Spain increases electricity bills to trim deficit

MADRID (Reuters) - Spain said power prices would rise by 7 percent to help contain an accumulated 24 billion euro (20 billion pounds) deficit due to utilities selling electricity below nominal costs.

Industry Minister Jose Manuel Soria said on Friday the increase would have been 30 percent if consumers alone had been required to pay to keep the “tariff deficit” within legal limits for this year, and to eliminate it next year.

But utilities would also contribute by cutting costs and some extra contribution would come from the government, he said.

Tackling the tariff deficit has posed a dilemma for successive governments between either angering crisis-hit voters with hefty tariff rises, or upsetting utilities by cutting into their profitability. In any case, the government is ultimately liable for the deficit.

“If no measures are taken to check the deficit’s annual growth rate, we won’t just be facing an electricity sector problem but a real financial problem,” Soria said after a weekly cabinet meeting.

The Supreme Court recently ruled that the tariff deficit could be no more than 1.5 billion euros this year, and had to be eliminated in 2013.

Soria estimated that would still leave a gap of 3.147 euros billion between prices and costs for 2011 and 2012, of which household consumers would contribute some 1.4 billion by paying 7 percent more for their electricity as of April.

Utilities would contribute 1.7 billion by cuts to costs which the government recognises for items including distribution, transport, paying gas plants to be on stand-by, and financing the power exchange and the regulator.

Of that amount, some 700 million euros would be cut from nominal distribution costs and charged against amortised assets. Soria noted distribution costs soared to 5.5 billion euros in 2011 from 3.3 billion in 2006, for handling the same amount of electricity.

Another 600 million euros would come from surpluses in financing renewable energy research body IDAE.

The government said it would also limit subsidies currently paid to utilities for burning domestically mined coal to 50 million euros.

Shares traded in Iberdrola, Spain’s biggest power utility, rose by 2.2 percent by 03:20 p.m. British time and outperformed a rise of 0.48 percent by the Madrid bourse’s benchmark index.

The government now needs to find ways of paying off the accumulated deficit of 24 billion euros, which it promised to make a priority shortly after taking office in December.

The deficit is entered on utilities’ balance sheets as a receivable, and some 17 billion has been financed by government/backed bonds. (Reporting by Martin Roberts; Editing by Anthony Barker)