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29 October 2020 / article

Loyens & Loeff successful for ContourGlobal in tariff regulation proceedings – ACM to review regulatory framework

ContourGlobal Bonaire BV (‘CGB’) was successfully represented by Loyens & Loeff before the Joint Court of Justice of Aruba, Curacao, Saint Maarten and of Bonaire, Saint Eustatius, and Saba (‘the Court’). In its judgment the Court annuls the 2017 tariff decision for electricity production on Bonaire and orders the Netherlands Authority for Consumers and Markets (‘ACM’) (the Dutch energy regulator) to review its regulation methodology.

Back in 2017, CGB lodged its notice of objection against the ACM decision for setting the maximum tariffs for the wholesale of generated electricity (‘production tariff’) for the year 2017 in Bonaire and subsequently appealed against the decision on objection before the Court in First Instance of Bonaire, Sint Eustatius and Saba, but to no avail. Only in its appeal to the Court, CGB’s arguments finally prevailed. The Court rendered its judgement on 21 October 2020.

Background

In 2016 the Electricity and Drinking Water Act BES (BES being an acronym for Bonaire, Saint Eustatius and Saba, which are the special municipalities of Caribbean Netherlands) (hereinafter ‘the Act’), entered into force introducing a maximum tariff regime in the aforementioned BES-islands. Electricity producers such as CGB are required to sell generated electricity through regulated tariffs to the local distribution undertaking since the entry into force of the Act.
The ACM is designated for that purpose to determine and set the production tariff as well as to determine a calculation methodology. 2017 was the first year in/for which the production tariff was set, based on a method to be applied for the period 2017, 2018 and 2019. As mentioned above, CGB lodged a statement of objection against this decision, starting the proceedings at issue.

Actual financing costs

CGB’s key argument is that the Act stipulates that the production tariff should be based on the actual costs for the production electricity and/or drinking water, taking into account a reasonable return. This is in contrast to ACM’s method and tariff decision which have the basic premise of expected efficient costs.
This difference in perception is especially evident regarding the financing costs of CGB’s power plant. CGB argued that ACM incorrectly dismissed CGB’s viewpoint that the project finance costs of the power plant were efficient and that the actual costs of financing should be taken into account. The Court follows CGB’s argument and assumes that the element "taking into account a reasonable rate of return" refers only to capital charges, by referring to the notion that the WACC method used by the ACM, which serves to determine the reasonable return, concerns the weighted average of the costs of equity and debt and therefore capital charges. This means that capital charges may (and must) be (somewhat) abstracted from actual costs, with the capital charges of an efficiently financed company forming the normative framework. However, the degree of abstraction is limited by the requirement of actual costs, as stated in the Act. This means that if a company is efficiently financed with the actual costs, those costs must be taken into account. In this respect, it is up to the company to substantiate this and then for the ACM to demonstrate that actual costs are not efficient costs.
The Court deems that ACM mistakenly abstracted the actual financing costs of CGB’s power plant without investigating the efficiency of these actual financing costs.

Compilation of the peer group

Another key argument of CGB concerns the compilation of the peer group for establishing the WACC. CGB questioned the inclusion of a large Polish electricity producer (‘Zespol’) in the peer group. Zespol’s power plant is located next to its own lignite mine and consequently has a different risk profile compared to a electricity producer such as CGB who has a diesel-fired power plant combined with a wind farm. The Court followed CGB and emphasized that due to the exceptionally low risk profile, Zespol had to be considered an ‘outlier’. The Court ruled that the ACM must convincingly justify why a company that stands out as an 'outlier' within the peer group may nevertheless be included in that peer group.

The Court concludes that the judgment under appeal must be set aside and rules that the ACM must, within six weeks of the date of judgment, adopt a new decision on the objection to the production tariff decision in the light of what the Court has considered in this ruling.

CGB was represented by attorney Roland de Vlam.



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