Government seeks to reassure consumers on electricity rates

Power producers up in arms over withdrawal of budget support

The government said Tuesday that it would not allow power producers to pass on all at once the impact of its last-minute decision to withdraw financing to help bridge the so-called tariff deficit, the difference between what it costs to produce electricity and what suppliers are allowed to charge to the public.

In surprise amendments introduced in the Senate on Friday by the ruling conservative Popular Party to the new draft electricity law, the government reversed its decision to set aside 3.6 billion euros to help cover the tariff deficit for this year, saying reducing the budget deficit took precedence.

“The public deficit is above any other consideration,” Industry, Energy and Tourism Minister José Manuel Soria said. “If we don’t fulfill our commitments, it will have an impact on all aspects of the economy.”

The reform of the electricity sector had already raised the hackles of suppliers by putting a cap on the return companies can earn from clean-energy sources. Some of the reactions of players in the industry to the latest amendments to the proposed law included “regulatory uncertainty” and even “fraud.”

One source said that after the latest amendment, the draft electricity sector law “no longer reflects with sufficient precision the objectives of the reform and this has generated a significant loss of credibility.”

The share prices of utilities continued to suffer on Tuesday after the government’s decision, which helped wipe 1.17 billion euros off the market capitalization of the big three in the sector: Iberdrola, Endesa and Gas Natural Fenosa.

“It wouldn’t make sense that the deficit created as a result of a one-off decision is paid all at once,” the secretary of state for energy, Alberto Nadal, said. “The government is not going to allow such a rise in electricity rates.”

Over the years, the tariff deficit has built up to 26 billion euros, with the latest move by the administration causing it to swell to almost 30 billion euros. The tariff deficit has so far been securitized and sold to investors. However, the 3.6-billion-euro shortfall for this year will be carried directly on electricity producers’ books and paid off over 15 years.

The wholesale price of electricity, known as the pool price, which is used in part to determine electricity rates for consumers, shot up to its highest level since February 1 on Tuesday. Industry sources attributed the rise to winter demand, denying it had anything to do with the latest amendments to the draft law affecting the sector.

Economy Minister Luis de Guindos on Monday also said consumers would not foot the bill for the unexpected increase in the tariff deficit, adding that the government would seek alternative funding measures that would “not have an impact on the taxpayer.”

Officials from 12 European electricity companies were due to meet Tuesday with the European Union commissioner for energy, Günther Oettinger, to lobby for pan-European regulatory measures that favor combined-cycle power plants and reduce premiums paid for electricity supplied by renewable energy sources.

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