This week, lawyers are preparing to take one of Spain’s largest fraud cases to the European courts -- and it’s all about the electric utility sector.

The case, which dates back to the deregulation of the Spanish electricity market in the early 2000s, is worth about USD $4 billion. The money relates to a deal the government struck to ensure Spain’s big five regional electricity companies would not suffer after the market was liberalized. 

Similar to the Contract for Difference mechanism being used to fund infrastructure in the U.K.’s electricity market reform, the transition plan (costes de transición a la competencia, or CTC in Spanish) guaranteed the utilities €36 ($41 USD) per megawatt-hour over 10 years.

The scheme came into effect in 2001, but was halted in 2006 when the spot price for energy rose above €53 ($60) per megawatt-hour and utilities reaped windfall profits. By that point, four of the five utilities had profited far in excess of what was agreed upon in the scheme. Endesa (now part of Enel) topped the list with an overpayment worth €1.56 billion ($1.76 billion).

Then came Iberdrola with €1.16 billion ($1.31 billion), Viesgo with €434 million ($490 million), Union Fenosa with €275 million ($311 million), and Hidrocantábrico with €155 million ($175 million). Only Elcogas, a specialist coal gasification player, was still owed CTC cash.

Under the terms of the CTC scheme, the utilities were supposed to return any overpayments to the consumer. They never did.

Although a ministerial order to recover the cash was drafted in 2008 with guidance from Spanish regulators, it was never executed.

A ministerial reshuffle around the time the law was drafted might provide a reason why the CTC overpayment was never recovered. However, that does not explain why ministers ignored a reminder issued by the CNE every year between 2006 and 2010.

There is now evidence of a failed trade brokered in 2009, whereby utilities were allowed to keep the CTC money in exchange for supporting a tariff discount for lower-income families, called the social bonus ("bono social").

A law giving utilities responsibility for the social bonus was created in 2009, but Iberdrola then fought the legislation and had it overturned in court. In 2010, the Spanish law allowing the government to reclaim the CTC overpayments expired with little notice.

Subsequent investigations stemming from a legal action lodged in 2013 seem to indicate collusion between the government and utilities to prevent the CTC payments from being returned to the public.

In an interview between the public prosecutor and Jorge Sanz Oliva, the Ministry of Industry, Energy and Tourism’s general director for energy and mining policy, Sanz Oliva admitted that the utilities used the “usual pressures” to keep the matter under wraps.

Sanz Oliva now works for Nera Economic Consulting, which lists Iberdrola among its clients. In a recent op-ed for the Spanish newspaper Cinco Días, he came out strongly in favor of the Spanish utility stance on penalizing residentialsolarself-consumption.

The 2013 lawsuit, lodged by pressure group Platform for a New Energy Model (Plataforma por un Nuevo Modelo Energético) and later joined by Ausbanc, a consumer affairs watchdog, failed to establish responsibility for the lack of a CTC repayment.

“The prosecutor believes that not approving the ministerial order that would have returned the overpaid CTCs to consumers was not a crime,” reported El País, the Spanish daily, in December 2014. Ausbanc is now appealing the decision in Spain’s Supreme Court.  

Meanwhile, the Platform for a New Energy Model is hoping for recourse through the European courts. “In this complaint, we are not seeking criminal liability, but to recover the money,” said Daniel Pérez, a lawyer at Holtrop, the firm handling the case.

The firm believes it may have a strong case because European law supersedes Spanish legislation, and the European Commission has been vigorous in combating potential state-aid arrangements in cases such as the Hinkley Point nuclear reactor project in the U.K.

Although the time for reclaiming the cash expired after four years under Spanish legislation, European law allows a 10-year period, so a legal challenge is still viable. 

The alleged CTC fraud happened under the watch of Spain’s previous administration, led by the Spanish Socialist Workers’ Party (Partido Socialista Obrero Español), which is now an opposition party.

That means the current People’s Party (Partido Popular or PP) government, which has had its own share of corruption cases, could in theory back the European action and emerge as the consumers’ champion while tarnishing its main opponent in general elections later this year.

Conversely, any attempt to play down or cover up the CTC issue will likely fuel already heightened public anger about the relationship between large utilities and ministers of both major parties. Pérez says the PP was invited to join in the lawsuit, but declined.

“This is a dream for any government,” said Pérez. “It benefits the whole of Spain. And the amount Endesa would have to return, for example, is only half of its profits in 2014. But the PP has had access to this information and has done nothing about it.”