Spain's Markets and Competition Commission (Comisión Nacional de los Mercados y la Competencia, or "CNMC") has exercised the new regulatory powers conferred in 20191 and approved Circulars 5/2019, 6/2109 and 7/2019. The Circulars, which were published in Spain's Official Journal (Boletín Oficial del Estado, or "BOE") on 19 December 2019 and entered into force on the following day, set out the remunerative framework applicable to electricity distribution and transmission for the second regulatory period (which starts 1 January 2020 and ends 31 December 2025).

1. Purpose and scope of the Circulars

As will be described below, the Circulars essentially follow on from the methodology and remunerative regime under regulations applicable up to now (Royal Decree 1047/2013, of 27 December, and Order IET/2659/2015, of 11 December, in the case of electricity transmission, and Royal Decree 1048/2013, of 27 December, and Order IET/2660/2015, of 11 December, in the case of electricity distribution).

It should also be remembered that one of the essential parameters for remunerating these activities – the Rate of Financial Return ("TRF") – had already been established in Circular 2/2019, of 12 November (BOE dated 20 November 2019), set at 6.003% for 2020 and 5.58% for subsequent years (2021-2025) of the regulatory period.

It should also be taken into account that, although the new Circulars to a great extent replace the content of pre-existing provisions (which will no longer apply during the second regulatory period), they do not render them completely void as they will continue to apply in a number of very significant areas (particularly, the limits set on investment eligible for remuneration and the approval of investment plans, for which the Government continues to be responsible).

Indeed, with the aim of clarifying the applicable regulatory framework, the CNMC announced in the Notes (Memorias) to each one of the Circulars that it will approve informative circulars that collate "all of the sources of information necessary to calculate the remuneration" applicable to each activity.

2. Circular 6/2019, of 5 December, of the CNMC, which establishes the methodology for calculating the remuneration applicable to electricity distribution

2.1. Impact of the new regulation on the remuneration of electricity distribution 

The Notes to Circular 6/2019 indicate that the overall impact of reducing the TRF and the methodology changes amount to a 4.51% reduction to remuneration for distribution for the entire 2020-2025 period compared to what it would have been had the TRF and methodology remained the same as in the first regulatory period (2016-2019). However, the Notes also highlight that practically all of that reduction (4.1%, although that value is 4.2% in one section of the Notes) is a result of the modification to the TRF2; the impact of changes made to the methodology are therefore lesser importance. 

2.2. Main methodology changes included in Circular 6/2019 

As mentioned above, Circular 6/2019 is essentially a follow-on from the remunerative system that applied in the first regulatory period pursuant to Royal Decree 1048/2013 and Order IET/2660/2015. The following changes should be highlighted, following the comments made in the Notes:

  • A modification is made to the formula for calculating the value of the investment eligible for remuneration in the case of distribution facilities brought into service from 1 January 2019: under the former model, the value of the investment was calculated, for each facility, as the semi-sum of the real or audited value and the corresponding unit value. Under the new model, the value of the investment shall be the facility's real or audited value, subject to an adjustment mechanism applied at the end of each regulatory semi-period (ie, every three years), where the real investment value for all facilities overall is compared to a theoretical investment value also for all facilities overall3.
  • A different facility type (type 2) in created for investments in network digitalisation and automation, associated with intelligent systems, tele-management and technical management systems, which shall be remunerated as investments of that kind4.
  • It provides for return on investment potentially being recognised in pilot projects, indicating that they will not be included in the regulatory investment limits.
  • The amount of EU funding that does not reduce investment value is limited to €10 million per distribution facility, offices and land5.
  • A so-called management efficiency component (componente gestionable) is included in the remuneration for electricity ("COMGES"): although this term is new, it actually groups together a number of pre-existing remunerative items: return on the operation and maintenance of both electricity assets ("ROM") as well as other assets ("ROMLAE") and investments in other assets ("IBO"6). This remuneration is based on the remuneration that would apply pursuant to the methodology established under Royal Decree 1048/20137, applying to that value, on the one hand, an upward adjustment factor linked to the increase in the return on investment received by distribution facilities and offices and, on the other, a downward adjustment factor in the form of a 0.97 multiplication factor to be applied per year of the regulatory period beyond 20218.
  • An increase is made to the remuneration for extending the operating life of facilities on the distribution network, and a specific remunerative term is created (REVU) for this (it was previously included under the general term ROM).
  • Modifications are made to the calculation of remuneration for other regulated activities performed by distributors (ROTD): in essence, the Circular modifies the unit values for the different activities (creating an additional bracket for distributors that have more than five million customers) and limits the application of the remuneration deferral factor (FRR) exclusively to the Tax on the occupation of the public thoroughfare.
  • Incentives for reducing losses and for improving quality have been modified9.
  • The incentive to reduce fraud is removed from 2022 onwards10.
  • The Circular includes an adjustment for the use of regulated assets and resources for other activities. Defining the methodology for the adjustment is deferred to a later Resolution by the CNMC, but sets out the criteria that may be taken into account. In the meantime, and without prejudice to a subsequent downward modification once the methodology has been defined, the adjustment has been set at 50% of the annual income obtained by the group in the performance of those other activities.
  • In the case of distributors with at least 100,000 customers, a so-called financial prudence penalty is imposed, which will take effect in 202311. The financial prudence penalty may reach up to 1% of the company's overall remuneration and is linked to the recommended ratios and values for assessing companies' financial indebtedness and economic capacity that were established in the CNMC's Communication 1/2019, of 23 October12.

3. Circular 5/2019, of 5 December, of the CNMC, which establishes the methodology for calculating the remuneration applicable to electricity transmission, and Circular 7/2019, of 5 December, of the CNMC, which approves the standard facilities and the reference unit values for operation and maintenance per fixed asset used for that activity

3.1. Impact of the new regulation on the remuneration applicable to electricity transmission

The Notes to Circular 5/2019 point out that the overall impact of reducing the TRF and of the methodology changes will be a 7.3% reduction in the remuneration applicable to transmission over the full 2020-2025 period compared to what it would have been had the TRF and methodology remained the same as in the first regulatory period (2016-2019).

The Notes also stress that the modification to the TRF13 in itself only triggers a 5% reduction; of the remaining 2.3%, the main impact is caused by the reduction of unit values for operation and maintenance resulting from Circular 7/201914

3.2. Main methodology changes included in Circular 5/2019 

As mentioned above, Circular 5/2019 is essentially a follow-on from the remunerative that applied in the first regulatory period pursuant to Royal Decree 1047/2013. However, it does make a number of changes. The following changes should be highlighted, following the comments made in the Notes: 

  • The Circular retains the methodology for calculating the value of the investment eligible to remuneration in the case if non-standalone facilities brought into service from 1 January 2018 as the semi-sum of the real or audited value and the respective unit value15, albeit subject to a new provision that, if the audited value is higher than the unit value, the value of the investment eligible to remuneration cannot exceed 112.5% of the unit value16.
  • The amount of EU funding that does not reduce the investment value is limited to €10 million17.
  • An increase is made to the remuneration for extending the operating life of facilities (and a specific remunerative term is created (REVU) for this; it was previously included under the general term, ROM). Furthermore, investments in the renovation and upgrading of facilities that are beyond their operating life can now be remunerated as if they were new investments.
  • Both the remuneration of standalone facilities and the structure of the availability incentive are reviewed.
  • The Circular includes an adjustment for the use of regulated assets and resources for other activities, on terms that are substantially identical to those for distribution.
  • From 2023 onwards18a financial prudence penalty will apply, on terms that are substantially identical to those for distribution.