Key Takeaways
- Slovakia's regulatory framework for electricity and gas networks is supervised by an independent regulator, Slovak Regulatory Office for Network Industries (RONI).
- S&P Global Ratings regards the framework as supportive and transparent, ensuring highly predictable earnings for operators.
- However, we also view it as somewhat weaker than in other European countries, such as the Czech Republic, since we believe the regulator is subject to moderate state influence.
Table 1
Slovakia Electricity And Gas Market | ||||
---|---|---|---|---|
Regulator | Regulatory Office for Network Industries (RONI) | |||
Key players | Slovenská elektrizacná prenosová sústava - Power TSO | |||
Eustream - Gas TSO | ||||
Zapadoslovenska Energetika (ZSE) (A-/Stable) - Power DSO | ||||
Stredoslovenská energetika (SSE) - Power DSO | ||||
Východoslovenská energetika (VSE) - Power DSO | ||||
SPP distribúcia (SPP-D) - Gas DSO | ||||
Tariff-setting methodology | Price cap (WACC on RAB) | |||
WACC 2019 (electricity and gas): 6.04% | ||||
WACC 2020 (electricity and gas): 5.81% | ||||
Regulatory period | Five years | |||
Electricity and gas: 2017-2021 | ||||
Regulatory assessment | Strong/Adequate | |||
DSO--Distribution system operator. RAB--Regulatory asset base. TSO--Transmission system operator. WACC--Weighted average cost of capital. Source: S&P Global Ratings, RONI. |
The Slovak gas market is dominated by TSO Eustream and DSO SPP - distribucia (SPP - D), neither of which we rate. Both companies are state owned, despite their 49% ownership by Czech Republic-based EP Infrastructure (BBB/Stable/--), and they operate in Slovakia under a natural monopoly. Eustream operates a high-pressure transmission system linked to the main transmission routes in Ukraine, Czech Republic, and Austria. In 2018, Eustream transported 59.7 billion cubic meters of gas through Slovakia. SPP - D operates 33,000 kilometers (km) of gas pipelines, representing the distribution of about 98% of gas in Slovakia in 2018 to about 1.5 million customers.
The Slovak electricity market comprises one state-owned transmission system operator (TSO), Slovenská elektrizačná prenosová sústava, a.s., which has a natural monopoly in Slovakia, and three state-owned distribution system operators (DSOs): ZSE, SSE, and VSE. Each DSO is 51% owned by the government of Slovakia, with the remaining 49% stake belonging to bigger groups. Slovakia has about 95,000 km of power distribution lines throughout the country.
Operator Profiles
(ZSE; A-/Stable/--). Owned 49% by one of Europe's largest gas and electricity distributors Germany-based E.ON SE (BBB-/Stable/A-2), ZSE has operated in western Slovakia since its inception in 2006. At year-end 2018, ZSE owned about 38,500 km of power lines distributing 9.7 terrawatt hours (TWh) of electricity to about 920,000 customers.
SSE (not rated). Energy infrastructure services provider EP Infrastructure owns 49% of SSE, which operates in central Slovakia. At year-end 2018, SSE distributed 5.8 TWh of electricity to about 700,000 customers through its 33,400 km network.
VSE (not rated). VSE operates in eastern Slovakia. Germany-based E.ON recently acquired 49% of VSE. At year-end 2018, VSE distributed 3.8 TWh of electricity to about 600,000 customers through its 21 000 km long network.
Assessment Factors
Regulatory stability: High and predictable, with the framework unchanged since 2002
Slovakia's regulatory framework for electricity and gas utilities has been in place since 2002, providing stability and predictability. The framework is in the form of a price cap. DSOs retain any higher profit achieved, provided they are effective and able to optimize costs. The current five-year regulatory period started in 2017 (see chart 2).
Chart 2
Tariff setting: Detailed and transparent
The Slovakian regulatory framework for gas and electricity operates under a price cap method that provides operators with allowed profits based on the regulatory asset base (RAB). The RAB used to calculate tariffs has been frozen at the 2010 level for electricity DSOs for the 2012-2016 and 2017-2021 periods. For gas DSOs, the RAB for tariff calculation purposes is still at the 2015 level. In 2017, the regulator, RONI, reassessed the impact of new price decisions for electricity, in particular the increase in capacity fees for low-voltage customers. It then decided to apply the principles from the 2012-2016 regulatory period to the 2017-2021 regulatory period to mitigate the negative effect on customers. Every year, RONI calculates and publishes the weighted average cost of capital (WACC) at the end of June, based on publicly disclosed parameters (see table 2).
Table 2
Slovakia WACC Parameter Evolution Since 2016 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
% | 2016 | 2017 | 2018 | 2019 | 2020-2021 | |||||||
Risk-free rate of return | 3.34 | 3.03 | 2.27 | 1.53 | 1.07 | |||||||
Costs of foreign capital | 4.36 | 3.73 | 3.37 | 2.8 | 2.51 | |||||||
Unweighted coefficient | 0.42 | 0.53 | 0.54 | 0.58 | 0.51 | |||||||
Market risk premium | 3.83 | 4.54 | 5.18 | 5.59 | 6.66 | |||||||
Cost of equity | 6.83 | 8.25 | 8.38 | 8.61 | 8.49 | |||||||
Tax rate | 22 | 22 | 21 | 21 | 21 | |||||||
Weighted coefficient | 0.91 | 1.15 | 1.18 | 1.267 | 1.11 | |||||||
Share of foreign capital to total capital | 60 | 60 | 60 | 60 | 60 | |||||||
WACC - pretax (max) | 6.12 | 6.47 | 6.27 | 6.04 | 5.81 | |||||||
WACC - after tax (max) | 4.77 | 5.95 | 4.95 | 4.77 | 4.59 | |||||||
WACC--Weighted average cost of capital. Source: Regulatory Office for Network Industries. |
Chart 3
The tariff covers eligible operating expenses, based on the average for the last regulatory period and linked to inflation or the efficiency factor of 3.5%, as well as depreciation and capital expenditure (capex). An efficiency factor is also applied to grid losses.
Table 3
Slovakia Efficiency Factor Applicable To Grid Losses | ||||||
---|---|---|---|---|---|---|
Allowed grid losses (initial level allowed for 2017) | Efficiency factor (per year) | |||||
High voltage | 0.88% | 0.075% | ||||
Medium voltage | 3.48% | 0.75% | ||||
Low voltage | 10.19% | 1.50% | ||||
Source: ZSE. |
The DSO framework incorporates a correction mechanism on depreciation, subject to a two-year time lag, adding in t+2 (t representing the current year, and t+2 representing two years after the current year); the difference between actual regulatory depreciation from actual investments in the t year; and planned depreciation from planned investment in the t year. The same correction is applied to transmission costs (paid by DSOs to TSOs) and to transmission revenue paid by customers to DSOs, since the transmission is included in the distribution prices.
The framework also incorporates a penalty for underinvestment. If the DSO invests less than 50% of its disposable sources (that is, regulatory depreciation and regulatory reasonable profit after tax), then the profit is reduced by up to 10% over two years (in t-1 year RONI evaluates t-2 actual capex and adjusts t year reasonable profit). Operating expenditure is not subject to any corrections (see chart 4).
The framework removes additional revenue from the allowed revenue formula. Additional revenue consists of actual revenue for the t-2 year:
- Revenue from sanctions for exceeding the reserved capacity by customers.
- Revenue from grid connections.
- Income from illegal consumption (revealed thefts; this is not included in the formula for gas).
Chart 4
Financial stability: Strong, based on a track record of full cost recovery
Operating expenses are fixed for the whole regulatory period and depreciation is linked to the RAB from the photo year--the year computation of parameters for the new regulation is based on--namely 2010 for power and 2015 for gas. The framework should evolve, taking into account the five years of investments from current one-year investment with a two-year lag for corrections.
Regulator independence: Subject to moderate state influence due to the governance structure
Established in 2001, RONI has national authority under the Act on Regulation in Network Industries. RONI is an independent regulatory body responsible for ensuring transparent, nondiscriminatory, and efficient economic competition in network industries, and for determining and approving tariff methodologies and tariffs.
As of 2017, the government appoints the chairman of RONI instead of the president. The government can only change RONI's chairman if he dies, commits a criminal offence, is elected to the parliament, or has relatives with a stake in regulated industries. The positions of head of RONI and head of the regulation council (appeal body) were separated in 2017, so that the same person does not make decisions and sits on appeals body as well. Before this, the president appointed one person to serve in both roles. The six-member board is appointed for six years and can serve only two terms. Every two years, one board member is replaced.
RONI is the only regulatory body in Slovakia led by a former high-ranking politician. We believe this could reduce RONI's independence from the government. In 2017, Jozef Holjencik, the longest-standing chairman resigned, due to the increase of the low-voltage capacity distribution payments, which was to reflect the DSO's fixed costs. Both the government and opposition were against the increase, due to the impact on customers and RONI's perceived miscommunication to customers on tariff changes.
Related Criteria
- Key Credit Factors For The Regulated Utilities Industry, Nov. 19, 2013
Related Research
- Zapadoslovenska energetika a.s., July 8, 2020
This report does not constitute a rating action.
Primary Credit Analyst: | Renata Gottliebova, Dublin +353 1 568 0608; renata.gottliebova@spglobal.com |
Secondary Contacts: | Pierre Georges, Paris (33) 1-4420-6735; pierre.georges@spglobal.com |
Emeline Vinot, Paris (33) 1-4075-2569; emeline.vinot@spglobal.com |
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