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Energy Sector Reform in Romania Regulatory Framework Development and Privatization Process

Energy Sector Reform in Romania Regulatory Framework Development and Privatization Process. Florin Gugu Head of Regulatory Dept. Romania Athens, 26-27 June, 2007. A brief overview of Enel. Enel is the third* largest listed utility in Europe with a market capitalisation of EUR 41 billion.

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Energy Sector Reform in Romania Regulatory Framework Development and Privatization Process

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  1. Energy Sector Reform in RomaniaRegulatory Framework Developmentand Privatization Process • Florin Gugu • Head of Regulatory Dept. Romania • Athens, 26-27 June, 2007

  2. A brief overview of Enel • Enel is the third* largest listed utility in Europe with a market capitalisation of EUR 41 billion. • The Italian Economy Ministry owns 31.6 %** of the company, leaving a free-float of some 70%, with 2.5 million shareholders. • Its 60.000 employees work in 15 countries, producing and distributing power and gas in Europe, North and Latin America. • Thanks to the strong commitment to Corporate Social Responsibility, Enel has been included in the world’s most selective ethical indexes, such as the FT4Good and the Dow Jones Sustainability Index. Enel aims to be the most efficient, market driven, quality focused provider of power and gas, creating value for customers, shareholders and people. * as of 7th July 2006 ** 21,4% directly and 10,2% indirectly through state-run lender Cassa Depositi e Prestiti

  3. Energy Sector Reform HUGE CHANGES IN A SHORT PERIOD OF TIME 1999-2002 ANRE establishment CONEL Unbundling Secondary Legislation 2002-2006 Market opening Privatization DAM BM GC M

  4. REGULATORY REVIEW – General Issues • Legal Unbundling • New Energy Law 13/2007 sets July 1st 2007 as deadline for the legal unbundling in Romania • Distribution Companies will inherit the Distribution Licenses • Supply Company will receive a new Supply License Regulated market (mandatory) • New Energy Law 13/2007 defines the role of Implicit Supplier (IS) and Supplier of Last Resort (SLR) • No further obligation for National Uniform Retail Tariff System beginning with July 1st 2007 Day Ahead Market (PZU) (voluntary) • New provisions in Law 13/2007 for consumers greater than 1MW to provide hourly load forecast => PZU contribution will be lower than 2% of average mix procurement costs Balancing market (PE) (mandatory) • possible aggregation between captive, eligible and CPT (network losses); PE contribution will be lower than 2% of average mix procurement costs

  5. Distribution Tariffs Methodology: key principles Regulatory Period: 5 years, except for the first period which lasts for 3 years (2005-2007); Efficiency increase (X factor) of 1% applied only to controllable OPEX; The investors keep the profit accomplished from the efficiency increase over the level settled by the regulator during the first regulatory period; sharing mechanism afterwards; Correction factor on complying with the required minimum level of quality; Technical and commercial losses (CPT): In year 2012, for all distribution operators in Romania, the regulator will accept an average CPT of 9,5%. WACC regulated values (in real values before tax): First regulatory period: WACC @12%; Second regulatory period: WACC @10%. Initial RAB Value: The sum paid by an investor at the signing of a privatization contract for the purchase of the existing shares and for the newly-emitted ones will be used to settle the initial value of RAB (only for privatizations closed before 2006)

  6. Supply Methodology: key principles • Issued on May 2005 • The methodology will apply until the electricity market is fully opened • Key principle: the full pass through of justified costs in the final tariff • Electricity acquisition through a portfolio of ANRE – regulated contracts (regulated quantities and prices) with generators • Cost for trading on DAM and BM capped at 2.5% • Regulated margin is 2.5% of the cost of energy procurement • Government’s policy is to maintain a National Uniform Tariff (NUT) for captive consumers, at least until 2007; • Achievement of 2.5 % margin through the structure of energy acquisition

  7. Social Protection • Conditions in y 2000 • Historically, electricity prices were among the preferred tool • Cross-subsidies: • Heat ^ Electricity • Voltage levels • Residential ^ Industrial • Solution • Methodology for cost allocation in the case of CHPs • Methodology for cost allocation among voltage levels • Social tariff (intra-class cross subsidies were preferred against inter-class ones) • Direct targeting of social aids after July 1st 2007

  8. Social Tariff • Bill [€] • Standard Tariff • Social Tariff • E [kWh/month]

  9. Social Tariff • Advantages • Intra-class is less distorting than inter-class cross subsidies • Less birocracy – the choice is done by the consumer • More focused on low-income consumers • Disadvantages • Still in contradiction with EU directives => has to be eliminated • No incentives for energy efficiency improvements • Not always a low consumption reflects a low income

  10. REGULATORY FRAMEWORK – Enel’s Perception Aligned with EU provisions Compliant with primary legislation in Romania Sometimes deviating from the PRG signed with WB Reduced predictability Wholesale market distorted by preferential treatment Room for amendments ANRE needs to play a new role Good business up to now + high potential for regional market => We expect better results for the future

  11. Investors’ expectations from the regulatory framework In general Stability Predictability Immunity against political factors (regulator’s independence) As regards regulated businesses Attractive remuneration of the invested capital Pass-through of the non-controllable cost components As regards competitive businesses Clear rules Non-discrimination among players

  12. First privatization Conditions: Regulatory framework not completely issued Lack of any privatization experience record Pressure to do the privatization Investor’s issues Amplified risk perception “Italian regulatory model” Regulator’s issues Pressure and responsibility “Single bidder problem”

  13. Together solving the problems Secure the regulatory framework: White paper for distribution tariff methodology White paper for captive consumers’ tariff methodology Guarantee the compliance of the newly issued regulatory framework with the declared white papers’ principles Partial Risk Guarantee (PRG) with The World Bank Regulatory framework adjustments Comfort Letters issued by ANRE Continuous open channel for communications among ANRE, Enel, WB, GoR and the consultants of all parties

  14. Partial Risk Guarantee (PRG) with The World Bank • Signed between: • the Romanian Government • the World Bank • respectively Electrica Banat and Electrica Dobrogea • Will cover only limited and pre-defined risks caused by a change, a repeal of or non-compliance with the provisions of the regulatory framework relating to the: • distribution business • supply to captive consumers business

  15. Partial Risk Guarantee (PRG) with The World Bank (2) PRG tool used for the first time Even if stipulated only with E.Banat & E.Dobrogea,the PRG is a guarantee for the stability of the regulatory framework, and so it supports the entire distribution and regulated supply business Never called, up to now

  16. First Privatization in Romania • WAS IT A SUCCESS ?

  17. First Privatization in Romania • WAS IT A SUCCESS ? DEFINITELY YES !

  18. Discos’ Privatisation in Romania moldova transilvania nord • 4 Discos privatised in the period 2004-2005 • E. Muntenia Sud: privatised in 2007 • Three remaining Discos to be privatised in 2007-2008 transilvania sud banat muntenia nord oltenia muntenia sud dobrogea

  19. The values which drive the Enel development in Romania We aim at growing personnel into responsible, accountable and performing leaders, by providing opportunities for professional development and by rewarding performance Care for people We will be focused in identifying and capturing all value creation opportunities, focusing on efficiency, productivity and right value of our energy Focus on performance We will pursue all profitable opportunities to reinforce our leadership position through investments and acquisitions, maintaining a socially responsible and safety oriented attitude towards the country and our stakeholders Invest in the community People, Performance and Community

  20. Drivers of future evolution • Why the South-Eastern Electricity market is potentially an attractive market for Investors? • Significant demand growth potential • Strong need for investment in new capacity to satisfy demand growth in the medium to long term • In the early stages of market liberalization and/or with privatization programs running • Investments risk mitigation for new entrants thanks to EU accession (Romania, Bulgaria)

  21. Conclusions • There is no perfect regulatory framework • What does matter: • Stability • Predictability • Immunity to political influence • How to measure the quality of the regulatory framework: • Compliance with the EU requirements and recommendations • Unbundling • Market opening • Complexity of the methodologies • Attractiveness for private investors

  22. ENERGY IN TUNE WITH YOU THANK YOU FOR YOUR ATTENTION!

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