October 26, 2010 / 5:15 PM / in 7 years

Q&A-Tackling Spain's power tariff deficit

MADRID, Oct 26 (Reuters) - Spanish power groups could breathe a sigh of relief before the end of the year if the first stage of a plan to take 14.6 billion euros ($20.4 billion) of government-backed debt known as the tariff deficit off their balance sheets goes according to plan. [ID:nLDE69P259]

Following are some facts on the tariff deficit:


The accumulated difference between generating, distributing and supplying electricity for regulated markets and the tariffs for those markets fixed by the government since 2001.

The deficit covers unprofitable business areas such as supplying islands with electricity and more recently, Spain’s huge renewable energy rollout.

Spain has promised to eliminate the shortfall between consumer prices and generation costs by 2013 through a combination of further deregulation, reduced subsidies for renewable energy and higher tariffs for consumers. It has also considered a windfall tax on cheap power from nuclear and large hydro electric plants.


Heavily indebted Italian utility Enel’s (ENEI.MI) Spanish unit Endesa (ELE.MC) has the highest proportion of the deficit, 7.7 billion euros, or 53 percent of the total.

Iberdrola, which is owed 4.37 billion euros or 30 percent of the total, could see its borrowing costs improve if its share of the deficit were taken off its balance sheet.

Gas Natural (GAS.MC), with a 1.62 billion euros share of the deficit, and EDP (EDP.LS), with 743 million, would also benefit.


The tariff deficit touches on many of Spain’s economic and energy problems:

When the deficit is securitised, bonds that are issued will compete with Spain’s sovereign debt. Spanish borrowing costs surged to record highs this year before stabilising recently.

The elimination of the tariff deficit depends on increased tariffs for consumers, a highly unpopular measure that the equally unpopular government has hesitated to take while the economy struggles to emerge from a deep recession.

Another way to reduce the tariff deficit is to cut lucrative subsidies for renewable energy that have made Spain the world’s No. 4 wind power generator and the No. 2 solar power generator.

Uncertainty over government support for the sector has an impact on share prices for renewable energy companies worldwide.


The government recognises 14.6 billion euros owed to power groups in accumulated tariff shortfall between 2001 and 2010.

This figure includes 3 billion euros for 2010, which is likely to be overshot. Energy regulator CNE has estimated a deficit of 2.59 billion in the first half of the year.

Madrid will not recognise this amount and subsequent shortfalls up to 2013 until the industry ministry approves the calculations made by the CNE.

The government is reported to have increased its cap on the tariff deficit it will recognise to 25 billion euros, indicating an extra 10 billion may be generated in the next three years.


By turning the utilities’ rights to collect the deficit through electricity tariff hikes into government-backed fixed-income securities.

The government has said that it will securitise and sell the pending collection rights in a series of issues by June 2011 depending on market conditions.

Market expectations, fuelled by the Spanish media, were for the government to issue up to 5 billion euros in September. But there were a series of delays in designing the prospectus and getting it approved by securities regulator CNMV.


As the deficit is guaranteed by rate increases for consumers and the government status as underwriter, analysts played down the extra weight it placed on power companies’ debt levels.

Utilities used to repackage some of their collection rights guaranteed by the tariff deficit and sell them to institutions, but the global financial crisis in 2008 scared institutions away from buying the securities.

Spain’s borrowing costs have now moderated somewhat, providing the Socialist government with an opportunity to take the debt off the power companies’ books.

A solution to the tariff deficit would allay fears that Spain’s two largest power groups will issue shares to relieve balance sheets stretched by large acquisitions. (Reporting by Jonathan Gleave, Editing by Fiona Ortiz and Michael Shields)

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