ELIA GROUP 2011 CORPORATE GOVERNANCE STATEMENT
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Description of the risks and uncertainties facing the company 1. Regulatory and income risks INTERNATIONAL
The two transmission system operators in the Elia Group proactively anticipate European legislation, new directives and regulations being prepared at EU level or awaiting transposition into Belgian and German law in order to minimise uncertainties. Elia and 50Hertz Transmission are European leaders when it comes to the components of the European Commission’s third package of directives aimed at developing a single electricity and gas market, as regards both the independence and impartiality of the management. The provisions of the third package were transposed into Belgian and German law in 2012. Under these provisions, Elia System Operator and 50Hertz will be subject to new procedures, such as certification as a full-owned unbundled TSO. The timetable and results of these new procedures at European level may include regulatory risks for both companies. Elia and 50Hertz are also founding members of the European Network of Transmission System Operators for Electricity (ENTSO-E), which was set up in December 2008 and brings together 41 transmission system operators from 34 countries, including the EU Member States. Amongst other things, ENTSO-E performs the role of the European Network of Transmission System Operators provided for in the third package. The Chairman of the Management Committee was re-elected as president of the association for another two years in June 2011. NATIONAL
The Belgian legal framework was established when the first EU Directive on the internal electricity market was transposed by the Electricity Act of 29 April 1999. The company’s net profit is largely determined by the fair return, which, for the period 2008-2011 contains an ‘incentive’ component spread over four years. Elia’s result will therefore be influenced annually, either positively or negatively, by its ability to achieve and/or exceed the efficiency improvement factor, by changes to Belgian linear bonds (10-year OLOs), and by the federal regulator’s analysis of the various budget items. On 22 December 2011, the tariffs and mechanisms determining Elia’s profitability as Belgium’s transmission system operator were approved by CREG for a new four-year tariff period, effective 1 January 2012. That approval was provisional since the third package of European directives had not been transposed into Belgian by that date. In addition, one or more customers may submit an appeal to the
Brussels Court of Appeal to contest the tariffs approved by CREG. This results in a legislative and regulatory risk likely to negatively impact the company’s profitability. On the other hand, Elia’s turnover also depends on the energy drawn off from its grid, and therefore on the level of business activity of its customers. The decline in residential consumption prompted by the slowdown in economic activity in 2009 has resulted in an income deficit compared with the tariffs approved by the regulator for 2008-2011. Under prevailing legislation, this deficit and the extra costs, such as additional financing, must be offset by the tariffs for the next regulatory period. The impact on the electricity consumption of Elia’s various customer segments and the uncertainty surrounding the outlook for an upturn in business amongst industrial customers continue to pose a risk to Elia’s cash flow. The regulatory framework for 50Hertz is based on an initial cost assessment and defines a revenue ceiling and efficiency incentives. It fixes the grid tariffs that include the remuneration based on a fixed return on capital invested for a five-year tariff period. The return for other regulatory periods will have to be confirmed subsequently. The German regulator has also defined a specific remuneration system for investments in the grid called ‘investment budgets’. To this end, 50Hertz files a request for approval of these budgets to ensure appropriate remuneration during the regulatory period. The investment budgets for various projects are currently in the approval process. Specific rules apply to costs and income generated by support programmes for renewable energy sources and cogeneration. The German government’s decision to shut down eight nuclear power stations following the incident in Japan results in additional costs for managing technical constraints on grids. The time it takes to offset the costs incurred means that 50Hertz prefinances its costs, which may have an impact on its cash flow and on its profit as defined by HGB accounting rules.