At the same time, regulations in this particular area are highly complex, making it difficult to understand these markets. The growing pressure from authorities for higher efficiency and lower costs are added to these differences in regulation, as well as political interference, which may lead to an instable regulatory environment.
Since the players in these markets are looking for comparative information about regulatory risk and new ideas for efficiency, as well as data to help them make informed decisions about investment/disinvestment or entry into new markets/exit from existing markets, the EY study Mapping study power and utilities regulation in Europe provides a clearer picture of the regulations in this area, as a benchmark tool for CFOs, local management and regulators of electricity and gas.
"Companies in the power and utilities sector must constantly monitor regulatory risks in order to anticipate the potential adverse consequences of legislative changes and implementation of new regulations" says Lars Wiechen, Executive Director and Leader of the Valuation and Business Modeling department, EY Romania.
The study analyzed the regulatory environment in the distribution and transport of electricity and gas in 16 European countries, including Romania, identifing key trends, similarities and differences, as well as the main features of regulatory systems in each analyzed country.
In addition to the typical complexity of the regulatory environment at the local level, stakeholders should consider the indicators used by regulators, as their definition may also vary from country to country. Even when regulators use the same kind of input categories, these can greatly differ, such as the components of cost of equity, debt gearing and tax rate. Through their nature, they are strictly related to the situation in each country, reflecting local financing conditions and tax regulations set by authorities.
Besides these differences, the EY study also identifies two common trends. First is the pressure on rates of return, largely due to the credit crunch and lower financing costs. Also, some national regulators consider that returns should be reduced as activities in regulated industries are less risky.
A second common trend focuses on efficiency and quality. Regulatory institutions in European countries communicate with each other and compare the components of the regulatory system more intensely than they were 5 or 10 years ago, because they are interested in understanding the methods of other parties, as well as their decisions, in order to improve the local regulatory system.
At this moment, the main approach in the regulation of these sectors in Europe is based on the regulated asset base of transport system operators and distributors of electricity and gas, to ensure operators a reasonable return on investments in the system. However, the picture is highly nuanced from country to country, so the EY study grouped the analyzed countries into four types, based on different parameters used by each regulator:
- Cost plus: Belgium
- Incentive-based: Czech Republic, France, Germany, the Netherlands
- Revenue/price/income cap: Romania, Poland, Slovakia, Sweden, Turkey
- Combination of models: Finland, Greece, Italy, Spain, Switzerland, the UK
"Understanding the complex features and implications of power and gas in European countries will remain difficult, despite pressure from the European Union for convergence between national regulatory systems. At the same time, regulators require higher efficiency, pushing for lower prices. In this context, a deeper understanding of the particularities of each country in this regulated industry can be a significant gain for the players in the field. Therefore, our study aims to provide mirrored comparisons of regulatory systems in 16 European countries, including Romania", concludes Lars Wiechen.
For full access to the EY study please click here.
