Royal Decree-Law 8/2014, of July, which approves urgent measures to encourage growth, competitiveness and efficiency ("RDL 8/2014") has adopted a series of urgent legislative measures to implement the Plan of measures to encourage growth, competitiveness and efficiency, approved by the Spanish Council of Ministers on 6 June 2014.
Against that backdrop, RDL 8/2014 has three primary aims:
- to encourage competition and market efficiency;
- to improve access to credit
- and to boost employment and the job market.
More specifically in relation to energy, RDL 8/2014 establishes a series of measures aimed at ensuring the sustainability and accessibility of the hydrocarbons markets, such as by establishing a system of energy efficiency in line with European directives.
The underlying reason behind these measures has been the deficit in the Spanish gas sector, which must be curtailed immediately if a scenario similar to the electricity sector is to be avoided. As a result, RDL 8/2014 acknowledges that the lower demand for gas in recent years caused by the financial crisis (as well as increased capacity and infrastructure in the system) has generated an imbalance between revenues and costs in the gas system between 2002 and 2006. This, in conjunction with the ultimate failure of measures to apply significant increases in regulated costs, has made it necessary to adopt a deeper reform to halt what the RDL 8/2014 considers to be a structural deficit of the system.
1. Chapter II of Title III of the RDL 8/2014 establishes measures to ensure the financial sustainability of the natural gas system
Firstly, the principle of financial and economic sustainability is defined as the ability of the system to cover all the costs it generates, a principle to which all the public administrations and participants in the natural gas system will be subject. It establishes that the revenues generated by the gas system will be used exclusively to finance the system's costs. It also establishes that the system's revenues must be sufficient to cover its costs, whereby any measures that trigger a cost increase or a reduction of revenues must be accompanied by an equivalent decrease in other cost items or an equivalent increase in other revenues in order to maintain the cost/revenue balance.
The system's costs that will be financed by its revenues are:
- the remuneration of transport, regasification, basic storage and distribution;
- the remuneration of the technical management of the system;
- the duty payable to the Spanish Markets and Competition Commission (Comisión Nacional de los Mercados y la Competencia or "CNMC") and the Ministry of Industry, Energy and Tourism (Ministerio de Industria, Energía y Turismo, or "MIET");
- if any, the cost differential of supplying liquefied natural gas or manufactured gas and/or propane-air other than natural gas in island territories that do not have a connection to the gas pipeline network or regasification plants, as well as the remuneration of the supply-at-tariff carried out by the distributors in those territories;
- demand management measures, if recognised by applicable regulation;
- annual payments for temporary imbalances, plus applicable interest and adjustment payments, as described below; and
- any other cost established expressly by a legal provision that is aimed exclusively at the gas system.
The following is also included:
- the accumulated deficit at 31 December 2014, which will be determined in the definitive settlement of 2014. Those parties subject to the settlement system shall be entitled to recoup those amounts in settlements corresponding to the 15 following years (plus interest in market conditions); and
- the imbalance resulting from the remuneration of natural gas aimed at the supply-at-tariff market resulting from the Algeria contracts and supplied through the Maghreb pipeline, as a result of the award rendered by the International Court of Arbitration in Paris on 9 August 2010. This deviation has been quantified at €163,790,000, which will be recovered over a period of five years (2015-2019).
The principle of sustainability must be accompanied by a remunerative methodology that allows for an adequate remuneration for low-risk activities, such as regasification, basic storage, transport and distribution.
Thus, the remuneration parameters applicable to those activities will be established for regulatory periods of six months, although they may be adjusted every three years if costs and revenues change significantly. However, the rate of financial return may not be adjusted throughout each regulatory period and automatic update formulas will not be applied to the parameters used to calculate them.
RDL 8/2014 establishes different methodologies for determining the remuneration applicable to distribution, on the one hand, and to regasification, transport and basic supply, on the other.
In both cases, the first regulatory period will begin on the date on which RDL 8/2014 enters into force, ending on 31 December 2020. Three sub-periods are also established:
- from 1 January 2014 until the entry into force of RDL 8/2014 (for period of 2014) the applicable remuneration will be the figure, proportional to that date, contained in sections of Appendix IV of Order IET/2446/2013, of 27 December, corresponding, respectively, to the companies that own transport, regasification and basic storage facilities and distribution companies;
- from the entry into force of RDL 8/2014 until 31 December 2014 (second period of 2014). In this period, the MIET will approve the remuneration for each company on the basis of a report prepared by the CNMC, according to the parameters and methodology contained in Appendix X of RDL 8/2014 in the case of distribution companies, or Appendix XI in the case of companies that own transport, regasification and basic storage facilities;
- from 1 January 2015 to the end of the first regulatory period (31 December 2020) remuneration will be calculated according to Appendix X of RDL 8/2014 in the case of distribution companies, or according to Appendix XI of RDL 8/20104 in the case of companies that carry out transport, regasification and basic storage activities. For these purposes, the MIET will approve the remuneration applicable to each calendar year, at the proposal of the CNMC, which must be delivered before 1 October of each year.
2. Methodology for calculating the remuneration of distribution
The remuneration due to distribution facilities is connected to customer increases and the new demand they generate. As such, each company will be remunerated, for the aggregate of its facilities, on the basis of the customers that are connected to those facilities and the volume of gas supplied. An incentive will also be offered for connecting new municipal districts to the gas system.
Distributors will receive the applicable remuneration in the previous year, which will then be adjusted according to a coefficient that reflects improvements in productivity. That remuneration will also be increased with payments due to each distributor for growing its market. This last parameter differentiates among different kinds of customers, accord to their connection to the network.
This methodology also applies to new secondary transport facilities.
3. Methodology for calculating the remuneration of transport, regasification and basic storage
A common methodology has been established for all facilities in the basic network, using as a basis the current net value of the assets, removing adjustments made during the regulatory period. The remuneration is composed of:
- a fixed component for the facility's availability, which includes: annual operating and maintenance costs, depreciation and a financial return; and
- a variable component for the continuation of supply, which allows the rebalancing of imbalances resulting from demand fluctuations, with which the owners of facilities are able to cover the risk of those fluctuations. This variable component is shared among all the facilities on the basis of the weighting of their replacement value with respect to all the facilities that perform the activity.
In the case of regasification, the gas used for operations is borne by the plant operator.
If a facility continues to operate beyond the end of its useful life, its fixed remuneration will be its operation and maintenance costs plus a coefficient, which will depend on the years by which the facility has operated beyond its useful life.
However, with regard only to the transport, regasification and basic storage facilities entitled to remuneration from the gas system, from the moment RDL 8/2014 enters into force and throughout the first regulatory period, the rate of return will be calculated as the average yield of Spanish government 10-year bonds on the secondary market among the holders of non-segregated accounts in the 24 months before the regulation entered into force, plus 50 basis points.
Finally, it should be highlighted that RDL 8/2014 also includes measures to correct any short-term imbalances and to prevent another structural deficit from being generated. These are:
- If in a single year the deficit exceeds 10% of the revenues generated by the system, tolls and duties will be increased automatically in the following year to recover the amount by which the limit was exceeded.
- If the accumulated deficit exceeds 15% of revenues, tolls and duties will also be increased automatically in the following year to the extent by which the limit was exceeded.
It is estimated that that the overall impact of these measures will be in the range of €200 million, proportionately affecting the income generated by transport, distribution, regasification and basic storage and, within each activity, each one of the companies that perform them.
Further reforms of the gas market are expected in the coming months, in particular regulations that establish an Iberian gas wholesale market (the Iberian gas hub).