2019 was a year full of events that would mark a milestone in the history of the company and will be very important for its future.

Firstly, and as can be seen in the yearly accounts, we have improved the operational result and the net result, despite the limitations and impact of the 2014 regulatory reform and the cuts that subsequently took place, with the reduction of the remuneration of some activities (such as meter rentals) and the opening up of others to competition (such as periodic inspections). The 2019 results show, once again, the direction of the company toward permanent internal improvement, one of which is the reduction of costs and improvement of processes, at the same time maintaining and improving quality and safety levels of the operations.

Regarding the operations, Madrileña Red de Gas is focused on operational excellence, on customer support, and ongoing improvement of management practices. The acquisition of new clients is mainly aimed at replacing the most contaminating fuels (coal and diesel), in small industrial processes, in the residential sector, with the replacement and modernisation of heating installations, and in the commercial sector, with complete heating and hot water solutions in buildings. In all cases, additionally, the cost of energy for the consumer is lower than with previous installations.

With the new opening of gas refilling stations for vehicles («gas stations»), we have increased the supply of natural gas to respond to a growing need, in line with to the increase of vehicle fleets supplied with compressed natural gas. This increase of distribution in our field of activity will continue in the coming years because there is expectation of a greater need for gas stations.

We have introduced the virtual office, allowing clients to maintain direct contact with the company for all types of processes and communications. Among other achievements, we are the first distribution company that makes the channel most widely used by its clients (WhatsApp) available, from where they may set dates for periodical inspections, freely choosing the date and time, resolve doubts or process any request related to their inspection and/or meter reading processes. Other improvements in this field are also operative. Our intention is to increase the effort and investment in this field for customer experience so their relationship with MRG is easy, simple, and secure. Likewise, we continue revising and improving interaction processes with our current or potential clients: contracts, connections, enquiries, billing, failures and emergencies, collections, and claims.

Our programme for fraud detection, correction, and prevention, pioneer in this sector, is giving very positive results. We have extended the scope of fraud detection and analysis, greatly reducing the negative impact on the company accounts.

Regarding operational safety, our indicators show a clear improvement, both in absolute terms and in relation to the indexes of comparable sectors.

Regarding corporate governance, the compliance action plan was started last year, supervised by the Board of Directors through the Auditing and Risks Committee. This way, MRG continues adopting the best governance practices.

All these achievements reflect MRG strategic priorities, which continue being operational improvements, customer service, corporate governance, energy transition and regulation.
During last year there have been other very important events for our activity, the Royal Decree-Law 1/2019 of January 11 gives the National Commission on Financial Markets and Competition (CNMC) competences in the development of the remuneration methodologies of the regulated activities. Consequently, the CNMC published diverse communications related to the regulated activities of the electric and gas sectors; among them, retribution of the same, in the calendar established by the mentioned Decree-Law.

The CNMC proposals were the object of allegations by the affected companies, due to the serious incoherence they contained, both from a strictly legal viewpoint and regarding economics, with impact in the coming years that not only modify the current retribution model without any justification, but also put the viability of the companies at serious risk. In addition, the public consultation process was clearly insufficient and could be manifestly improved.

Because of the allegations and the State Council observations, the communication related to retribution of gas distribution was modified and once again sent to the State Council at the end of 2019, meaning its publication was delayed until the initial months of 2020. MRG has acted during this process providing legal, economic, and technical arguments defending a regulatory model that has been working well, providing stability to the business activity with moderate retribution, but coherent with the risk level of the activity in its current definition, and will continue doing so, in defence of its legitimate interests, of legal security and quality of the regulatory process, that are the questions really being considered.

Madrileña Red de Gas considers that regulatory stability is essential to assure company freedom, investment decisions, creating wealth and employment, and the attraction of Spain for investors, because sectorial regulation is nothing else than the specific expression of the legal security principle, essential for the life of a society and for the continuance of the rule of law.

Regulatory stability does not have to disagree with the new direction of regulation, based on energy transition policies, and the recently granted authority of the CNMC, which are the driving force that have impelled the change process started last year in all Spanish energy sectors.

As everyone knows, in this new scenario, energy policies are subject to climatic objectives: reduction of CO₂ emissions, massive introduction for generating electricity using renewable sources, and accelerated replacement of fossil fuels. These objectives respond to a European Union policy but are specifically defined by each Member State. Spain is one of those who have proposed more ambitious objectives in its National Integrated Plan for Energy and the Climate, as has been recognised by the European Commission.

The energy policy is instrumental for reaching those objectives. The changes the must take place in the energy mix, both primary and final, will require not only large investments in all energy subsectors, but also in the industrial sectors using energy in its different formats and in the remaining uses of energy (commercial and residential). In this scenario, the key question for MRG, and for the entire gas sector, will be the role of gas in the energy transition and beyond.

Evidently gas has many short term advantages: it replaces coal and oil derivatives in the most important uses, notably reducing emissions, not only CO₂, but, and above all, the most polluting substances (nitrogen and sulphur oxides, carbon monoxide) and with economic advantages (low prices at a medium term perspective). One example of these advantages is the comparison between electric cars and gas ones, in the current market and technology conditions. The latter cost less, both for acquisition and for mileage, and the total carbon footprint of an electric car can be less than that of a gas one only after having covered a very large quantity of kilometres. Likewise, the experience of usage of electric vehicles in intensive use (delivery fleets and others) is not being as satisfactory as expected.

In the long term gas is unreplaceable in numerous industrial processes and is a perfectly acceptable alternative for other end users, since there are no other technologies offering the same costs and performances. On the other hand, whatever the technological evolution, gas networks provide the most efficient access for consumers to, renewable gas in the short and medium terms, and hydrogen in the long term, after developing the production technologies that allow reducing their costs to those of natural gas. This potential distinguishes gas from other fuels, so it becomes the indispensable complement of electricity in the long term.

Understanding these factors by the Administration, and the efforts of the gas sector and generally that of industry to adapt to the transition scenarios, must allow guaranteeing the network management activity for a very extended future. We also trust that the future Energy Transition Law, which could be approved in the first part of the current parliamentary term, establishes rational and viable objectives for all the affected subsectors, and that the regulatory framework adapts to facilitate reaching them.

Therefore, the way this energy transition is designed and developed is crucial. The future of gas as a clean energy is a real solution available from today to radically improve air quality in cities (one of the major problems of developed societies), and the role that natural gas can play in mobility due to the aforementioned advantages will depend on this.

We must insist in that the regulation of sectors like the energy one, and more so in this new scenario, needs ongoing and fine adjustment, the success of which depends, above all, on continuous dialogue with the stakeholders, who know the detail of the complex reality we should manage every day.

The Covid-19 pandemic was declared after the start of 2020, giving way to measures dictated by the Government, as from March, to establish the state of alarm and try to contain expansion of the disease, imposing the stoppage of the greater part of production activities, except those considered as essential. Consequently, that has caused an important drop in the demand for goods and services, among which, energy, with the subsequent negative impact on the energy sectors.

The first phase, with greater incidence and lethality of the disease, has affected our employees. Teleworking was organised for all possible cases and non-essential activities were suspended (except attention to emergencies and safety), without any greater problem. Now is the time to design the macroeconomic and sectorial scenarios, even with some uncertainty, that allow directing the future of the company in the medium and long terms, after evaluating the impacts of this initial phase of inactivity and in the company accounts. We expect to be able to report in detail in the next few months as soon as the economic situation regains normality.

Finally, I would like to express, once again, the company’s gratitude to the shareholders for their support in all action plans, both in the short term and with a long-term vision. And to the management team and all those who dedicate their working lives to Madrileña Red de Gas, in recognition of what has been achieved and in support for all the challenges that lie ahead in the coming years.

 

Pedro Mielgo

President