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NMa is welcoming comments on policy rule regarding 'reasonable prices' for district heating and individual-building heating

On September 23rd, 2009, the Netherlands Competition Authority (NMa) is making the policy rule 'Reasonable prices under Dutch Heat Act' available for perusal. This policy rule stipulates how the reasonable price that users (consumers and small-business owners) have to pay for their individual-building heating and/or district heating is determined. Everyone has the opportunity to submit their comments on the policy rule within eight weeks. In addition, the NMa will be holding a hearing on this subject on November 5th, 2009.

When the Dutch Heat Act comes into effect mid-2010 (tentatively), the policy rule will play an important role in the process of determining the reasonable price for heat supply through district heating and individual-building heating. The bill, sponsored by Dutch Members of Parliament Mr. Jan Ten Hoopen (Dutch Christian Democrats) and Mr. Diederik Samson (Dutch Labor Party), is aimed at protecting users that are connected to individual-building heating or to district heating against monopolistic suppliers. The Dutch Heat Act will affect all households and small businesses that have connections of up to 1,000 kW through individual-building heating or to district heating, which comes down to approximately 7,000 networks and some 800,000 users. Heat suppliers are, among others, energy companies Eneco, Essent, and Nuon, as well as housing corporations and homeowner associations.

Actual costs determine reasonable price
The bill proposes that suppliers themselves determine a reasonable price for his users. The NMa's policy rule stipulates, among other things, what costs are allowed to be taken into account when determining the reasonable price, as well as how exactly this price is determined. This reasonable price should be a compensation for the actual costs the supplier incurs per heat network. This means that heat networks may have different prices.

Under the bill, the reasonable price has two components: a supply-dependent part and a supply-independent part. Supply-independent costs are, for example, costs for getting connected to an existing heat network (one-time costs), depreciations, maintenance and repair costs, a reasonable return on investment, administrative costs, innovation costs, R&D costs, and overhead costs. Any applicable subsidies are discounted therein. Supply-dependent costs are costs for purchasing heat and additional heating facilities for the heat network.

Maximum price sets limit
In accordance with the Heat Act, the reasonable price that will be determined this way is thus capped. The NMa will therefore annually determine a maximum price based on a so-called 'No More Than Otherwise'-principle (NMDA) meaning that consumers connected to district heating cannot pay more than consumers that have central-heating units. The Dutch Council of Ministers will issue an order in council explaining in what way the NMa is supposed to set the maximum price. This order in council still needs to be brought before both chambers of Dutch Parliament for approval. At least the following cost items of central-heating users need to be included in the NMDA principle: supply costs, transport and distribution costs, and the costs of buying and maintaining a central heating unit. The reasonable price and the maximum price will have retroactive effect as of January 1st, 2007.

In practice, the reasonable price could be higher than the maximum price, which means a supplier's costs would not be fully compensated. In such a case, that supplier could ask the Dutch Minister of Economic Affairs for permission for compensating an unprofitable network with one or more profitable networks, in which the reasonable price is lower than the maximum price. The NMa advises the Minister on such a permission request. This kind of compensation is called 'pooling'. The reasonable price that users pay for such a profitable network will be higher. A supplier will thus see a larger share of his costs compensated, or possibly even all of his costs, and is thus able to meet his legal obligation to supply heat.

Procedure after perusal
After the eight weeks during which the policy rule will have been made available for perusal have expired, the NMa will review the opinions and comments it will have received, and will possibly adjust the policy rule accordingly. The revised policy rule will be submitted to the Minister of Economic Affairs. The NMa is expected to finalize the policy rule by March 1st, 2010. However, the rule will only become effective when the Heat Act comes into effect first.