Energy Sector Reform in RomaniaRegulatory Framework Developmentand Privatization Process
Florin GuguHead of Regulatory Dept. Romania
Athens, 26-27 June, 2007
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• Enel is the third* largest listed utility in Europe with a market capitalisation of EUR 41 billion.
• The Italian Economy Ministry owns 31.6 %** of the company, leaving a free-float of some 70%, with 2.5 million shareholders.
• Its 60.000 employees work in 15 countries, producing and distributing power and gas in Europe, North and Latin America.
• Thanks to the strong commitment to Corporate Social Responsibility, Enel has been included in the world’s most selective ethical indexes, such as the FT4Good and the Dow Jones Sustainability Index.
A brief overview of Enel
Enel aims to be the most efficient, market driven, quality focused provider of power and gas, creating value for
customers, shareholders and people.
Enel aims to be the most efficient, market driven, quality focused provider of power and gas, creating value for
customers, shareholders and people.
* as of 7th July 2006
** 21,4% directly and 10,2% indirectly through state-run lender Cassa Depositi e Prestiti
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Energy Sector Reform
HUGE CHANGES IN A SHORT PERIOD OF TIME
1999-2002
ANRE establishment
CONEL Unbundling
Secondary Legislation
2002-2006
Market openingPrivatization
DAMBM
GC M
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REGULATORY REVIEW – General Issues
Legal Unbundling
New Energy Law 13/2007 sets July 1st 2007 as deadline for the legal unbundling in Romania
Distribution Companies will inherit the Distribution Licenses
Supply Company will receive a new Supply License
Regulated market (mandatory)
New Energy Law 13/2007 defines the role of Implicit Supplier (IS) and Supplier of Last Resort (SLR)
No further obligation for National Uniform Retail Tariff System beginning with July 1st 2007
Day Ahead Market (PZU) (voluntary)
New provisions in Law 13/2007 for consumers greater than 1MW to provide hourly load forecast => PZU contribution will be lower than 2% of average mix procurement costs
Balancing market (PE) (mandatory)
possible aggregation between captive, eligible and CPT (network losses); PE contribution will be lower than 2% of average mix procurement costs
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Regulatory Period: 5 years, except for the first period which lasts for 3 years (2005-2007);
Efficiency increase (X factor) of 1% applied only to controllable OPEX;
The investors keep the profit accomplished from the efficiency increase over the level settled by the regulator during the first regulatory period; sharing mechanism afterwards;
Correction factor on complying with the required minimum level of quality;
Technical and commercial losses (CPT): In year 2012, for all distribution operators in Romania, the regulator will accept an average CPT of 9,5%.
WACC regulated values (in real values before tax):First regulatory period: WACC @12%;Second regulatory period: WACC @10%.
Initial RAB Value: The sum paid by an investor at the signing of a privatization contract for the purchase of the existing shares and for the newly-emitted ones will be used to settle the initial value of RAB (only for privatizations closed before 2006)
Distribution Tariffs Methodology: key principles
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Issued on May 2005
The methodology will apply until the electricity market is fully opened
Key principle: the full pass through of justified costs in the final tariff
Electricity acquisition through a portfolio of ANRE – regulated contracts (regulated quantities and prices) with generators
Cost for trading on DAM and BM capped at 2.5%
Regulated margin is 2.5% of the cost of energy procurement
Government’s policy is to maintain a National Uniform Tariff (NUT) for captive consumers, at least until 2007;
Achievement of 2.5 % margin through the structure of energy acquisition
Supply Methodology: key principles
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Conditions in y 2000
Historically, electricity prices were among the preferred tool
Cross-subsidies:» Heat ^ Electricity» Voltage levels» Residential ^ Industrial
Solution
Methodology for cost allocation in the case of CHPs
Methodology for cost allocation among voltage levels
Social tariff (intra-class cross subsidies were preferred against inter-class ones)
Direct targeting of social aids after July 1st 2007
Social Protection
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Bill [€]
Standard Tariff
Social Tariff
E [kWh/month]
Social Tariff
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Advantages
Intra-class is less distorting than inter-class cross subsidies
Less birocracy – the choice is done by the consumer
More focused on low-income consumers
Disadvantages
Still in contradiction with EU directives => has to be eliminated
No incentives for energy efficiency improvements
Not always a low consumption reflects a low income
Social Tariff
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REGULATORY FRAMEWORK – Enel’s Perception
Aligned with EU provisions
Compliant with primary legislation in Romania
Sometimes deviating from the PRG signed with WB
Reduced predictability
Wholesale market distorted by preferential treatment
Room for amendments
ANRE needs to play a new role
Good business up to now + high potential for regional market
=> We expect better results for the future
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In generalStabilityPredictabilityImmunity against political factors (regulator’s independence)
As regards regulated businessesAttractive remuneration of the invested capitalPass-through of the non-controllable cost components
As regards competitive businessesClear rulesNon-discrimination among players
Investors’ expectations from the regulatory framework
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Conditions:Regulatory framework not completely issuedLack of any privatization experience recordPressure to do the privatization
Investor’s issuesAmplified risk perception“Italian regulatory model”
Regulator’s issuesPressure and responsibility“Single bidder problem”
First privatization
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Secure the regulatory framework:
White paper for distribution tariff methodologyWhite paper for captive consumers’ tariff methodology
Guarantee the compliance of the newly issued regulatory framework with the declared white papers’ principles
Partial Risk Guarantee (PRG) with The World Bank
Regulatory framework adjustments
Comfort Letters issued by ANREContinuous open channel for communications among ANRE,
Enel, WB, GoR and the consultants of all parties
Together solving the problems
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Partial Risk Guarantee (PRG) with The World Bank
Signed between:the Romanian Government the World Bank respectively Electrica Banat and Electrica Dobrogea
Will cover only limited and pre-defined risks caused by a change, a repeal of or non-compliance with the provisions of the regulatory framework relating to the:
distribution businesssupply to captive consumers business
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Partial Risk Guarantee (PRG) with The World Bank (2)
Even if stipulated only with E.Banat & E.Dobrogea,the PRG is a guarantee for the
stability of the regulatory framework, and so it supports the entire distribution and regulated
supply business
PRG tool used for the first time
Never called, up to now
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WAS IT A SUCCESS ?
First Privatization in Romania
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WAS IT A SUCCESS ?
First Privatization in Romania
DEFINITELY YES !
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Discos’ Privatisation in Romania
oltenia
banat
dobrogea
moldovatransilvanianord
transilvaniasud
muntenianord
munteniasud
• 4 Discos privatised in the period 2004-2005
• E. Muntenia Sud: privatised in 2007
• Three remaining Discos to be privatised in 2007-2008
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The values which drive the Enel development in Romania
Care for people
We aim at growing personnel into responsible, accountable and performing leaders, by providing opportunities for professional development and by rewarding performance
Focus on performance
We will be focused in identifying and capturing all value creation opportunities, focusing on efficiency, productivity and right value of our energy
Invest in the community
We will pursue all profitable opportunities to reinforce our leadership position through investments and acquisitions, maintaining a socially responsible and safety oriented attitude towards the country and our stakeholders
People, Performance and CommunityPeople, Performance and Community
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Drivers of future evolution
Why the South-Eastern Electricity market is potentially an attractive market for Investors?
– Significant demand growth potential
– Strong need for investment in new capacity to satisfy demand growth in the medium to long term
– In the early stages of market liberalization and/or with privatization programs running
– Investments risk mitigation for new entrants thanks to EU accession (Romania, Bulgaria)
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There is no perfect regulatory framework
What does matter:StabilityPredictabilityImmunity to political influence
How to measure the quality of the regulatory framework:Compliance with the EU requirements and recommendationsUnbundlingMarket openingComplexity of the methodologiesAttractiveness for private investors
Conclusions
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THANK YOU
FOR YOUR ATTENTION!
ENERGY IN TUNE WITH YOU
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