JANUARY 2017
METHODOLOGY
Spanish 2005
Electricity Tariff
PREVIOUS RELEASE: JANUARY 2016
Spanish 2005 Electricity Tariff
Contact Information
Paolo Conti
Senior Vice President,
EU ABS Global Structured Finance
Tel. +44 207 855 6627
[email protected]
DBRS.COM
Table of Contents
Scope and Limitations
3
Rating Rationale
3
Summary
4
Background
Kevin Chiang
Senior Vice President,
EU ABS Global Structured Finance
Tel. +44 207 855 6633
[email protected]
Legal and Regulatory Framework
4
7
General
7
Review of the Legal and Regulatory Framework
7
Ownership Rights
10
Distributors Review
10
Issuer Bankruptcy Remoteness
11
Irrevocability Of Law
11
Bypass Risk
12
Liquidity Risk
12
Timing Risk
12
Sovereign and Country Risk
13
Transaction Level Structural Review
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2
14
Summary of Spanish 2005 Tariff Deficit Transactions
14
Liquidity Risk
14
Commingling Risk
14
Set-Off Risk
15
Conclusion
15
The Stability of the System
15
Surveillance
15
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Scope and Limitations
This methodology represents the current DBRS approach for rating securitisations backed by Spanish electricity tariffs arising from
a deficit in electricity charges of 2005. It describes the approach to analysis, which includes consideration of historical and expected
business and financial risk factors as well as industry-specific issues, regional nuances and other subjective factors and intangible
considerations. The DBRS approach incorporates a combination of both quantitative and qualitative factors. It is important to note
that the methods described herein may not be applicable in all cases. Specifically, the considerations outlined in DBRS methodologies
are not exhaustive, and the relative importance of any specific consideration can vary by issuer. In certain cases, a major strength
can compensate for a weakness, and conversely, a single weakness can override major strengths of the issuer in other areas. DBRS
may use and appropriately weight several methodologies when rating issuers that are involved in multiple business lines. Further,
this methodology is meant to provide guidance regarding the DBRS methods used in the sector and should not be interpreted with
formulaic inflexibility, but understood in the context of the dynamic environment in which it is intended to be applied.
Rating Rationale
This methodology is narrowly defined as the Spanish 2005 Electricity Tariff Methodology and addresses the structures used to
finance periodic historical deficits in electricity charges against costs. These charges are directed by law to be recouped under
a formula in future charges and may be sold to a special-purpose vehicle (SPV), which then raises funds against the assigned
compensation entitlements.
For most tariff methodologies, the legal and regulatory framework aspect comprises a significant portion of the methodological
issues, with the other key rating variable being credit risk. In most tariff deficit transactions, because of their pass-through structure,
there is little traditional credit risk. There is, however, a potential timing difference or liquidity risk, whereby administrative errors
or delays could result in deferred payments. This methodology focuses predominantly on the legal and regulatory framework, as it
is this framework that drives the assignment of a rating and includes a discussion on the liquidity risks to the transaction and the
parties responsible for mitigating those risks.
The scope of this methodology and the regulatory review herein are specific to the Spanish national electricity system with respect
to the 2005 electricity deficit. This methodology also reviews the potential risks related to collection amounts that could affect the
timing of bond payments.
A linkage between the probability of default of a sovereign’s rating and the rating of the securities issued in the context of 2005
Spanish electricity tariff securitisations is due to the essential role played by entities under the umbrella of the sovereign authority
(such as the Spanish government, the Bank of Spain, the Comisión Nacional de los Mercados y la Competencia (CNMC) and,
formerly, the Comisión Nacional de Energía (CNE), whose role has been recently overtaken by CNMC) in actively managing the
fund necessary to repay the securities.1
The achievement of a rating higher than the sovereign’s rating is based on the assessment that (1) the securities are sufficiently
protected and (2) the payments are not necessarily directly or indirectly negatively affected by the sovereign’s solvency.
The analysis encompasses the array of risks below:
• Satisfactory legal and regulatory support for the transaction, which ensures the timely payment of interest and full payment of
principal of the securities, including consideration of the following:
– Existence of the compensation entitlement related to the collection of the specific tariff component;
– Ownership of the compensation entitlement;
– True sale of the compensation entitlement;
– Validity and enforceability of the compensation entitlement; and
– Collection procedures related to the compensation entitlement.2
1. It is unlikely that in the current legal and regulatory framework a structure can be designed that achieves perfect delinkage between the securities’ rating and the
rating of the sovereign.
2. In the Spanish legal and regulatory framework, the collection procedures are spelled out by law; for this reason, this section of the methodology is mentioned under
Legal and Regulatory Framework.
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• The transaction parties’ capabilities and financial strength to perform their respective duties, including
– Review of the utilities performing the duties of the distribution grid operators (or distributors);
– Possible liquidity constraints and structural mitigants;
– Operational considerations related to management of funds;
– Timing considerations related to the reinstatement of payments, following failure by a distributor, and structural mitigants;
– Absence of commingling and set-off risks; and
– Absence of bypass risks related to the electricity customers who are required to pay amounts related to the
compensation entitlement.
• Assessment of Spain’s sovereign risk and respective mitigants, including
– Sovereign risk and the potential impact on enforcement of the compensation entitlement and related cash flows supporting
the securities; and
– The importance of the electricity system to Spain and its citizens.
• Review of the transaction’s legal structure, including consideration of the following:
– Consolidation risk and bankruptcy remoteness of the SPV holding the compensation entitlement;
– The presence of satisfactory legal opinions supporting the legal and regulatory framework around the securities; and
– Consistency with the DBRS Legal Criteria for European Structured Finance Transactions.
This paper focuses on the securitisation of compensation entitlements arising from the 2005 Spanish electricity tariff because of
their particular legal status and recovery mechanism.
Summary
Background
The relevant electricity tariff deficit that falls within the scope of this methodology is defined as the difference between
1. Regulated electricity tariffs, set by the Spanish government or by a relevant regulatory body and paid by electricity consumers for
their regulated supplies, or access tariffs, set by the liberalised market; and
2. Actual costs (e.g., production costs, energy transfer cost, infrastructure costs, etc.) associated with such tariffs. Such kind of deficit
has existed in the Spanish electricity sector for some time.
Spain has the highest electricity tariff deficit among member states of the European Union, and various tariff deficits exist, each
with different characteristics:
• The deficit of 2000 to 2002 (EUR 1.522 billion) and the deficit of 2005 (EUR 3.83 billion, the 2005 Tariff Deficit), where the initial
holders assigned rights arising from these tariff deficits to third parties.
• The deficit of 2006 and 2007, whereby a new system was introduced for its financing through auctions managed by the CNE (now
the CNMC).
• The deficit referred to in Royal Decree 6/2009, whereby collection rights are assigned to a Spanish securitisation government
guaranteed fund, the Spanish Electricity Deficit Amortisation Fund (Fondo de Titulización del Déficit Eléctrico or FADE), and the
fund’s assets include (1) existing collection rights, generated and not assigned to third parties by the initial holders of the right and
(2) new collection rights. Royal Decree-Law 29/2012 established that the EUR 4.1 billion additional deficit that took place in 2012
would generate collection rights that could be transferred by their holders to FADE. Additionally, for the Spanish government to
be able to guarantee the new economic obligations claimable from FADE, the total limit on the guarantees to be provided by the
Spanish government to the FADE programme was raised to EUR 26 billion in July 2013 from EUR 22 billion.
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In Spain, the amount of the outstanding electricity tariff deficit was estimated at approximately EUR 30 billion at the end of 2013
(corresponding to 3% of GDP). The tariff deficit has also become an issue of economic policy concern in Spain, and the European
Commission has recently issued a country-specific recommendation to tackle the electricity tariff deficit3.
The Spanish tariff deficit has gradually built up since 2000; until 2006, it was mainly generated in the energy component of the
electricity price (as the 2005 Spanish tariff deficit). However, since the liberalisation of energy prices in 2007/2008, this component
does not contribute to the tariff deficit, as it is fully passed on to electricity consumers, and the regulated costs (called the access
costs) have started to grow rapidly over the last years. These costs not only include transmission, distribution and annuities
to cover the tariff deficit from previous years but also include a special regime of support to renewable and co-generation,
extra-peninsular costs (such as compensation for higher electricity costs in the Balearic and Canary Islands) and other costs.
Regulated costs, and especially the special regime costs, have increased rapidly in recent years because the Spanish government
granted generous subsidies to renewables producers, mainly solar and wind, and these subsidies led to a significant investment in
these sectors. The costs of support to renewable energy in Spain increased to EUR 8.4 billion in 2012 from EUR 1.2 billion in 2005. The
extra-peninsular costs and the annuities to cover the tariff deficit in the previous years have also increased, and there were additional
increases observed in the network costs.
The Spanish authorities considered that the growth in regulated costs was so high that it could not be matched by the corresponding
increase of the fees paid by energy consumers (reflected in the access tariff revenues); thus, substantial increases of the tariff deficits
have been recorded each year since 2008. The financial burden resulting from the tariff deficit was provisionally borne by the
Spanish utilities, but these companies were entitled as creditors to recover the corresponding amount from the budget, as their
financial burden resulted from obligations imposed on them by regulation. The companies have been granted a credit right to
receive such amount with interest. In order to avoid significant one-off compensation, which would represent a burden on public
finances, in 2010, the government set up FADE in order to turn the rights of the utilities into fixed-income securities backed by
payment rights to be repaid by energy consumers but with guarantee by the Kingdom of Spain.
The 2005 electricity tariff deficit was generated prior to the emergence of the issues related to special regime electricity and is
mainly derived from the energy component of the electricity prices of 2005.
The CNE, which has recently been merged into the CNMC, was the regulatory authority for Spain’s energy sector and an entity
mandated by the Ministry of Tourism, Infrastructure and Industry (the Ministry). The main functions of the CNMC in the collection
and disbursement of the amount related to the 2005 Tariff Deficit are to
• Manage timely collections from distributors and payments to tariff deficit beneficiaries; and
• Open and maintain a dedicated account with the Bank of Spain (the CNMC Account).
The 2005 Tariff Deficit is repaid by a specific surcharge applied to access tolls from July 2006 until December 2020. The surcharge
is collected by the CNMC pursuant to the general settlement procedure of the Spanish electricity system as a specially dedicated
amount (cuota con destino específico), or fixed cost, and is therefore intended to be recovered separately from other costs of the
system and not to be applied for any other purpose until the 2005 Tariff Deficit is fully repaid. Notwithstanding this, however, cuotas
con destino específico are not privileged incomes and are not protected or guaranteed over other amounts to be collected through the
access tolls — they just have their own regulations regarding how they are collected and paid.
Two systems currently comprise the regulated electricity sector in Spain: the regulated system and the liberalised system.
The distributors are the agents in charge of collecting amounts generated through the tolls. The tolls are the payments for the use of
the electric networks (transmission and distribution grid). They are determined on a yearly basis by the government. The obligation
to pay the tolls is stipulated in the access agreements entered into by the distributors and their customers (the end consumers or the
retailers, acting in their own name or on behalf of the consumers).
When the 2005 Tariff Deficit appeared and was recognised, consumers paid the so-called Tarifa Integral – the price that consumers
paid to the distributors for the electric power supply, since the distributors carried out the power supply activity (the electric
power market was not liberalised, and there were few consumers who had entered into supply agreements with retailers at market
conditions). It included both the cost of power generation and the cost of the use of the network. As a result of the amendments
3. The 2014 Country Specific Recommendation no. 7. The EU recommends “ensuring the effective elimination of deficit in the electricity system as of 2014, including
by taking further structural measures if needed”.
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in the legal and regulatory framework between 2007 and 2009, the degree of liberalisation of the electric power market has grown
by increasing the number of consumers who entered into a supply agreement with retailers. Distributors were removed from the
supply activity and since then only carry out the distribution activity. The Tarifa Integral was suppressed.
However, some small consumers may still be supplied under specific economic conditions regulated under Royal Decree 216/2014
and pay a special price (the so-called voluntary price for small consumers, or PVPC price) to their retailers. The tariff includes the
amount related to the electric power supply and also the tolls, all together in the same invoice.
Consumers in the liberalised market pay the price agreed with the retailer for the supplied power and the tolls (one or two invoices,
depending on whether the consumer has agreed only with the retailer and the retailer with the distributor in its own name or on
behalf of the consumer, or if the consumer has directly entered into the supply agreement with a distributor).
Therefore, the Tarifa Integral does not exist anymore, and all consumers must pay the corresponding tolls in proportion to their
actual electricity consumption and the price of the energy power supply (included in PVPC price or the agreed price depending on
whether the consumer stays under the regulated regime or has passed to the liberalised market). The entire amount is collected by
the distributors.
As a result, at present, the recovery of the 2005 Tariff Deficit is only linked to the payment of the tolls.
On 31 December each year, the Ministry calculates a target annuity amount sufficient to repay the 2005 Tariff Deficit, together
with notional interest, on an annuity basis over the remaining term to maturity in December 2020. The Ministry sets the surcharge
periodically4 with the objective of recovering by the end of that year an aggregate amount equal to the target annuity amount based
on an estimate of the level of electricity usage by consumers during the year. The distributors bill their customers based on their
actual consumption and pay the relevant amounts related to the 2005 Tariff Deficit (the 2005 Tariff Deficit Amounts) to the CNMC,
which is then responsible for paying the beneficiaries.
The table below provides details of the annuity and the amounts recovered to date in respect of the 2005 Tariff Deficit.
Years to
Maturity
Annuity
(A)
Tariff Deficit
Amounts (B)
O/S
Compensation
Entitlement
at end
(B - A)
As a % of
the Tariff
Deficit
Amounts
71,927
3,898,216
142,168
14
360,492
330,028
3,710,356
(30,464)
-9.2%
4.703%
174,498
13
387,958
4.297%
150,340
12
379,249
386,131
3,498,723
(1,827)
-0.5%
419,298
3,229,765
40,049
9.6%
3,229,765
0.726%
23,448
11
2,900,163
1.057%
30,655
10
306,558
353,050
2,900,163
46,492
13.2%
307,145
308,118
2,622,700
973
2012
2,622,700
1.505%
39,472
0.3%
9
313,779
313,353
2,348,819
(426)
-0.1%
2013
2,348,819
0.195%
2014
2,031,541
0.226%
4,580
8
296,172
375,391
2,031,541
25,686
8.0%
4,470
7
292,832
355,400
1,723,659
19,641
2015
1,723,659
0.082%
6.0%
1,413
6
283,471
Year
O/S
Compensation
Entitlement
at start
Notional
interest
rate
Interest
2006
3,830,447
3.647%
139,696
2007
3,898,216
3.647%
2008
3,710,356
2009
3,498,723
2010
2011
DBRS understands that shortfalls to date have been caused by the Ministry overestimating electricity consumption for the year.
4. Although Royal Decree 1634/2006 established that the tariff shall be reset quarterly, and Royal Decree 1164/2001 established that the access toll shall be reset
when the tariff is reset, in practice, DBRS understands that both the tariff and the toll (and hence the 2005 Tariff Deficit surcharge) have been reset less frequently
but not less than annually.
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Legal and Regulatory Framework
General
A feature of tariff deficit securitisations is that the tariff itself is typically established under legislative or regulatory authority. It is
important to highlight that while the legislation and regulatory authority create the framework for the collection of the amounts
needed to cover the bond repayment and all related costs, this does not usually create an obligation on the part of any government
entity to ultimately repay the deficit. With specific reference to the 2005 Tariff Deficit, the mechanics are designed under the law
(or regulatory authority) to collect sufficient amounts to repay the deficit by December 2020, but there is no explicit sovereign
guarantee. Most importantly, the law/regulations provide that the CNMC – and by extension, the bondholders – are made whole via
a dynamic adjustment. This dynamic adjustment results in the bondholders’ taking on mainly liquidity risk.
Whereas most utility tariff securitisations are based on future flows, the 2005 Tariff Deficit mechanism is designed for recovery of
electricity that has already been consumed but has not yet been paid for by customers.
The following section of this methodology focuses on the specific Spanish legal and regulatory framework, ownership rights,
utilities review, issuer bankruptcy review, irrevocability of law issues, bypass risk, liquidity risk and considerations with respect to
legal opinions.
Review of the Legal and Regulatory Framework
Spanish law distinguishes between regulated activities (technical and commercial management of the system, transmission and
distribution) and liberalised activities (retail and generation). Any company wishing to undertake one or more regulated activities
must conduct them on an exclusive basis. However, a group of companies may conduct both regulated and liberalised activities,
provided that they are carried out by different companies (i.e., both corporate and financial unbundling is required).
In respect of each activity, except for the system management, a summary of the framework settled by the Electricity Sector Act is
provided below:
1. Generation: liberalised. Most electricity wholesale trade between market participants (namely power producers, distributors,
resellers and qualified consumers) takes place on the electricity exchange set up by Royal Decree (the POOL market, managed by
Compañia Operadora del Mercado Espanõl de Electricidad (OMEL)). OMEL’s activities are centred on the forward spot market,
and its costs are recovered through the tariffs and tolls so there is no trading fee for users.
2. Transmission: regulated as a permitted monopoly activity. Red Eléctrica de España is the main operator (with 93% of the
market share).
3. Distribution: regulated as a natural monopoly activity. Distributors are subsidiaries of large, privately held utilities.
4. Retail: there are different types of customers: those supplied in the regulated market and those supplied by authorised last refuge
retailers who pay PVPC price.
Under Act 24/2013 (the Spanish Power Act), the electricity market is supervised by the energy regulator, the CNMC. The CNMC
also acts as an advisor to the Ministry. Spain represents the fifth-largest electricity market in Europe by consumption and is largely
dominated by four vertically integrated energy utilities (generation, distribution and retail facilities) being Endesa, S.A., Iberdrola,
Gas Natural Fenosa and HidroCantábrico Distribución, S.A.U.
In late 2013, the new Spanish Power Act on the Electric Power Sector was approved. Although the Spanish Power Act was not a
novelty in 2016 (in fact, it was already in force in 2014), 2015 offered the opportunity to observe its effects.
The new act strengthens the financial balance of the system, which becomes an essential element for assessing the risk of regulatory
changes. The reason was twofold: (1) If the deficit does not increase in the future, regulatory changes will be less likely; and (2) the
Spanish Supreme Court has declared that a growing deficit can justify relevant policy changes in the sector. Therefore, if this is not
the given situation, the Spanish government will have fewer reasons to amend the Spanish Power Act.
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The Spanish Power Act has made progress in the establishment of a balanced model:
a. A principle of economic and financial sustainability is established as the general principle that governs the power system (art.
13). Economic and financial sustainability is understood as the ability of the electric power system to meet its full costs.
b. The system’s income will be sufficient to meet the entire costs of the electric power system.
c. Any measure involving an increase of costs for the electric power system or a reduction of income shall incorporate an
equivalent reduction of other cost items or an equivalent increase of income to ensure that the system is balanced.
d. If an imbalance occurs in the financial year because of an income deficit, its amount may not exceed 2% of the system’s
estimated income for that financial year.
e. The debt accumulated from imbalances from previous years may not exceed 5% of the system’s estimated income for that
financial year.
f. The amount of imbalance that, without exceeding the above-mentioned limits, is not offset by increasing tolls and charges
will be financed by the subjects of the settlement system (carriers, distributors and renewable energy producers).
g. If any transitory deviations should appear between income and costs in the monthly settlements (on account of each end-year
settlement), such deviations shall be borne by the subjects of the settlement system (transporters, distributors and generators)
in proportion to the payments due to them in each monthly settlement.
h. The income surplus that may result from each period’s electric power system settlements will be considered income of the
system attributable to the current financial year. Whenever there are imbalances in previous years, these revenues will go to
the reduction of outstanding amounts corresponding to those years.
i. Charges shall not be reduced if the electric power system’s cost items reflect payments owed to outstanding debts from
previous years.
The consequence of the new framework is that the power system has to be balanced. A good example of this balance is the Royal
Decree-Law 9/2015 of 10 July (on urgent measures to reduce the tax burden borne by taxpayers of Personal Income Tax and other
economic measures). Its objective was the revision of prices in respect to capacity payments. Prices borne by consumers in respect
of capacity payments are reduced by adjusting the unit values. This measure is adopted without altering the economic and financial
sustainability of the electric power system required by Article 13 of the Spanish Power Act of 26 December, as the balance between
the different income and cost items is guaranteed.
The 2005 Tariff Deficit is a cost of the Spanish electricity system and is ultimately paid by all Spanish consumers of electricity as
a component of the billed amount. The CNMC is obliged to make payments to the beneficiaries’ account on the day it receives the
2005 Tariff Deficit Amounts from distributors and has the ability to impose fines on distributors for underpayment or non-payment
of the 2005 Tariff Deficit Amounts.
Presently, the extra payments dedicated to all tariff deficits amount to around 8.5% of the EUR 75 average monthly electricity
invoice. The percentage of the tolls allocated to the 2005 Tariff Deficit is legally considered a fixed cost (namely, la cuota con destino
específico) and consequently follows a different regulation regarding its settlement (collection and payment) than other costs that
are also included in the tolls (e.g., amounts to remunerate regulated activities such as distribution).
As indicated above, the distributors collect the tolls, a percentage of which is allocated to the 2005 Tariff Deficit Amounts. The
term they have to pay the 2005 Tariff Deficit Amounts for month M ends before the tenth day of the calendar month (M+2). This
obligation must be fulfilled by the distributors irrespective of whether or not they have actually collected the corresponding amounts.
Therefore, the distributors, who are entitled to collect the tolls from the consumers, must assume any default, under-payment and
non-payment during the collection process.
Should the distributors fail to comply with said term or pay lesser amounts than expected, the CNMC will request them to pay
immediately and will exercise its authority to be sure that the distributors comply as soon as possible. The distributors’ failure to
pay entails the direct application of the legal interest plus 150 basis points per day following the due date for payment (i.e., the tenth
day of the relevant calendar month M+2). The CNMC is required to pay the amounts standing to the credit of the CNMC Account in
respect of the 2005 Tariff Deficit Amounts to the beneficiaries on the same day that such amounts are received from the distributors.
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Should the distributors not comply with their obligation to pay the corresponding amounts to the CNMC Account within the
established term, they would be committing a very serious administrative infringement. The CNMC may initiate sanctioning
procedures against the distributors that committed said infringements. In such case, the CNMC will process the sanctioning file;
however, the relevant authority to impose any sanction as a consequence of very serious infringements is the Council of Ministers.
It is worth mentioning that the Spanish Power Act (Act 24/2013) includes an additional protection measure: in the event that
distributors that are obliged to make settlement payments do not fulfill their obligation to pay the amounts allocated to them on
time, the following rules shall apply:
1. The unfulfilled amounts shall first be covered by reducing the receivables of the subjects of the same group of companies.
2. The remaining amounts will be distributed among the other participants that do not belong to that group.
The redemption of the 2005 Tariff Deficit is programmed to conclude on 31 December 2020, which is 14 and a half years from the
recognition of the relevant deficit. However, in accordance with the settlement system, the second and last settlement regarding
2020 will occur in April 2021. Because of this, it is envisaged that the CNMC will pay to the beneficiaries any pending amounts as a
result of deviations on 10 April 2021 (or the following business day if that date is bank holiday).
By virtue of the 2006 Decrees, the Spanish Government provided that (1) a deficit had arisen in the settlement of the costs of the
regulated activities of the Spanish electricity sector in 2005 (i.e., the 2005 Tariff Deficit) and (2) the Spanish utilities that had funded
the 2005 Tariff Deficit were entitled to obtain compensation together with interest thereon calculated at a notional interest rate by
adding a surcharge on the regulated prices5 paid for the electricity supply (i.e., the tariff ) and access to electricity grids (i.e., the toll)
to end customers. The additional amounts charged to customers (i.e., the 2005 Tariff Deficit Amounts) are payable by customers
to the distributors, by the distributors to the CNMC and by the CNMC to the Spanish utilities that initially funded the 2005 Tariff
Deficit or their assignees.
The 2005 Tariff Deficit Amounts are collected through the settlement procedure of the regulated costs and revenues of the Spanish
electricity system. Invoices are generally issued monthly or bi-monthly in respect of the previous one or two months’ consumption
(as applicable) by distributors. However, certain customers are invoiced less frequently. By no later than the 25th day of each calendar
month (M+1), the distributors will provide the CNMC with a report on the invoices issued by them in the previous calendar month,
M, including details of the 2005 Tariff Deficit Amounts and the other fixed costs of the Spanish electricity system included in such
invoices. By no later than the tenth day of the subsequent calendar month (M+2), the distributors will be required to pay an amount
equal to the 2005 Tariff Deficit Amounts into the CNMC Account and pay to the CNMC the other fixed costs included in invoices
reported in the previous calendar month (M+1) and invoiced in the previous calendar month, M.
Each year in December, the Ministry will calculate (1) the outstanding balance of the Compensation Entitlement (as defined in the
table below) as of 31 December for the relevant year and (2) the amount required to repay the Compensation Entitlement to the
beneficiaries on a linear basis for the remaining years to maturity in December 2020 (the Annuity Target Amount).
The Annuity Target Amount is calculated using an annuity formula (i.e., discounting future cash flows) with (1) the Compensation
Entitlement as of 31 December for the relevant year as the principal component, (2) the unweighted average three-month EURIBOR
for the preceding month of November as the applicable discount rate and (3) the remaining number of years to 31 December 2020
as the term-to-maturity component.
The formulas to obtain the Annuity Target Amount and the Compensation Entitlement at the end of the relevant year are
summarized below:
Opening balance of the Compensation Entitlement
a*
Notional interest rate
b
Accrued interest
a×b
Remaining years to maturity (2020)
n
Annuity Target Amount
2005 Tariff Deficit Amounts
d
Closing balance of Compensation Entitlement
a × (1 + b) − d
* The original balance used in 2006 was set by the Ministry.
5. At that time the electricity sector worked in a regulated framework.
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Ownership Rights
It is vital that the Compensation Entitlement is legally conveyed in such a way that the beneficiary is entitled to receive all the
collections without exception. DBRS analyses the following in order to assess ownership rights:
Ownership of Compensation Entitlement. The relevant legislation should clearly establish the right to the Compensation Entitlement.
True sale of Compensation Entitlement. The assignment of the Compensation Entitlement constitutes a true sale of those
receivables and is not capable of being declared void or recharacterised from a legal standpoint, and no creditor of the originator,
namely in the context of its insolvency, would be able to set aside such transfer.
The Compensation Entitlement is valid, perfected and enforceable. DBRS reviews the receivables of the Compensation
Entitlements to assess if they are valid, enforceable and perfected by law.
Collection Procedures. DBRS reviews the collection procedures to ensure they are spelled out by law.
Distributors Review
While distributors contribute both risk and support to the transaction, the exposure of the transaction to each of these entities
is mitigated by (1) the collective responsibility of Spanish electricity consumers for shortfalls caused by such a default through
the true-up mechanism applied in recalculating the Compensation Entitlement every year; (2) the assumption that a defaulting
Distributor would ultimately be replaced, most likely by one of the other distributors; (3) the fact that collections each month
are expected to be significantly in excess of the amount required to pay monthly interest; and (4) the fact that any yearly deficit
is covered by reducing the payments to transport, distribution and generation companies. Those companies will receive pending
payments during the next five years.
A Distributor’s ability to continue to operate is of vital importance, with electricity today being viewed as a basic necessity. DBRS
believes that the most important factor mitigating a possible Distributor bankruptcy is the replacement by a successor Distributor
and the strength of the regulatory support around this issue. DBRS analyses four areas of a possible Distributor bankruptcy.
1. Replacing a Distributor
In Spanish tariff transactions, because of the fundamental role the distributors play in the electricity system, if any problem were to
arise with the entities acting as distribution grid operators that would result in an interruption of the payments, both the State (as
concession grantor) and the CNMC (as regulator and pursuant to the legal duty described within this report) would take prompt
measures, including the substitution of the concessionaire and/or the appointment of another capable entity to distribute the electricity.
This effectively ensures that the Spanish national electric system functions smoothly and guarantees the continuity of supply.
If a Distributor had to be replaced very rapidly, with no time to negotiate with several potential parties, a solution available to
the CNMC to avoid any disruption in the functions of the Distributor would be for a competitor to take over the functions of the
failing Distributor. In compliance with the CNMC’s legal obligation to take all necessary measures to ensure that deliveries of the
Compensation Entitlement amounts are maintained and made in a timely manner, the CNMC could also advise the Council of
Ministers to replace a Distributor that has not remitted amounts related to the tariff deficits.
2. Liquidity upon Distributor bankruptcy
Upon a Distributor’s bankruptcy, DBRS assesses the continuity of the system as well as the continuity of payments. DBRS assesses
whether the probability of a liquidity shortfall is commensurate with the rating sought; in case such probability is judged too high,
liquidity constrain scenarios are considered in order to verify that the liquidity in the transaction is sized accordingly. DBRS reviews
the ratings of any liquidity provider according to its European legal criteria. DBRS specifically analyses the timeline in which
payments are due from the utility to the beneficiaries and the time the notes are due to the investors.
The notes are exposed to the risk that a default of one or more distributors could result in insufficient funds being received to meet
the issuer’s obligations in respect of interest on the subsequent interest payment date. DBRS has produced an analysis that shows
that, given the expected contribution of each Distributor to the overall collections and the anticipated size of those collections in
each period relative to the issuer’s interest payment obligation, it would require a simultaneous failure of at least the two largest
distributors (combined with significant increases in interest rates and overall declines in electricity consumption) to leave the issuer
with insufficient funds to meet its obligations in relation to timely interest payments. DBRS also expects that any non-payment from
the Distributor would be discovered immediately, after which proper action and the power of the regulator, as well as duty by the
law or statute, are assessed.
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3. Distributor viability
DBRS assesses the likelihood that a Distributor may become insolvent. The factors include, but are not limited to, the following:
• Whether the Distributor is heavily regulated.
• Whether the Distributor is entitled by law to collect any shortfalls, and if so, the mechanics and timing of the adjustment; the
size of the tariff revenues relative to the total revenues of the Distributor is also considered to address the incidence of possible
adjustments of shortfalls.
• The percentage of the tariff relative to the entire electricity cost.
• Whether bypass risk is present (the risk that consumers can bypass paying their electricity bills).
• Whether the Distributor is the sole provider; in Spain’s case, there are several providers who could potentially replace each other,
as opposed to countries that rely on a single distribution grid operator.
• The regulator’s duty and power by law to ensure continual electricity distribution.
• The variability of the revenues.
• The fact that unfulfilled amounts of a distributor shall first be covered by reducing the receivables of other companies of the
same group.
4. Non-consolidation of Distributors and SPV
If a Distributor were to become insolvent, DBRS reviews whether any commingling of tariff deficit amounts could occur. Spanish
law specifically states that upon the bankruptcy of a Distributor, the amounts in its possession that result from payments related to
the tariff deficit amounts will not form part of the bankruptcy estate of any entity operating in the Spanish electricity system.
In fact, the amounts collected are addressed as cuota con destino específico and are explicitly collected for the purpose of repaying
the tariff deficit.
Issuer Bankruptcy Remoteness
DBRS expects that a legal opinion establishing the bankruptcy remoteness of the beneficiary of the Compensation Entitlements and
issuing entity will be provided.
Irrevocability Of Law
As is common with tariff transactions, there is no state guarantee. However, sometimes the state can pledge that it will not seek
to overturn, limit or alter the special tariff that has been set. This pledge is more prevalent in the United States than in Europe.
Nonetheless, there is no such pledge by the Spanish State. However, the Spanish Tariff Deficit Compensation Entitlements were
created by Decree-Law. While the law is not irrevocable in the sense that there is the risk of change of law, DBRS has been advised
that if the law were overturned or altered, the owner of the rights would be entitled to plead for the State’s liability and claim
damages accordingly. Given the uncertainty with respect to recovery of such amounts from the sovereign, DBRS regards this as a
mitigant only in that it may serve as a deterrent for the Spanish government to change/alter the law if it knows it is likely to be liable
for damages. Should a change occur, DBRS would evaluate the change to determine the impact on outstanding ratings.
While the Spanish consumer seems financially capable of absorbing significant further rises in the cost of electricity, and the recovery
of receivables backing the notes at present seems to have had a limited contribution to the total costs of the Spanish electricity
system, there are nevertheless indications that raising electricity prices is a matter of some political sensitivity, particularly at a time
when Spain’s economy is deteriorating.
Notwithstanding the liberalisation of the Spanish electricity market since 2009 and until 2014, tariffs have not been increased
sufficiently to cover the full costs of the system, with the result being that deficits have continued to increase. The new Spanish
Power Act, together with the new framework for renewable plants (including significant cuts of their remuneration), have apparently
achieved this balance goal, although it is too soon to apply this conclusion to following years.
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DBRS recognises that the 2005 Tariff Deficit recovery mechanism is embedded in Spanish law and that amending existing legislation
might have adverse consequences for Spain, including
1. The impact on the Spanish electricity system, and in particular on the ability to finance tariff deficits through securitisation going
forward. Having seen borrowing costs surge to record highs during the sovereign crisis, Spain will presumably remain sensitive to
issues potentially affecting efficient access to funding markets.
2. The possibility that in taking such action Spain would open itself to potential claims by noteholders.
However, while DBRS considers it unlikely that Spain would unilaterally amend the 2005 Tariff Deficit legislation to the detriment
of the current beneficiaries, and without prejudice of the effects of a new regime’s coming into force, DBRS detects significant
political sensitivity surrounding the level of tariff deficits in Spain. This methodology relies on the existing legislative framework to
remain in place. Should this no longer be the case, there is the potential for a significant negative impact on ratings.
Bypass Risk
DBRS expects that the law or statute establishes that all electricity consumers are subject to the payment of tolls. DBRS assesses if
there are any possible exceptions. This would affect the viability of the utilities — the distributors, in the case of Spain.
The Spanish Government has recently set up the new regulation for so-called self-consumers (those consumers with small renewable
generation assets). The Royal Decree 900/2015 of 9 October, on the conditions for those modalities of electricity supply based on
self-consumption and production with self-consumption, has established a toll for subjects that benefit from self-consumption in
order to prevent damages to the system or to consumers who remain in the system.
Liquidity Risk
There is little traditional credit risk with respect to Spanish electricity tariffs. What would otherwise be defined as credit risk is
embedded in the legal and regulatory framework or borne out as liquidity risk. The current Spanish 2005 Tariff Deficit securitisations
place the identifiable liquidity risks on the Distributor as the nominee of the CNMC. The obligation of the Distributor is to remit
the full tariff deficit amount, which is reset every year in order to ensure all interest, principal obligations and related costs of the
rated Securities are paid. As a result of this legal obligation, the risk is essentially binary. Either the Distributor performs or does not
perform its legal obligation to deliver the tariff. If it does not remit the designated amount, it can be fined and eventually replaced
by the Ministry following actions by the CNMC, which is charged with the continuity of electricity delivery to Spain and also has a
legal obligation to immediately take all necessary action to ensure the timely and full payment of the tariff bonds.
With respect to adjustments of the tariff deficit amounts, each year, the Compensation Entitlement may be adjusted based on any
shortfall to ensure repayment of the tariff deficit on an annuity basis over the remaining term to maturity. Upon application of the
true-up in a given year, the beneficiaries are made whole for any shortfall in the prior year. This periodic true-up mechanism means
that electricity consumers effectively have collective responsibility to make up shortfalls in collections, regardless of how these have
been caused. In addition, the distributors are required to make up the shortfalls in collections from consumers. Transactions have
been structured as principal pass-throughs (i.e., the notes amortise principal using excess cash flows after payment of interest).
While the issuer is required to pay monthly interest, the relative size of this obligation compared with the monthly collected amounts
should mean that these collections will be adequate for this purpose even assuming significant decreases in electricity consumption,
increases in interest rates and the disruption of cash flows caused by the simultaneous failure of a number of distributors. Finally,
although the tariff deficit surcharge is determined each year with a view to ensuring that the 2005 Tariff Deficit is repaid by December
2020, if the tariff deficit amounts and accrued interest are not fully recovered by that date, it is expected that any outstanding
amount will be settled, including accrued interest, by the residual collections received between January 2021 and April 2021.
Timing Risk
DBRS considers the cash reserve in the transaction and the time that may be required in times of turmoil to replace a defaulting
Distributor. The replacement mechanics of the Distributor, the reconstitution of payments and the viability and willingness of
potential Distributor candidates are all risks that could be exacerbated in periods of stress. Mitigating factors include the fact that
the present distributors are highly regulated and the CNMC has a legal obligation to adopt any necessary measures required to
ensure full monthly payments. DBRS believes that the CNMC has the power, ability and legal duty to ensure the continuity of
electricity and, by extension, the payments of the securitised tariff deficit notes.
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Sovereign and Country Risk
DBRS has factored DBRS Sovereign Ratings Group’s long-term local currency rating on the Kingdom of Spain, as well as related
country risks in the methodology.
The methodology proposed involves a link between the rating of a Spanish electricity tariff transaction and the sovereign rating
of Spain.
Given the negative implications for Spain of amending the legislation underpinning the repayment of the 2005 Tariff Deficit
without putting in place an alternative support mechanism, it would appear logical to assume that the risk of this happening is most
significant at a time when Spain is experiencing financial difficulties.
Unlike some other tariff deficit securitisations, the 2005 Tariff Deficit mechanism does not rely on an explicit guarantee from
Spain. The CNMC, a public entity independent from the State, is responsible for setting the regulated tariff and the access tolls at
the appropriate level to ensure repayment of the tariff deficit by the final payment date. Nevertheless, through the Ministry, the
State is closely involved in administering and maintaining the recovery mechanism for the deficit. While DBRS does not consider
that a default by Spain would necessarily mean that either the Ministry or the CNMC would automatically cease to be effective
in performing their operational roles for the transaction, the likelihood of that scenario occurring must be seen to increase with a
sovereign default.
However, DBRS believes that both sovereign and country risks are mitigated in the determination of ratings for this asset class for
the reasons detailed below.
• The Securities to be rated with this methodology are not general obligations of the Spanish government, nor do they provide
an implied or explicit guarantee either in respect of the securities themselves or the underlying tariff deficit amounts. The
financial burden related to the 2005 Tariff Deficit Amounts is the ultimate and exclusive responsibility of all Spanish consumers
of electricity.
• A key function of the CNMC in the collection and disbursement of the 2005 Tariff Deficit Amounts is to open and maintain a
dedicated account with a regulated Spanish credit institution. This account is currently maintained in the name of the CNMC
with the Bank of Spain on behalf of the beneficiaries. By virtue of Article 1.2 of the Spanish Insolvency Law, entities under public
law are not subject to insolvency proceedings. This does not mean that it is impossible for the Bank of Spain to become insolvent
or to default; merely, that it is not subject to being wound up in accordance with Spain’s Insolvency Law. The Bank of Spain is
not rated, and no trigger mechanism exists for its replacement, although DBRS understands that in theory the account could be
moved to another credit institution in Spain if required. The balance of the account does not form part of the estate of the CNMC.
The CNMC is obliged to make payments out of such account to the beneficiaries on the day it receives any payments of 2005
Tariff Deficit Amounts from distributors. The CNMC also has an obligation to act diligently in the discharge of its functions, and
it is responsible to beneficiaries for any proven damages (in accordance with Spanish law) caused through the performance of
its duties. In this way, the CNMC has a duty to ensure that the payments received into the dedicated account for this purpose
are allocated and remitted to the beneficiaries in the manner contemplated by law. DBRS also understands that in the event of
an inability of the Bank of Spain to pay amounts deposited with it, any amounts lost to its estate would ultimately be recoverable
through the true-up process, although obviously this could cause issues in the short term in relation to the ability of the issuer to
meet its obligation to pay interest each month.
• The CNMC has the ability to offset and to impose fines on distributors for underpayment or non-payment of 2005 Tariff Deficit
Amounts. The CNMC is also obliged to carry out audits of distributors and to check, among others, their compliance with the
relevant Spanish legislation governing the settlement of the 2005 Tariff Deficit.
• The CNMC is a public entity (organismo público) of the Spanish State regulated by Law 3/2013. The CNMC is dependent on the
Ministry, and its purpose is to ensure effective competition and transparency in the Spanish energy market, with particular regard
to the best interests of all parties involved in the energy market and its customers. In addition, Spanish Royal Decree 657/2013, as
amended from time to time, implements and develops the functions, structure and internal regulations of the CNMC.
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Transaction Level Structural Review
Summary of Spanish 2005 Tariff Deficit Transactions
The Compensation Entitlement
The Spanish State has recognised the existence of the 2005 Tariff Deficit by means of regulations passed by the Spanish State and
has designed a mechanism that aims to make possible the recovery of corresponding amounts for the entities that had to finance
and bear the funds during 2005 (or any current holder of the right if the original entities assigned their rights). This entails the
following consequences:
1. The beneficiaries own a right, with its specific characteristics, to recover the 2005 Tariff Deficit Amounts, which has been
recognised by the applicable regulations. Therefore, the beneficiaries can claim against any State behaviour (new regulations,
administrative resolutions, lack of activity) that harms their rights.
2. The legal relations between consumers, distributors, the CNMC and the beneficiaries are not always based on agreements and
contracts; these relations are imposed by laws also regulating the settlement system and the particularities of the collection and
payment of the 2005 Tariff Deficit Amounts.
3. The regulations governing said relations between the different agents regarding the 2005 Tariff Deficit Amounts have been passed
by the Spanish State (Spanish parliament, Spanish government and the Ministry).
4. The Spanish State determines the amounts of the tolls, bearing in mind the sustainability of the system; no ex ante deficit
is allowed.
5. The Spanish State regulates the tolls and determines the amounts that the consumers pay for the tolls and the percentage allocated
to the 2005 Tariff Deficit Amounts. Therefore, the Spanish State is obliged to carry out all the necessary steps in order to protect
the rights of the 2005 Tariff Deficit beneficiaries.
Bearing in mind the aforementioned, DBRS understands that there may be grounds to find the Spanish State’s liability in case of an
underpayment or non-payment, although it will depend on the final causes of the non-payment, and in any case, there can be no
assurances that the courts issue judgments imposing the State to pay the amounts not received by the beneficiaries.
A different matter would be the amendment of the legal framework affecting the beneficiaries’ rights (e.g., an amendment of the
legal framework regulating the 2005 Tariff Deficit Amounts or a change in the regulations of the tolls affecting the percentage
allocated to the 2005 Tariff Deficit Amounts). In such a case, unless the new regulations include a mechanism to compensate the
outstanding amounts, DBRS understands from Spanish counsel that the beneficiaries would be able to claim for damages against
the Spanish State.
If over a given year the collection of tolls is below the expected amount, the regulations for the following period will increase the
amounts of the tolls and, if necessary, the percentage allocated to the 2005 Tariff Deficit Amounts. Moreover, as long as the tolls
are paid by consumers and the distributors collect them, it is unlikely that there could not be enough funds to pay the 2005 Tariff
Deficit Amounts.
Compensation Entitlement Transfer
Interest shares in the Compensation Entitlement are transferred by way of Spanish law assignments, which are notified to the CNMC.
Liquidity Risk
DBRS evaluates whether there are mechanisms in place to mitigate situations where the CNMC fails to transfer amounts collected
from the distributors to the beneficiaries as a result of administrative delays or errors. Such mechanisms can take the form of a swap
facility, a liquidity facility or setting a time gap between the scheduled payments and the transaction payment date (to the CNMC
and from the CNMC to the beneficiaries).
Commingling Risk
Commingling risk relates to the collections that could be lost in the case of the bankruptcy of a key party. As is the case with the
mitigation of other risks with respect to tariff deficit transactions, it is covered in the legal and regulatory framework.
• Commingling between different securitisation transactions: No commingling between transactions can occur, because the
2005 Tariff Deficit Amounts are securitised through different series of notes whose underlying assets cannot satisfy the claims of
other series of notes.
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• Commingling between the entities involved in the billing and collection activities: The CNMC is the manager of the account
in which the distributors pay the 2005 Tariff Deficit Amounts. However, said account is opened with the Bank of Spain in favour
of the beneficiaries, on behalf of whom the CNMC runs this account. Consequently, the amounts of said account do not belong to
the CNMC and are not integrated in the estate.
Set-Off Risk
Set-off risk relates to a party within the system effectively netting any or all of the cash flows associated with the tariff deficit amounts
that are to be used to pay the investors of the securitisation notes. DBRS analyses whether the legal and regulatory framework
protects the beneficiaries.
The tolls are collected by the distributors from the consumers (directly or through the retailers). The distributors have the obligation
to pay the 2005 Tariff Deficit Amounts, but they are not ultimately payers, just mere collectors (i.e., the tolls collected are not
integrated in their estates).
Conclusion
DBRS believes that the nature of the underlying receivables and the legislative framework supporting the collection of the 2005
Tariff Deficit Amounts are, in and of themselves, capable of supporting a higher rating than that of Spain given that a default of Spain
would not automatically result in a default of the transaction. Nevertheless, risks exist that warrant a link to Spain’s sovereign rating,
including the risk that it might in certain circumstances be considered politically expedient to amend the existing framework in
order to reduce the burden of electricity cost for Spanish consumers, or indeed to comply with a ruling from the Commission that
the existing arrangements comprise State aid to certain participants in the electricity system, contrary to the provisions of the EU
Treaty. The central involvement of a number of entities (the Ministry, the CNMC, the Bank of Spain) is also supportive of such a link.
In order to arrive at a rating for the transaction using this approach, it is necessary to determine the probability of a default on the
transaction, given the default of the sovereign. DBRS assumes that a default of the rated notes is most likely to happen because of a
significant deterioration in the financial condition of the sovereign, combined with either (1) a decision by the sovereign to amend
the terms of the 2005 Tariff Deficit framework in a manner detrimental to beneficiaries or (2) a deterioration in the performance of
CNMC and/or the Ministry and/or the Bank of Spain such that the performance of the transaction is affected.
Through the assessment of such probability, DBRS has concluded that the highest rating of the transaction is two rating notches
above the sovereign’s rating based on the following assumptions:
1. DBRS is aware of the current political sensitivity concerning the tariff deficit in Spain and considers there to be considerable
uncertainty surrounding how that deficit is to be managed going forward.
2. Notwithstanding that uncertainty, DBRS nevertheless assumes that, absent a default by the sovereign, Spain would not unilaterally
amend the existing 2005 Tariff Deficit legislation without adequately compensating beneficiaries.
3. If the second assumption above proves incorrect, the rating on the notes may be subject to considerable volatility.
The Stability of the System
Although the protection ensured within the aforementioned legal and regulatory framework permits the achievement of a rating up
to two notches higher than the sovereign’s rating, the stability of the Spanish tariff system is perceived as an additional requirement
to ensure that the maximum envisaged rating can be reached.
Persisting and unaddressed circumstances of distress within the electricity system or adverse changes in the credit standing of the
sovereign may increase the likelihood of adverse policy-driven events that could jeopardise the reliability of the framework and thus
negatively expose the rating of the 2005 Spanish Electricity Tariff transactions in relation to the sovereign rating.
Surveillance
DBRS monitors outstanding transactions in accordance with its Structured Finance Surveillance Global Policy on www.dbrs.com.
DBRS applies the current methodology to monitor 2005 Spanish electricity tariff securitisations. For the avoidance of doubt, the
current methodology may not be the only methodology used to monitor such transactions
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