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Rise in Electricity Fees: 6% increase

Since yesterday the electricity companies are somehow more at ease. The National Securities Commission has already registered the prospectus for the rate deficit placement. Thus, the transaction to securitize this electricity mortgage (which as of December 31, 2009 amounted to 17,624 million) is implemented and drives away the ghost of rating cuts and improves its financial situation.

According to the issue prospectus, the securitization will amount at first to 13.5 billion euros, but it reserves the ability to increase this amount up to 25 billion euros, a decision that will be inevitable based on the growth of this debt that this year can add some 5 billion euros

The only safeguard imposed is that in the event this amount is increased, it should be increased in the Government’s General Budgets Law where they are approved by the state. The placement will begin today, November 24, and is expected to last until no later than December 8 at 5:00 p.m.

They expect to place 3 billion.

However, the managers reserve the right to close this period in advance. At first, the sector is expected to place from 1 to 3 billion euros, but no amount has been set to test the market’s appetite for this product, after several years of preparation.

The fund will also have a credit line for 2 billion euros, while the Government’s General Budgets Draft (PGE) for 2011 reserves a maximum of 5 billion during the next fiscal year to guarantee the fund’s economic obligations.

The aim of the transaction is in a negotiable debt a liability so far funded by the major electricity companies generated because the electricity cost exceeds the revenues and, according to the prospectus, amounts to over 17.62 billion since 2000 in accumulated terms

Burden on the citizens

While the government guarantees the quality of the bonds, this debt must be repaid by electricity consumers through the electricity rate set by the government. With the issues, consumers will pass from paying this debt to the electricity companies to paying it to the bond buyers, predictably, at a higher interest rate.

It is expected that the deadline to repay this amount is 16 years and may imply a significant electricity rate increase. According to industry sources, the electricity bill would rise by approximately 6% to bear these costs that have not been paid in recent years.

Source: The Economist

So far the article in The Economist. Many experts agree that end customers will inevitably have higher rates and, on the other hand, a new approach to renewable energies and their premiums will be necessary.

Although this is the opinion of many, they all agree on two aspects: it is difficult for any government not to increase the electricity rate due to the election cost and, additionally, renewable energies are a cornerstone of the Spanish government’s policy which, in its President’s words, is expected to generate more than 1 million jobs related to these energies.

The rate deficit implies over 1% of the Spanish GDP and it is an issue that cannot be left in a drawer. It is important to have a clear regulatory framework, to establish an action plan and a timetable to manage to eliminate the deficit.

Another problem is the economic moment in Spain: an electricity increase is not better for the consumer or for the companies. There is also an election schedule that can influence decision-making. If we add to these factors the fact that reviewing the premiums will inevitably affect the income statement of the electricity companies, this does not currently improve the country’s economic conditions.

In any event, we are in a case where there is not a magic wand and it is necessary to have a solution which, although it does not benefit everyone, is as widely agreed and balanced as possible.

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