RPT-Fitch: Portugal can eliminate tariff deficit, Spain less certain

Thu Mar 13, 2014 5:41am EDT

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March 13 (Reuters) - (The following statement was released by the rating agency)

The government plan to reduce costs and increase revenue can make Portugal's electricity system sustainable and eliminate outstanding tariff deficits (TDs) in the next 10 years, Fitch Ratings says. Spain's ability to eliminate TDs remains considerably less certain.

Portugal's plan includes revising special tariffs on new renewable contracts, and phasing out end-user regulated electricity tariffs by end-2015 (63% of consumers on the regulated tariff at end-2013, down from 83% in 2012). We expect these measures eventually to eliminate the imbalances that create TDs in Portugal, and increase repayments.

Our analysis forecasts the creation of a new gross TD of EUR4bn until 2018, after which the system will be in surplus. Total TDs outstanding will peak at about EUR4.6bn in 2015, then fall sharply to 10% of this in 2020, and be fully amortised by 2023, when the final payment of the 2009 TD is due. This bolsters our view that a detailed agenda and supervision process, a hard deadline leading to aggressive amortisation schedules for new TDs, and regulatory independence make Portugal's aim of eliminating TDs credible.

Our belief in system sustainability and the stability of the legal framework for TD recoverability supports the 'BBB(EXP)sf' ratings two notches above Portugal's sovereign rating, we assigned to Tagus STC/Volta II, a securitisation of Portuguese TD receivables. Sovereign ratings anchor TD securitisation ratings because they generally capture macroeconomic risks that influence electricity demand.

An economic slowdown could reduce electricity demand and increase the risk of legislative intervention that compromised the roadmap. At present we consider the risk of legislative interference low in Portugal, partly due to the EU, IMF, and ECB's role in designing and monitoring electricity sector reform.

We believe that the level of TD generated by the electricity system in Spain has become less sustainable. The latest estimate of the TD at FYE13 is EUR4.1bn, partly due to withdrawal of previously committed government support. The uncertainty created by other government interventions and legal initiatives indicate persistent political interference in the sector and a lack of systematic mechanisms to prevent TD growth. For example, the government said that it will suspend quarterly wholesale power auctions that help set regulated consumer electricity prices, but it is not yet clear when a new price-setting formula will be implemented.

We recently downgraded five securitisations backed by Spanish electricity TD credit rights to 'BBBsf' from 'BBB+sf'/Negative, bringing them into line with the sovereign rating. The downgrades reflected the lack of a credible and predictable plan to substantially reduce or end TDs. The Negative Outlooks reflect our opinion that the risk of further political interference is high, and the failure so far of regulatory initiatives to reduce TDs, which reached a cumulative total close to EUR30bn, 211% of annual regulated revenues, at FYE13.

See "Fitch Downgrades Five Spanish Electricity Deficit Securitisations to 'BBBsf'", available at www.fitchratings.com. Our Presale for the Tagus STC/Volta II transaction is also available, and contains further details of our analysis of Portuguese electricity system sustainability. See also "Exposure Draft - Rating Criteria for Portuguese and Spanish Electricity Tariff Deficit Securitisations".

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