low-income consumers. A special fund to cover the remaining amount not covered by consumers provided U.S. 21.8 million in 2005. On average, 7.5 million people a month are benefiting from this fund.Additionally, the fund provided grants Col (pesos) 17.159 billion (U.S. 7.4 million) to 1,808,061 natural gas customers. Subsidies are also granted to provide diesel for energy production in areas not connected to the network. While the diesel within the country can cost around 0.8/gal in remote areas can reach values of 4.5/gal due to high transportation costs. This system of stratification of subsidy in Colombia has proved relatively ineffective in channeling subsidies to the poor. Although the scheme is comprehensive in its coverage and excludes no more than 2 percent of the poor coverage services like electricity, water and sanitation, the benefit is not adequately restricted. About 50-60 percent of subsidy beneficiaries are from the upper half of the income distribution, and moreover, only 30-35 percent of subsidy resources are captured by the poor.However, the performance of this subsidy scheme varies depending on the service in question, being water and telephony sectors with the worst and best performance respectively.