Moody’s warn of Spanish power sector downgrade

Rating agency warns that a surprise Spanish government review of wholesale electricity prices could lead to a downgrade of Spain's power companies


Spanish electricity companies could face a credit rating downgrade, after Spain’s government announced a surprise wholesale price review of the entire sector, which could lead to more regulatory uncertainty, says Moody's in a report.
"The announcement came as a surprise to the market because it froze an expected 4% rise in the electricity tariffs already scheduled for July 2010 and announced that the review will include a thorough assessment of all the costs of the electricity system," explains Helen Francis, vice-president and senior credit officer and author of the report Increasing Regulatory Pressure in Spain Potentially Negative For Electricity Companies.

The government announced in a statement on July 1 that it was reviewing the entire energy sector with the aim of putting a long-term framework in place. Further details will be available this month (July).

Moody’s say the review increases regulatory risk in the sector with the possibility of credit-negative consequences for Spain's rated electricity companies. The agency is concerned that current electricity tariffs are too low to fully cover all the regulated and unregulated costs of the system.

"To cover both past and potential future deficits, electricity prices will either need to rise significantly or other measures must be taken to cut the costs of electricity and reach full tariff sufficiency by 2013, as well as maintain a sustainable tariff structure in the next few years," says Francis.

Moody’s report explains that Spain’s apparent reluctance to raise tariffs in the short term means that electricity companies will likely need to bear some of the cost burden.

“The remuneration of existing assets could therefore be affected,” says the report. “If so, a squeeze on companies' profitability and cash flows could weaken credit metrics and, depending both on materiality and the companies' ability to absorb such a hit, may lead to negative rating pressures."

Spain’s regulatory environment has been challenging in recent years, with a build-up of large tariff deficits due to insufficient price increases. These deficits comprise amounts that the electricity system owes the electricity companies, but are currently financed by the companies and hence weigh on their balance sheets.

See the August issue of Energy Risk for an in-depth look at the Iberian power market, which will also be available online at

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