Bloomberg News

Iberdrola Resists Spain’s Push to Swallow Debt

February 24, 2012

Iberdrola SA (IBE) Chairman Ignacio Galan is resisting the Spanish government’s campaign to make utilities like his assume some of the 24 billion euros ($32 billion) in debt that consumers owe to electricity producers.

Galan, head of Spain’s largest power generator, presented a competing plan yesterday to close the gap between the industry’s costs and what it’s allowed to charge. He would boost consumer bills, impose a clean-power levy on fossil fuels and cut subsidies for solar generators. Only one group escapes new sacrifices under Galan’s plan: power companies like Iberdrola.

“We are already shouldering the burden,” Galan said at an earnings press conference in Madrid that was largely devoted to his criticism of power regulations. “You don’t call it a sacrifice having financed the sums we’ve financed that were nothing to do with us, and playing banker for the industry?”

Galan’s broadside capped a week of high-profile lobbying from Spanish power companies that include Gas Natural SDG SA (GAS) after Industry Minister Jose Manuel Soria said Feb. 16 they will have to assume some of the costs of balancing the books of the power system. The accumulated debt swelled to an estimated 24 billion euros ($32 billion) by the end of 2011.

Iberdrola, which yesterday reported 2.8 billion euros in 2011 profit. fell for a fourth day in Madrid trading, losing 0.9 percent to 4.49 euros at 5:10 p.m. local time. The stock has declined 7.1 percent this year compared with a 0.8 percent gain in the Euro Stoxx Utilities Index (SX6E).

Soria, who took the minister’s job under a new Spanish government elected in November, is battling to prevent that debt from ending up on the government’s books after public accounts were shredded by an economic slump heading into its fourth year.

Swollen by Subsidies

Spanish consumers were allowed to run up that debt because previous administrations agreed that utilities should book more revenue than they were permitted to collect. The gap accelerated during the last five years, swollen by subsidies added to power bills to support renewable power plants, energy efficiency projects and domestic coal mines.

While the five biggest power companies that finance the so- called power-tariff deficit are allowed to collect it from power bills over 15 years, the debt has snowballed.

Galan, 61, said financing the annual deficit has cost Spanish power companies 1.1 billion euros because they pay more to finance the debt in the capital markets than they earn in interest from consumers.

Spain has shifted 12 billion euros of the debt of the 24 billion-euro estimated total from the industry’s balance sheets by bundling the assets and selling them to investors through a government-guaranteed fund.

Exceeding Legal Limit

The utilities’ lobby group, Unesa, estimates the deficit will be 5.9 billion euros this year unless the government addresses the imbalances in the system. The legal limit for this year’s deficit is 1.5 billion euros.

Neither consumers, the government nor the power industry can bridge on their own the gap in power rates, or tariffs, Soria said during last week’s speech in Madrid.

“Nobody can think that any one of those can or should unilaterally provide a solution to the tariff deficit,” he said. “What we have to work on is a mix so that the burden is distributed.”

The most likely solution may involve a levy on atomic and hydroelectric plants owned by Iberdrola SA and Endesa SA (ELE), according to Shai Hill, an analyst at Macquarie Group Ltd. in London. He predicts the government will impose a “windfall tax” of 15 euros a megawatt-hour on the two technologies, costing Iberdrola 578 million euros a year and reducing its 2012 earnings per share by about 14 percent.

Share in Pain

“The power companies know they are going to be made to share some of the pain,” Hill, who predicted a freeze in clean energy subsidies that Spain announced on Jan. 27, said in an interview. “Ongoing remuneration levels for low-cost generation such as hydro and nuclear are going to get battered.”

The government has also considered capping wholesale power prices, a move rejected by “all parties,” Iberdrola Business Director Jose Luis San Pedro said today, while Deputy Prime Minister Soraya Saenz de Santamaria last week declined two invitations to rule out a so-called haircut for the tariff debt utilities still hold on their books.

Unesa Chairman Eduardo Montes said Feb. 17 the industry will sue the government if it tries to force utilities to take a haircut on their power debt.

The Spanish system was designed to stabilize costs for consumers by allowing the government to set prices based on the regulator’s forecasts for each year.

Instead, successive governments failed either to raise prices for consumers or lower payments for utilities when revenue fell short of costs, leading to a spiral of deficits.

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net


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