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Eastern European Utilities' Regulatory Frameworks Are Varied, But Most Are Adequate To Strong


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Eastern European Utilities' Regulatory Frameworks Are Varied, But Most Are Adequate To Strong

  • The regulatory frameworks in Eastern Europe, Malta, and Greece, a cornerstone of our credit rating analysis for regulated utility companies, are not homogeneous and are skewed toward an "adequate" or "strong/adequate" assessment.
  • Czech Republic is an outlier, having the strongest framework ("strong" score) while Bulgaria and Malta have the weakest assessments ("adequate/weak" and "weak" scores, respectively).
  • We see a strong correlation between country risk and the frameworks' overall quality, with countries having lower country risk benefitting from a stronger regulatory framework. Country risk in Eastern Europe is skewed toward "intermediate/moderately high" in our assessment.

DUBLIN (S&P Global Ratings) Sept. 18, 2023--S&P Global Ratings views the regulatory frameworks for energy (electricity and gas) and water utilities in Eastern Europe as supportive overall, albeit with some heterogeneity as they range from strong to weak, i.e. from our most- to our least-credit supportive assessments. Regulations in most countries allow for timely recovery of operating costs and capital. We consider the majority of frameworks to be predictable and transparent, which we view as credit supportive.

Table 1

Selected Eastern European utilities regulatory framework assessments
Strong Strong/Adequate Adequate Adequate/Weak Weak
Czech Republic Estonia Croatia Bulgaria Malta
Hungary Romania
Latvia Georgia
Lithuania Greece
Source: S&P Global Ratings

We currently rate--directly, or indirectly through a larger group--about 20 utilities operating in Eastern Europe, Malta, and Greece. These companies' total rated debt amounts to an equivalent of about €39 billion. When assessing regulated network operators' credit quality, an analytical cornerstone is our assessment of the regulatory frameworks that govern regulated utilities. Regulatory stability, tariff-setting procedures, financial stability, and the regulator's independence underpin our analytical framework. For deeper insight into the regulatory frameworks and how we assess them, see our reports on Georgia, Hungary, Latvia, Bulgaria, Czech Republic, Estonia, Lithuania, and Slovakia (listed under "Related Research," below).


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Table 3

Czech Republic electricity and gas: strong
Regulator Energy Regulatory Office (ERO) since 2001
Key players Electricity networks
Transmission system operator (TSO): CEPS (100% owned by government)
Distribution system operators (DSOs): CEZ (65% market share); E.ON (25% share); Pražská Plynárenská (10% share)
Gas networks
TSO: Net4Gas
DSOs: Czech Gas Networks (more than 80% share); PP, which is 75% owned by EnBW and 22% by the city of Prague (10% share); and E.ON (5% share)
Tariff-setting methodology Hybrid revenue cap as a mix of allowed costs and regulatory asset base (RAB)-based allowed profits for electricity and gas
Annual update of RAB to reflect net investments
DSOs can retain higher profits if efficient, efficiency factor 1.01%
Pre-tax weighted average cost of capital (WACC) 2021-2025 (electricity/gas [regulatory period 5]): 6.54%/6.43%

Table 4

Estonia electricity and gas: strong/adequate
Regulator Estonian Competition Authority (ECA) since 2008
Key players Electricity networks
TSO: Estonian Elering AS
DSOs: Elektrilevi OÜ (93% market share), which is owned by Eesti Energia, along with 26 other operators, the main being VKG Elektrivõrgud OÜ and Imatr Elekter AS (3% share each), which operate in eastern and western Estonia, respectively.
Gas networks
TSO: Estonian Elering AS
Tariff-setting methodology No set formula to calculate tariffs since 2013, mandatory annual correction of tariffs with DSOs that can apply for tariff increases/decreases
Network fees are based on historical actual costs and forecast additional costs. The cost model does not react to inflation, for this network operators have to apply to the ECA themselves (if there is a specific need for example procurement price change, the addition of the ECA's supervision fee, etc.). The ECA uses the consumer price index (CPI) to assess the validity of future forecasts.

Table 5

Hungary electricity and gas: strong/adequate
Regulator Hungarian Energy and Public Utility Regulatory Authority (HEA) since 1994
Key players Electricity networks
TSO: MAVIR Zrt (owned by MVM Group)
DSOs: Six licensed power DSOs, of which three belong to E.ON SE, two to MVM, and one to Opus Global PLC
Gas networks
TSOs: FGSZ Földgázszállító Zrt (owned by MOL Hungarian Oil and Gas PLC)
DSOs: 11 total, of which two belong to E.ON and three to MVM. Tigaz, the biggest DSO in the country, was sold to Opus Holding in 2021
Tariff-setting methodology Price cap
Weighted average cost of capital (WACC) 2021-2024 (electricity): 3.36%
WACC 2021-2025 (gas): 3.24%

Table 6

Latvia electricity and gas: strong/adequate
Regulator Public Utilities Commission (PUC) since 2001
Key players Electricity networks
TSO: JSC Augstsprieguma tīkls (AST)
DSO: JSC Sadales tīkls (owned by Latvenergo)
Gas networks
TSO: JSC Conexus Baltic Group (68.46% owned by AST)
DSO: SC Gaso
Tariff-setting methodology Revenue cap WACC 2021-2022 (electricity): 2.65%, 2023-2024: 2.52%
Revenue cap WACC Jan. 2020-Sept. 2023 (gas transmission): 4.22%, 2023-nondefined: 2.63%
Revenue cap WACC (gas storage): 2021-2025: 2.65%

Table 7

Lithuania electricity and gas: strong/adequate
Regulator National Energy Regulatory Council (NERC) since 1997
Key players Electricity networks
TSO: AB Litgrid (97.5% owned by EPSO-G)
DSOs: AB Energijos Skirstymo Operatorius and four other smaller DSOs (Achema AB, Lifosa AB, Akmenes cementas AB, and Dainavos elektra, UAB)
Gas networks
TSO: AB Amber Grid (93.58% owned by EPSO-G)
DSOs: AB Energijos Skirstymo Operatorius (94.68% owned by Ignitis Group) and four other smaller DSOs (Intergas, Fortum Heat Lietuva, Agrofirm Josvainiai, and SG Dujos in the city of Druskininkai)
Tariff-setting methodology LRAIC (long-run average incremental cost) model, which still provides operators with allowed profits based on the RAB; and the WACC. Allowed profits are recalculated annually but the WACC is fixed for the entire regulatory period
The cost of debt is recalculated annually
Pre-tax WACC 2022 (electricity/gas): 4.03%/3.94%
WACC 2023 (electricity/gas): 4.17%/3.99%

Table 8

Slovakia electricity and gas: strong/adequate
Regulator Regulatory Office for Network Industries (RONI) since 2001
Key players Electricity networks
TSOs: Slovenská elektrizacná prenosová sústava (100% state owned) with a 100% market share
DSO: Stredoslovenská energetika (SSE; 49% owned by EP Infrastructure, 51% state owned) with a 30% share; Východoslovenská energetika (VSE; 49% owned by E.ON 49%, 51% state owned) with a 20% share; Zapadoslovenska Energetika (ZSE; 49% owned by E.ON, 51% state owned) with a 50% market share
Gas networks
TSO: Eustream (51% state owned and 49% ownership by EP Infrastructure)
DSO: SPP distribúcia (SPP-D) (51% state owned and 49% ownership by EP Infrastructure)
Tariff-setting methodology Price cap (WACC on RAB), with annual WACC update at the end of June for gas and at the end of July for electricity
RAB is based on IFRS value and updated annually.
Correction mechanism every two years on actual D&A compared with planned D&A.
Escalation of opex (excluding perex, i.e., about 40% of opex) by the core inflation decreased by an efficiency factor of 2% per year. Escalation of perex (about 60% of opex) by the change of the nominal salary in Slovak economy without any efficiency factor.
Pre-tax WACC for 2022, electricity: 5.09%; gas: 4.36%
For 2023, electricity: 5.18%; gas: 5.24%
D&A--Depreciation and amortization. Opex--Operating expenditure. Perex--Personnel expenses.

Table 9

Georgia electricity and water: adequate
Regulator Georgian national energy and water supply regulatory commission (GNERC) since 1997
Key players Electricity
TSO: Georgian State Electrosystem JSC (GSE)
DSO: Energo-Pro Georgia
DSO: Telasi JSC
Georgia Global Utilities JSC
United Water Supply Company of Georgia LLC
Tariff-setting methodology RCB-based revenue cap
Electricity pre-tax WACC: 15.39% for 2021-2025.
Water WACC: 14.98% for 2021-2023.

Table 10

Greece electricity: adequate
Regulator The Regulatory Authority for Energy (RAE) since 1999
Key players Electricity networks
TSO: Independent Power Transmission Operator (IPTO)
DSO: Hellenic Electricity Distribution Network Operator (HEDNO), owned by Public Power Corp.
Gas networks
TSO: National Natural Gas System Operator (DESFA)
DSO: Public Gas Distribution Networks SA (DEDA)
Tariff-setting methodology Revenue cap mechanism
6.7% WACC-based remuneration over the four-year period Jan. 2021-Dec. 2024, premium for specific projects

Table 11

Romania electricity and gas: adequate
Regulator National Electricity and Heat Regulatory Authority (ANRE) since 1998
Key players Electricity networks
TSO: Transelectrica
DSOs: E.ON; CEZ until mid-2021 then MIRA; Enel; Electrica
Gas networks
TSO: S.N.T.G.N. Transgaz (NR)
DSOs: 36 independent companies
Tariff-setting methodology Revenue/price cap (WACC on RAB)
Pre-tax WACC (electricity and gas) 6.39%

Table 12

Bulgaria electricity: adequate/weak
Regulator The Electricity and Water Regulatory Commission (EWRC) since 1999
Key players Bulgarian Energy Holding (Parent)
TSO: Electricity System Operator EAD
DSOs: Energo-Pro; EVN; Eurohold Bulgaria AD; EDC Golden Sands
Tariff-setting methodology TSO: Cost-plus approach (WACC on RAB) over annual one-year regulatory period from July 1 to June 30
DSO: Revenue cap (WACC on RAB) over two and five years, normally a three-year regulatory period; price reviews are conducted annually, with pre-tax WACC updates

Table 13

Malta electricity: weak
Regulator Regulator for Energy and Water Services
Key players DSO: ENEMALTA
Tariff-setting methodology Fixed electricity tariff since 2014.
Full exposure to price and volume risk remains.

Related Criteria

Related Research

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Primary Credit Analysts:Renata Gottliebova, Dublin + 00353 (1) 5680608;
Emeline Vinot, Paris + 33 014 075 2569;
Pauline Pasquier, Paris + 33 14 420 6771;
Massimo Schiavo, Paris + 33 14 420 6718;
Secondary Contact:Emmanuel Dubois-Pelerin, Paris + 33 14 420 6673;
Research Assistant:Kimberly Suarez, London

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