Brussels, 23/09/2004 (Agence Europe) - On 22 September the Commission today decided not to raise objections to the State refunding three Portuguese energy providers, EDP, Tejo Energia, Turbogás for so-called “stranded costs”. In the case at issue, stranded costs arise because old power plants built prior to February 1997 - i.e. prior to liberalisation -- will not be sufficiently efficient to be able to face a competitive electricity market.
As Portugal opens its electricity markets to competition pursuant to the directive of 26 June 2003, the Portuguese authorities plan to abolish the long term power purchase agreements ("PPA"s)whereby the publicly owned electricity network operator, Rede Eléctrica Nacional, S.A. (“REN”) purchases a guaranteed amount of electricity from the three electricity suppliers at a guaranteed price that coves a series of investment costs. The state-sponsored refund scheme approved today replaces the PPAs with public compensation payments for stranded costs.
In approving public compensation for the stranded costs the Commission took into account that the investments involved are very important and generate very large losses. The Commission considers that, should these losses not be compensated in any manner, in view of their size, they would clearly jeopardise the viability of the undertakings concerned. The investments undertaken by the beneficiaries are irrevocable. There is no other way to recover an investment in a power plant than to operate it, or to sell it at a price that itself cannot exceed the income that the power plant may generate by selling its electricity on the market. The Portuguese authorities have provided the Commission with a list of costs to be covered by the compensations where a power plant's income is insufficient to cover them. These costs are the one that are defined in the PPAs' list of costs. After having analysed these costs categories, the Commission has come to the conclusion that the compensations will not exceed what is necessary to repay the shortfall in investment costs repayment over the asset's lifetime, including where necessary a reasonable profit margin.
The computation of the maximum value of the compensations is based on a number of economic assumptions, including in particular a base market price equal to the price that would be offered by a new entrant using a combined cycle gas turbine. If the actual market price is lower than this price, only it will be taken into account for the calculation of the compensation. The Commission considers that this mode of computation, reflects economic costs that correspond to the actual sums invested. The mode of computation of the stranded costs takes account of the actual evolution of electricity prices. The periodical adjustment in compensations will take account of the difference between the foreseen electricity price that is used for the purpose of computing the maximum amount of compensations and the actual electricity price.