The text of the Act and its explanatory memorandum indicate that the legislator seeks to balance the interests of electricity users and energy companies.
On 28 December 2018, the Act amending the Excise Duty Act and certain other acts ("the Act") was passed, effective from 1 January 2019.
The Act, inter alia:
- reduced excise duty for electricity sold to the final customer from 20 PLN/MWh to 5 PLN/MWh,
- freezed the 2019 prices and rates of electricity charges to the final consumer to be applied by sellers at the level of the prices applied in 2018,
- allowed sellers to apply to the Settlement Administrator (Zarządca Rozliczeń) defined in the Act for financing to cover the difference in revenues (“Price difference amount”) from electricity trading for the benefit of final consumers.
The Act was amended with effect from 6 March 2019 (“Amended Act”). The text of the Act and its explanatory memorandum indicate that the legislator seeks to balance the interests of electricity users and energy companies. This leads to a conclusion that sellers should be compensated for their basically lost revenues. In some key areas, the Act makes references to the Regulation, which has not been published as on the day of this report.
Determination of the provision for onerous contracts as at 31 December 2018
As a result of the adoption of the Act, the Group analysed whether it is obliged, in terms of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, to create provisions for what is known as onerous contracts. According to reporting provisions, if a given contract or a group of contracts generate losses, the company should recognise an appropriate provision in the period in which the loss became unavoidable, unless it is not able to reliably determine the amount of the provision.
In view of the lack of implementing regulations to reliably determine the amount by which the Group will reduce revenues resulting from its contracts as a result of the obligation to change prices and rates in settlements with customers in 2019, for customers other than the tariff ones, The Group has estimated the financial effects of the Act to the extent possible and reliable. When estimating the value of the necessary provision, the following assumptions were made:
- existing legal status as at 31 December 2018,
- with respect to the determination of the costs of performance within the meaning of IAS 37, only direct costs (energy acquisition costs, property rights with the current rate of excise duty) were assumed, and indirect costs (own costs and profit) were disregarded. The question which of the costs should be taken into account when estimating the provision for onerous contracts was the subject of consideration by the IFRIC in 2017. The IFRIC stated that this issue was not clearly regulated, and the adoption of a solution is a matter of judgment of the preparer,
- for the purpose of determining the costs of energy purchase, market values have been assumed, without taking into account the fact that the cost of energy production within the Capital Group may be different than the market value. Sales volumes of electricity were adopted on the basis of amounts estimated for 2019 for the G segment in amounts similar to 2018. In 2018, households (including those mostly applying the G tariff) accounted for 22% of the total sales volume of the Company, while business customers accounted for the remaining 78% of the total sales volume.
As a result of the above assumptions, the following was established:
- assuming prices binding in 2018 for customers from G tariff groups in the tariff regulated by the President of the Energy Regulatory Office, the Company estimated the excess of minimum unavoidable costs of meeting the obligation over benefits from the contract at PLN 79 million. The loss results from the adoption of model costs of purchase of electricity in 2019 (costs of electricity and property rights and the excise tax rate at the level resulting from the Act) and the simultaneous application of sales prices from 2018. The sales volume results from the level of sales to customers in Tariff G planned for 2019. The Group established a provision for the above amount in the books of 2018.
- based on the literal provisions of the Act and assuming the price list prices (excluding discounts and rebates) in force as at 30 June 2018 for other customers (i.e. business customers and other customers applying tariffs other than G), the estimated benefits from the performance of contracts were determined and compared with the minimum unavoidable costs of performance of these contracts. The analysis did not show any excess of such costs over benefits and therefore no provisions were created. The amended Act issued after 31 December 2018 specifies that the sales price applicable in their contract as at 30 June 2018 should be adopted for these customers, which will result in a decrease in revenues from the sale of electricity, resulting in a surplus of costs over revenues from already concluded contracts.
- due to uncertainty as to the manner of determining the Amount of the price difference, recognition of any compensation assets as at 31 December 2018 has been waived.
Impact on subsequent reporting periods
As a result of the introduction of the Act in question, with effect from 1 January 2019, the Group applies prices and rates of electricity charges at the level of 2018 specified in the tariff approved by the President of the Energy Regulatory Office for customers from the G tariff groups in settlements with end users. The provision, estimated and recognised as at 31 December 2018, is the best estimate of minimum losses, but it does not include the right to compensation, which may have a positive impact on the sales results for this tariff group.
With respect to other customers (mainly business ones), the Group applies contractual prices for 2019, in the absence of an approved regulation of the Minister responsible for energy. The adjustment to the provisions of the Act and the amended Act is assumed by the Group within the deadlines resulting from these provisions. The Group estimates that for this group of customers, the individual decrease in revenues will be determined by the difference in unit prices of electricity, which is reflected in the difference in average quotations of BASE 2018 and BASE 2019 on the wholesale electricity market and changes in market prices and percentage levels with respect to the obligation to obtain the required certificates of origin for redemption (“Obligations”). Revenues from electricity sales in 2018 for business customers amounted to PLN 3,568 million for the sales volume in this segment at the level of 15,974 GWh, which gives an average unit sales price of 223.36 PLN/MWh.
Electricity costs for the product with the highest liquidity, i.e. BASE Y listed on the Polish Power Exchange for 2019 (BASE Y-19) in the product quotation period amount to 237.11 PLN/MWh. The analogous price for the contract for 2018, i.e. BASE Y-18, amounted to 167 PLN/MWh. Differences in market valuation of Obligations which, in addition to the cost of purchasing electricity, are a component of the sale price to end users, despite a significant change in their structure, are very close to one year on year. As a result, the total cost in 2018 was 189.21 PLN/MWh, and for 2019 it is estimated at 258.49 PLN/MWh.
The Group does not identify premises for significant diversification of own costs and margins for the same structure of customers between 2018 and 2019. On the basis of the aforementioned available information, it is possible to adopt approximate values of the input parameters referred to in the Amended Act. However, there is considerable uncertainty as to whether they will be set at an analogous or similar level in the implementing regulations. Under the Act and the Amended Act, the Group is entitled to receive compensation resulting from the price cap taking into account both direct and indirect costs and margins; this applies to both the amounts included in the amount of the provision for losses in 2018 and potential losses that may arise in 2019. However, given the lack of implementing provisions, the Group is not in a position to determine the amount of compensation as at the date of this report and to determine how much compensation will compensate for potential losses.
The Group discloses known or determinable amounts, which are only a component of the result on sale of energy in order to indicate the potential scale of the difference between costs and revenues from sale. The difference calculated on the basis of such amounts may differ materially from the actual amounts that will be recognised after the issue of the implementing legislation.
The Group analyses the regulations on an ongoing basis and, at the time of publication of the implementing regulations and assumptions allowing to remove uncertainties and make reliable estimates, will identify the results of the analyses in terms of confidential information within the meaning of the MAR Regulation.