Introduction

Regulated asset base and depreciation

Weighted average cost of capital

Operating expenses

Volume production

Introduction

In Austria, the determination of costs for gas transmission system operators (TSOs) is facilitated by a methodology which must be approved by the national regulatory authority E-Control. Since the application of the existing methodology ended on December 31 2016, E-Control announced in December 2016 the next methodology, which will apply between January 1 2017 and December 31 2020. The methodology is based on the incentives stipulated for the second regulation period for gas (January 1 2013 to December 31 2017), which is revised every five years. It applies the calculation of TSOs' allowed costs and their volume production. Further, it comprises framework conditions for all entry and exit points, as well as interconnection points of the TSOs transmission lines.

This update provides a broad overview of the new methodology, focusing on its most important elements.

Regulated asset base and depreciation

The regulated asset base is based on long-term assets as reflected in the annual accounts, as well as planned future capacity expanding measures or planned future investments for the maintenance of existing network (reinvestments). In that respect, a distinction must be made between existing plants and new investments, as well as debt-financed and equity-financed assets.

Existing plants will depreciate according to the existing system by considering their remaining useful life. As for new investments in natural gas pipelines, the depreciation period ranges from 20 to 30 years, based on nominal historic costs. In the case of compressor stations and other assets, the depreciation period ranges from 12 to 17 years. The exact period differs between TSOs. In order to take into account the depreciation of debt-financed assets, the debt-finance book values are divided by the standardised remaining useful life and are thus linked to the remaining useful life of the core investment. In relation to the equity-financed share, revised replacement values are calculated by applying the real cost of equity. Thereafter, the imputed depreciation for equity-financed assets is calculated by adding the revised replacement values (calculated with a constant annual appreciation factor ranging between 4.17% and 4.54%, depending on the TSO) and dividing them by a weighted remaining useful life.

Weighted average cost of capital

For determining the weighted average cost of capital, the new methodology refers to the methodology which has been used until now. However, due to the development of interest rates on the capital markets, an update of the interest rates was carried out.

In that respect, the applicable cost of debt (pre-tax) is now 2.7%. Given the decision to use replacement values for equity-financed assets, a real interest rate for equity is used to calculate remuneration. As compensation for meeting the marketing risk in relation to the unsold line capacity, a risk premium of 3.5% is used for the cost of equity. As a result, an 8.92% interest rate is used for the real cost of equity (pre-tax).

Moreover, the reasonable rate of return for calculating the cost of capital is derived from the weighted average cost of capital for a normal capital structure and the income tax burden. A 40:60 ratio between equity and debt is considered to be a normal capital structure. In addition, the normal capital structure must consider overall industry aspects. In relation to the next (third) regulation period, the normal capital structure must be adjusted to the actual financing structure of the company in case the equity or debt capital shares are undercut by more than 10%. The capital structure applied is derived from the book values and must be substantiated by the company. The values are reviewed by the regulatory authority.

Operating expenses

Operating costs (not including energy costs, carbon dioxide costs, market area manager costs and costs for regulation) are not individually calculated for each transmission line, but instead for the TSO's entire transmission system without depreciation. The determination of appropriate operating costs is facilitated by detailed data of the last available annual account. The costs resulting out of this determination are revised and normalised by E-Control. In addition, further adjustments are performed in order to ensure a comparable and steady cost base. Due to the incentive regulation approach, deviations between actual and forecasted operating costs are not revised.

Costs which are determined in this way are projected in the first year of the new method and are subject to a deposit. In the last method, the average productivity factor amounted to 2.5% a year.

Moreover, compensation for the inflated network operator price index (NPI) has been introduced for the duration of the new method. For the next (third) regulation period, the NPI amounts to 1.94%.

Volume production

The future volume production corresponds with that from the preceding methodology: volume production is established by comparing the contractually committed capacities as of June 1 2012 with the maximum technical capacity. The imputed amount of existing contracted capacity from 2017 onwards is permanently fixed, leaving aside capacities which are not transferred to suppliers. If additional capacities (beyond the contractually committed capacities) are allocated at an entry or exit point, they will also be considered. Any decline of committed capacities detected in the volume production between 2013 and 2016 does not influence the calculation of the volume production for the price period from 2017 onwards. This prevents remaining consumers from having to absorb the decline in capacity demand in the transmission system. Rather, it is the TSO which carries the marketing risk for which it is compensated by the risk premium included in the cost of equity and an individual risk premium.

For further information on this topic please contact Bernd Rajal or Azra Dizdarevic at Schoenherr by telephone (+43 1 53 43 70) or email (b.rajal@schoenherr.eu or a.dizdarevic@schoenherr.eu). The Schoenherr website can be accessed at www.schoenherr.eu.

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