September 23, 2020

High prices, user debt and over-payment mark the keys to cutting gas distributors

High prices, a billion dollar debt burdened by consumers and an over-payment from natural gas distributors. These are the keys that justify the cut that the National Commission of Markets and Competition (CNMC) approved a few days ago, in the midst of the coronavirus crisis, for this activity.

The cut will be an average of 9.6% for the period 2021-26, less than the ‘hack’ of 17.8% that the body proposed in a first circular that it withdrew in November, after the companies’ complaints, which they came to augur an escape from foreign investment in Spanish debt by the “noise” generated by the cuts.

In the case of distribution, it will affect an activity that almost 70% corresponds to Naturgy (the former Gas Natural Fenosa) but also carried out by other companies such as Madrileña Red de Gas, Nortegas or Redexis, all of them owned by large international investment funds.

It is a regulated business that encompasses the sets of pipe networks and other facilities connected to large transport pipelines that carry natural gas to end consumers. It includes gas pipelines with pressure less than 16 bar, protection, regulation and measurement stations, and the connections that connect to the supply points.

The new methodology, which will be applied from January 1, 2021 to December 31, 2026, determines the annual remuneration of distributors, which is financed with the income from tolls and fees paid by domestic consumers and companies in their receipts. If during this period a demand similar to that expected for 2019 is maintained, the average economic impact could reach an average reduction of about 137 million a year compared to the current methodology.

It is convenient to put this forecast in quarantine due to the tremendous impact that the current health emergency is having on all economic activity, although for the moment the slowdown in activity is being noticed with much greater intensity in the demand for electricity.

The CNMC estimate is that the average remuneration for the period 2021-2026 would go from about 1,420 million with the current methodology up to now to 1,283 million. It would represent an average reduction equivalent to the aforementioned 9.6%.

The new circular will have an impact on the price paid by gas consumers, but with nuances. It may mean a decrease in tolls, although due to the deficit accumulated by the sector, there may be no coincidence in time between the two decreases. In addition, each marketer must decide (in the case of consumers in the free market) which part will transfer to the final price and which to the business margin. Added to this is the uncertainty of the impact of the coronavirus crisis on the gas system.

Reason for trimming

The revision of the methodology comes after the current one, which dates from 2002, resulted in a price increase for consumers and a tariff deficit (difference between income and regulated costs) of € 1 billion accumulated from 2006 to despite the increase in tolls. This dammed debt is paid by consumers, with interest, over the years.

Furthermore, the CNMC’s technical services concluded that the distribution assets prior to 2002 were already amortized. According to their calculations, the total accumulated compensation received for the amortization of these assets in the 2002-2020 period, of 4,769.64 million, exceeds their gross value, 4,569 million. This means that in the last 19 years, these investments would have been fully remunerated.

To avoid paying twice for the same assets, the CNMC has decided to reduce the remuneration for this concept by 239 million a year. A criterion that clashes with that of the distributors, who claimed that the agency’s calculations “are incorrect” and that “in reality there is under-remuneration” for those assets.

The Ministry for Ecological Transition recognized in July, in its report on the CNMC’s first proposal to circulate, the existence of an “over-remuneration” of distribution that “involves transferring inefficiencies to the sale prices of natural gas paid by consumers , it distorts the competition of this energy source against other more polluting fuels, makes it difficult to meet the emission reduction targets and limits the competitiveness of Spanish companies.Also, a high sale price of natural gas aggravates the phenomenon of poverty of the most vulnerable consumers “.

Prices higher than the EU

According to Eurostat, Spanish domestic gas consumers had the second most expensive pre-tax price in Europe in the second half of 2018, the year before the first proposal to circulate by the CNMC. They endured a variation in prices between 2015 and 2018 much higher than that of the euro area, much higher for domestic (12.9% in Spain compared to -0.5% in the EU) than for industrial (-12, 4% Spain and -17.8% EU). A Spanish domestic consumer pays more than most Europeans, while the industrialist pays almost the same.

In the period 2015-2018, a Spanish domestic paid a price, without taxes, 27.1% higher than the average in the euro zone, while that of the Spanish industrialist was 1.1% more expensive. “In the period 2012-2018, the competitive advantage that the Spanish industrial consumer had in the 2007-2011 period, compared to the average industrial consumer in the euro area,” was lost, going from a price “10.8% lower than the of the euro zone “at” a price 1.8% higher in the period 2012-2018 “, reflects the memory of the CNMC circular.

Rate deficit

The billion dollar deficit generated since 2006 occurred despite the fact that tolls increased strongly to finance investments made to meet a demand that did not occur, after the financial crisis of 2008. Between 2007 and 2018, conventional demand (household consumption , shops, industries and cogeneration, as well as the tank market) went from 266 TWh to 287 TWh, which meant a cumulative annual growth of 0.7% that was produced thanks to the recovery in demand in the last three years of period.

For its part, the transport and distribution network grew between 2005 and 2018 a cumulative annual 3.6%, with an additional 32,404 kilometers, to 87,699 in 2018, with investments that, according to the memorandum of the circular, were 12,189 millions. This allowed an increase in the number of supply points of 2.4% annual cumulative to 7.9 million in 2018, of which 1.58 million were supplied with a last resort regulated rate, 20% of the total. It started to supply natural gas to 1,204 municipalities in 2005 to 1,792 in 2018.

In this context, domestic consumers endured the greatest increases in marketing costs, tolls and royalties. While the item that includes the associated costs (mainly tolls and marketing) of natural gas for industrialists evolved in a contained way (5.3%) with respect to the price of natural gas as raw material (12.7%), for domestic It increased 44% in the 2012-2018 period compared to the 2007-2011 period.

The memory of the circular warns that, if you compare the profitability of the natural gas sector with other economic activities, the gas production and distribution companies by pipeline of gaseous fuels (CNAE 35.2) and the supply of steam and air conditioning (CNAE 35.3 ), had a profitability in the 2014-2016 period much higher than that obtained by the group of companies in the sector average of 166 analyzed sectors.


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