OREANDA-NEWS. Fitch Ratings says that the recent Ministerial Orders on electricity distribution unitary costs and access tariffs are revenue-neutral for Spanish utilities, while maintaining the electricity system's tariff sufficiency. In our view, the system's surplus is maintained even after considering the yoy 2.8% reduction of the regulated part of the electricity bills from January 2016.

The long-expected Ministerial Order IET/2660/2015 that sets the unitary standard costs for electricity distribution companies (DSOs) was finally published on 12 December 2015. The unitary costs announced in the Ministerial Order are in line with provisional unitary costs set from 2014. Fitch expects the final outcome, after the Comision Nacional de los Mercados y la Competencia's (CNMC) report due by mid-January, to have a negligible impact on regulated revenues for DSOs. The first regulatory period will now run from January 2016 to December 2019.

A second Ministerial Order, IET/2735/2015 published on 18 December, kept regulated access tariffs unchanged and reduced by 21.5% the parameters for regulated capacity payments paid by consumers, or by around EUR500m for the whole system. The cumulated reduction to this item on the customer bills has been 53% since July 2015 when the reduction was first made. This decision only impacts the capacity payments paid by consumers while the amounts received by electricity generators remain unchanged.

Capacity payments received by generators have been reduced several times from 2012 with the last adjustment in 2013. The final regulatory decision on capacity payments paid to generators is still pending although it does not seem to be a priority on the government's agenda. As a result, the decision to reduce capacity payments paid by consumers effectively lowers the expected tariff surplus in the system, between regulated revenues and regulated costs.

The CNMC has confirmed a EUR550m tariff surplus for 2014, compared with a EUR3.5bn tariff deficit in 2013. The elimination of tariff deficit in 2014 follows an electricity market reform with substantial cuts to regulated costs, including remuneration cuts to renewables and introduction of new taxes. The tariff surplus will remain in the system until the use of surpluses is eventually regulated.

Fitch expects additional surpluses from 2015, partly due to demand recovery and the full impact of the reform. We also expect outstanding tariff deficit debt-to-regulated revenues (as defined by the agency) to converge to the 100% sustainability threshold by 2019 from about 150% in 2014 (see Fitch: Electric Shock III: Iberian Tariff Deficit Analysis, dated 16 October 2015 on www.fitchratings.com). Furthermore, the Spanish ministry has set up a EUR250m contingency fund for unexpected cost shocks.

Finally, the Constitutional Court dismissed on 23 December the first appeal case against the new framework of renewables that was developed by the government as part of the electricity market reform. Even though the decision of the Constitutional Court could set the ground for other appeal cases, this could still be challenged with the final result potentially different to the initial outcome.