On 20 July 2016 the Swiss Federal Court ruled on the costs distributors may charge to their captive customers. The case dates to 2009: production costs in the Swiss fleet were then well below market prices, prompting several eligible large consumers to demand they remain on the captive customer tariff.
Four principles set out in the ruling
- Own generation may not be allocated primarily to the non-eligible market. Neither the law nor the parliamentary record provides that own generation should be assigned first to captive consumption.
- Purchases on the open market must be taken into account, whether cheaper or more expensive. This applies even where it causes a loss for the supplier, and even where it means higher costs for the end consumer.
- Strict accounting separation is no obstacle to proportionate inclusion of purchase contracts when setting captive tariffs.
- Federal Council ordinances cannot alter the principles set by law. The legislative delegation must be read very restrictively: it is a mere delegation of execution. Only Parliament can change the current legal framework.
An immediate impact above CHF 200 million
The regulator moved quickly to communicate the first consequence: a five-year tariff correction applying the average price method, together with refunds of overcharging.
The order of magnitude is significant. For a supply company distributing 1 TWh, 70 % of it to captive customers, with 500 GWh of own generation, the refund would represent CHF 2 to 6 million for 2015 alone. The range reflects hedging strategy and own generation costs. Since these companies are unlikely to be able retroactively to raise prices for open-market customers, the refund would be a straight loss.
Across Switzerland the impact would exceed CHF 200 million for 2015, less for earlier years and more for later ones given continuing wholesale price declines. That represents a reduction of more than 5 % in revenue across the generation and retail chain, twice the amount of support paid to large hydropower.
A structural incompatibility between two businesses
The second consequence runs deeper. The ruling calls into question running regulated supply and open-market supply side by side.
The logic is inescapable. The open market being highly competitive, there is virtually no room to apply an average price there, since customers prefer a supplier tracking wholesale prices. Running that business would therefore mean lowering the price charged to captive customers. Our analysis shows that beyond around 15 % own generation, the price gap becomes insurmountable: the average price tariff is no longer competitive. Only players with less than 10 % own generation or long-term contracts could keep both portfolios.
Three possible strategies for the rest
Manage the legal risk while betting on legislative change. Since the ruling holds that ordinances cannot alter the law, room for manoeuvre is very limited without going through Parliament. Under the existing legal framework, uncertainty remains over calculation methods and over differentiating the products delivered, which could incidentally give momentum to green product development.
Sell or exit open-market supply, preserving the captive business by abandoning an activity with thin or non-existent margins. Some distributors had already withdrawn well before the ruling. Viable in the short term, that strategy carries a risk: losing the retail capabilities that will be needed if the market opens fully, and eroding economies of scale in energy management.
Create a retail subsidiary to strengthen accounting separation and limit legal exposure.
Limiting the impact would also mean engaging with the legal and economic technicalities of the average price method, for instance by demonstrating that the product delivered to captive customers differs from that delivered to the open market in quality, profile, predictability or long-term price security.
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The downloadable PDF of this study is available in French only.
