Government agrees solution with electricity suppliers to avoid rate hike

Spain’s electricity suppliers and the government have reached an agreement on the 3.6-billion-euro shortfall created for the sector by the administration’s last-minute decision to withdraw budget support to cover the so-called tariff deficit, the difference between what it costs to produce electricity and what companies are allowed to charge for it.

Mostly significantly, the accord should avoid an increase in electricity rates. Economy Minister Luis de Guindos had pledged that consumers would not have to foot the bill for the unexpected tariff deficit increase and that the administration would seek alternative means of resolving the issue. The solution took the form of the government agreeing to the securitization of the 3.6 billion euros, with the debt guaranteed by the state. Electricity companies can then sell this debt to investors to recover their costs.

The tariff deficit has been a thorn in the side of the sector and a headache for the government, with the accumulated shortfall now close to 30 billion euros.

The agreement was reached in a meeting between Finance Minister Cristóbal Montoro and representatives of the leading electricity producers, including the chairmen of Iberdrola, Gas Natural Fenosa and Endesa, respectively Ignacio Sánchez Galán, Salvador Gabarró and Borja Prado; and the chief executive officers of E.On España and EDP, Javier Alzóla and Miguel Stilwell de Andrade. The emergency meeting followed a telephone call by Montoro to Sánchez Galán.

Soria argued that the about-turn was necessary as reducing the budget deficit was “above any other consideration”

The deal was struck while Industry, Energy and Tourism Minister José Manuel Soria, the man directly responsible for the electricity sector, was meeting with the European Union commissioner for energy, Günther Oettinger, in Brussels.

The deal avoids the electricity sector having to assume the 3.6 billion euros in debt on their balance sheets. According to sources in the sector, that would have resulted in an increase of between 0.5 percent and 1.0 percent in the electricity rates paid by end users over the 15 years the companies would have to amortize the debt.

Electricity companies had complained that they were not informed beforehand of the amendments to the new draft law overhauling the regulation of the sector introduced on Friday in the Senate, which included the withdrawal of the 3.6 billion euros in government funding to cover the deficit this year. Soria argued that the about-turn was necessary as reducing the budget deficit was “above any other consideration.”

The agreement with the sector will involve removing the cap on the so-called Electricity System Deficit Securitization Fund (FADE), which the government set at 26 billion euros. The average interest rate paid on the 19 issues of debt made by the FADE was 4.48 percent. However, market conditions have improved significantly since the last issue, with similarly dated sovereign debt now being issued in the primary market at rates of under 3 percent.