Muscat’s energy proposal may not survive rating test

A Labour Party proposal to slash electricity bills by reducing the investment capital recouped from consumers may be severely compromised unless Enemalta downsizes its new projects, according to a major credit rating agency.

Standard and Poor’s said that if any reduction in tariffs was not compensated by measures on the investment side, the ratings agency would have to reassess the likelihood of exceptional support.

If this happens, Enemalta’s credit rating may worsen, leading banks to breathe down the corporation’s neck.

In his reply to the Budget last week, opposition leader Joseph Muscat said that if Enemalta reduced the percentage return on its investment from the current 8.5 per cent, it could translate to a €12 million saving for consumers.

Last January, Standard and Poor’s lowered the energy company’s credit rating by one notch to BB with a negative outlook and this assessment may create a sticking point for the Labour Party’s proposal.

According to infrastructure ratings director Vittoria Ferraris, one of the analysts who worked on the Enemalta report, it is difficult to say what the final impact of such a proposal on the corporation will be.

But the ratings agency, she said, would expect that a reduction in tariffs from a lower return on capital is followed by “an equivalent downsizing of Enemalta’s investment plan”.

The Labour Party has not hinted at any plans to downsize the corporation’s capital investments. On the contrary, it hascommitted itself to continue with the interconnector cable with Sicily and promised to run the Delimara power station on gas, which would require substantial new investment.

Standard and Poor’s downgrade earlier this year was attributed among other things to Enemalta’s weak debt coverage ratios.The report had also insisted that ratingstability depended on the execution of “a sustainable refinancing plan”.

The company’s saving grace is the “exceptional support” it receives from the government that guarantees its debt, which runs into half a billion euros.

According to the Finance Ministry, a reduction in return on capital will endanger Enemalta’s financial situation and have “significant repercussions on the financial stability of the country as a whole”.

In its defence, the Labour Party drew a comparison with the UK where the energy regulator set the return on capital rate for utility companies at 4.7 per cent in 2009 for the next five years.

Unlike the UK, electricity in Malta is provided by a monopoly and regulation was required not only to limit excessive pricing but also to set incentives for efficient performance, a spokesman for the Labour Party said.

He added that keeping the return on capital “artificially high” provided no incentive for the company to improve its efficiency levels.

“Ultimately this will result in a loss of competitiveness for the country, given that energy is a basic input for all production processes and this negative loop would feed back onto Enemalta and have a negative effect on its credit rating,” he said.

Labour’s claim

If Enemalta’s return on capital is benchmarked with the UK’s 4.7 per cent, the Labour Party estimates that savings could reach €15.3 million.

Adopting a slightly higher rate of 5.5 per cent, which is more in line with the European Commission’s recommendations, the Labour Party says that it would still cut down return on capital by €12.1 million.

However, when asked what such a saving would mean for individual consumers, the Labour Party insisted that reducing return on capital was only one of a raft of proposals that would be presented to the electorate.

“The plan will be a holistic one that will offer realistic and sustainable savings,” a spokesman said, without quantifying the savings.

Broadly offering similar calculations, the Finance Ministry is insisting that any reduction in return on capital by €12 million would lead to “a maximum decrease of €4 per €100”.

If this is the case a consumer currently receiving a bill for €300 would see this go down to €288.

ksansone@timesofmalta.com