Mapping power and utilities regulation
Power and gas regulation across Europe is highly complex. No two countries are regulated in quite the same way, although all regulators are getting more demanding.
In our daily work with power and utility clients, we see what a struggle it can be to understand the whole picture.
We have surveyed the regulation of gas and electricity distribution and transmission in 16 countries.1 This paper provides an analysis of key trends, similarities and differences across the region, supplemented by detailed information on the key features in each country.
Patchwork of different regulatory models across Europe
Diverse styles of regulation are not the only problem. The lack of stability in national regimes, which often results from political interference, causes constant change. This can seriously disrupt long-term strategic planning, daily operations, investment planning and investor relationships.
It's not surprising that compliance and regulation emerged as the number one risk for power and utility businesses in our Business Pulse 2013 report.
For over a decade, Europe has been moving toward a liberalized system for power generation and energy sales. This has supported development of power and gas trading markets and cross-border activity between European power and utility companies.
The EU's Third Energy Package aimed to reinforce the power and independence of national energy regulators, and new institutional frameworks2 have given regulators new forums for discussion and cooperation.
While these moves reinforce communication between national power and gas regulators, we're unlikely to see Europe operating under a single regulatory system in the short term. A variety of models will continue to coexist for the foreseeable future.
Understanding Europe's power and gas regulation rules will continue to be complex and extremely challenging.
“Two main trends are at work: regulators are demanding more and more efficiency, and they are pushing for fair prices, putting pressure on returns.”
— Louis-Mathieu Perrin,
Wide-ranging definition of “common” elements
It isn't just the overall approach that varies by country. The definition of what we might assume to be common parameters – the cost of equity and debt gearing, for example – can also be distinctly different depending on your location.
Even when regulators are using the same kind of input categories, the level of input itself can vary widely, and in ways we might not expect.
Widespread downward trend in rate of return
There are some common trends, including a widespread downward pressure on rates of return. This is partly because, apart from a few countries affected by the debt crisis, the cost of debt has generally come down.
Some national regulators also clearly believe regulated returns should be reduced because the risks of operating a regulated activity are lower now. Others appear to believe that operators have been earning too much.
Increasing focus on better efficiency and quality
Regulators are sharing and comparing the components of their regulatory structure in ways that couldn't have happened even 5 to 10 years ago, seeking to understand each other's methods and decisions.
As a consequence, their objectives and methods have increasingly converged, with a general move toward incentive-based regulation and widespread interest in regulating for better efficiency, economic performance and quality of service.
The European Commission is likely to continue to push for greater consistency in regulatory regimes. But rising energy costs are politically controversial for all national governments, and the trend toward greater convergence may well be countered by government interference with regulatory decisions.
This may inject further instability and an even greater degree of risk for those operating internationally.
We aim to create a clearer picture and provide a useful international benchmark tool, to allow CFOs, local country management, transactions teams and regulators to compare and contrast approaches.
1Belgium, Czech Republic, Finland, France, Germany, Greece, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden, Switzerland, Turkey, the United Kingdom.
2The Agency for Cooperation of Energy Regulators (ACER), set up in 2010, and the European Network of Transmission System Operators for Electricity and Gas (ENTSO), set up in 2008.