In an unusual decision, the Spanish Council of Ministers agreed in April 2018 to file a legal challenge (“Declaración de Lesividad”) against an order by the Ministry of Energy that defined the Regulatory Asset Base (RAB) and the allowed revenue of the operators of the electricity distribution networks. The decision was based on the understanding that the Ministry of Energy had incorrectly calculated one of the key parameters in the determination of the RAB (the residual life of the assets, or “Vida Residual”). The decision, if endorsed by the Spanish Supreme Court, would have resulted in a large revenue loss for power distribution companies.

NERA was retained by one of the main operators in Spain to provide an expert report and testimony in the case. Associate Director Jorge Sanz and Associate Director Marcelo Rabinovich analysed the regulation and asset data available to the operators and concluded that the issue revolved around an information problem.

The regulation assumed that operators had perfect information on the operational status and age of each of the thousands of assets that formed their asset base, and that companies had kept a record in their accounting systems. However, information in the hands of operators was imperfect, and although they knew whether assets were in operation or not, they did not have records on their exact age (and whether their regulatory life had expired or not).

Also, the regulation used information from both regulatory and statutory accounting without solving the inconsistencies in the data available in both account systems. This inconsistency resulted in an erroneous calculation of the Regulatory Asset Base.

In fact, according to NERA’s analysis, the formulae stipulated in the Royal Decrees and Ministerial Orders disregarded the information problems and produced a RAB that was too high, so the Council of Ministers was right in asking for the correction of the order. However, its proposed solution was flawed, and if applied, it would have produced too low a RAB. With a good understanding of the information issues, NERA developed the conditions to yield the correct RAB. The impact of applying the correct methodology differed by operator, but for some it would have reduced the revenue cut substantially.

Mr. Sanz and Mr. Rabinovich testified at the Spanish Supreme Court, explaining the flaws of the regulation and the problems with the proposed solution by the Council of Ministers. NERA also proposed a solution for the information problem and for solving the incoherence between regulatory and statutory accounting.

The case ended with the Supreme Court’s decision, published in May 2020, accepting NERA’s view on the information problem and opening the door for a correct recalculation of the RAB. The Spanish regulator, CNMC, and the Ministry for the Ecological Transition (now in charge of energy affairs) need to calculate and publish a new RAB and recalculate the allowed revenues for the electricity distribution companies.