CNMC lowers the remuneration of electricity transport and distribution to 5.58%

National Commission of Markets and Competition

Following the public consultation made between July 5 and August 9 of 2019, the National Commission of Markets and Competition has approved the circular that establishes the methodology to calculate the financial compensation rates for activities involving electricity transportation and natural gas distribution, regasification and transport. This information was published by the regulator on Wednesday.

New competences of the CNMC

This is the first circular approved in the field of new competences assigned to the CNMC in Royal Decree 1/2019 and is issued in accordance with the Council of State. Thus concludes the procedure for the Circular published on the Official State Gazette.

The purpose of this circular is to establish a methodology to calculate the rate of compensation for the activities of transport and distribution of electric energy, transport and regasification of natural gas, and distribution of natural gas for the second regulatory period, as well as the values resulting from the implementation of this methodology.

The procedure for this first circular concludes once the favorable decision of the State Council is received and published in the Official State Gazette. Overall, the regulator launched 14 circulars for public information.

Among other measures, it will establish the compensation for different agents in the electricity and gas sectors. It will also set tolls to cover the costs of the systems.

New remuneration rates

For transport, regasification, and distribution of natural gas, the second regulatory period is from January 1 2021 until December 31 of 2026. In accordance with the methodology of the National Commission of Markets and Competition, the financial remuneration rate will be 5.44% natural gas regasification and transport activities and 5.83% for gas distribution.

This first circular lowers the remuneration for electric energy transportation and distribution to 5.58%, from current 6.5%; which will be implemented from January 1, 2020 until December 31, 2025.

WACC methodology

The main novelty of this circular is that it establishes an explicit methodology for calculating this financial remuneration based on the Weighted Average Cost of Capital (WACC).

According to the WACC, the cost of capital of a business or activity is the weighted sum of the respective costs of the equity and debt where the weight reflects the base of each resource over the total financing. Thus, the WACC reflects the cost of the debt and profitability demanded by shareholders that provide the capital through equity.

The WACC methodology reflects the reality of the capital markets where regulated businesses find their financing. Hence, the remuneration of investments with profitability equal to the WACC entails that the company will be able to obtain the funds necessary to carry out the planned investments and ensure its continuity and expansion. In other words, the WACC guarantees reasonable return so that the capital providers contribute the funds to finance the regulated activity.

Less regulatory uncertainty

Furthermore, the use of the WACC methodology minimizes regulatory uncertainty, since it is replicable. This way, it facilitates the predictability of future remuneration rates and contributes to generate a more stable environment that favors investment.

This methodology entails a substantial difference from the retribution rate applied in the current regulatory period. The former methodology was based on the value of the Spanish State’s ten-year bond yield, plus a differential.

The regulator also underscores that this methodology “reflects the reality of the capital markets where the regulated companies find their financing.”

For more information, check Energía16

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