The German Federal Network Agency (BNetzA) opened a consultation phase for return on equity (ROE) rates for the second regulation period (2013 for gas and 2014 for electricity networks). The agency proposes to lower the rate before corporate tax from 9.29% to 8.2% for new installations. Affected market participants are asked to comment by 5 October 2011.
BNetzA justifies the lower rate with the generally low interest rates for investors, arguing that network operators can expect stable rates of return under volatile circumstances in other markets.
Feedback from the industry:
The Federal Association of the Energy and Water Industry (BDEW) heavily criticised BNetzA and said the proposed lower return rate ran counter to the current change in Germany’s energy system, endangering the necessary expansion of the grids on all levels, The four German TSO’s sent out a joint statement that they don’t agree with the lower rates in an environment of high spending needs.
The German energy information provider energate on its term remarked that the BNetzA started the consultation phase for the 1st regulatory period by proposing a ROE of 7.82%, finally agreeing to the current 9.29%.
The sudden change of heart by the BNetzA comes as a surprise to us, especially since we understood that the four German TSO’s were having a positive discussion with the BNetzA on certain supportive changes on other regulatory matters. We are also surprised that this decision follows an earlier decision by the German government to phase out nuclear power stations, hence leading to large grid investment needs over the coming decades.
According to BDES the current ROE rate of 9.29% (pre 15% tax) is lower than in most other European countries where it amounts to roughly 10%, whereas the US grants investment premiums of almost 12%.
Although clearly this news is not supportive for the revaluation of 50Hertz towards its RAB level, the gap between the RAB and current valuation of 50Hertz implied by Elia’s share price (~ 25% discount) still underlines the risk of the German regulatory regime. We leave our forecast unchanged since the new regulatory regime only takes place from 1 January 2014 onwards and our model deals with midterm ROE’s of less than 5%, thus significantly below the current allowed and newly proposed returns.
We stick to our Accumulate rating and € 31.5/sh TP on Elia, although acknowledge that the upside to move to € 34/sh on supportive regulatory changes in Germany looks uncertain. We don’t believe the dividend will be affected by this decision.