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Regulatory framework

Regulatory framework

1. Regulations

A referendum on economically significant local public services was held on 12-13 June 2011, which was in favour of repealing two regulations concerning the Group’s activities. The repeal came into effect with the issuance of Presidential Decrees 113 and 116 of 18 July 2011.

The withdrawal of Article 23-bis of Law 133 of 6 August 2008, as amended by article 15 of Decree 135 of 25 September 2009 (the ‘Ronchi’ decree, converted by Law 166 of 20 November 2009) eliminates a regulatory framework governing the entire services sector. The main effects of this include cancellation of the transitional arrangement for management concessions (in the Group’s case, water services and urban waste management), which stipulated, for listed companies, that concessions would last until the expiry date set out in the original service agreements, provided that the publicly held share capital of the concessionaires was gradually reduced. The elimination of the transitional arrangement, and therefore of the restrictive condition, means that concessions are valid until their natural expiry.

The second rule repealed by the referendum is included in article 154, paragraph 1, of Legislative Decree 152 of 3 April 2006, and relates to the requisite ‘adequacy of the return on invested capital’, a component of the integrated water service tariff. This partial repeal does not affect the EU principles of: full recovery of costs in the tariff; ‘the polluter pays’ (i.e. taking environmental effects into account when using a resource); and ensuring balanced economic and financial management. Any measure designed to undermine these principles cannot be regarded as legitimate; moreover, stable tariff profiles established under valid contractual relationships or related resolutions (tariff agreements with local water boards) may not be challenged.

Furthermore, the applicable tariff method (the ‘standardised method’, pursuant to Ministerial Decree 1.08.1996) will remain in force until it is amended, in accordance with article 170 of Legislative Decree 152 of 3 April 2006.
The next review of the standardised method will be one of the tasks assigned to the new Independent National Regulatory Agency for Integrated Water Services (Agenzia nazionale indipendente di regolazione del servizio idrico integrato), set up under Law 106 of 12 July 2011, converting Decree-Law 70 of 13 May 2011 relating to the “European Semester – first urgent provisions for the economy”.
The new regulatory authority has inherited the functions of the former National Supervisory Commission for Water Resources (Commissione Nazionale di Vigilanza sulla Risorse Idriche), with broader economic regulatory powers (e.g. approval of tariffs drawn up by the competent local authorities), which limits discretionary local powers where these exist. Most significantly, the authority’s board is appointed according to the model for independent authorities established by Law 481/95: i.e., its members must be approved by the competent parliamentary committees by a two-thirds majority. The new body’s independent status suggests that reforms which have until now been blocked might be fast-tracked, and it may represent a development opportunity for the sector.

In energy services, the adoption into national law of the EU’s Third Energy Package, via Legislative Decree 93 of 1 June 2011, has brought in major changes designed to guarantee secure energy supplies, greater competition and consumer protection and to stimulate the creation of a single European market, in which the recently established Agency for Cooperation of Energy Regulators (ACER) has also played a role.

The provisions of the decree include:

  • with regard to competition, regulations governing the complete operational separation of gas transmission businesses. EU regulations stipulate that Member States in which the transportation/transmission system belongs to a vertically integrated business must choose between ownership and operational models when selecting a method to guarantee the transporter’s independence. Italy has opted for the second alternative: in other words, the largest transport business will have to split up its operations, creating an independent system operator. Other unbundling measures that should be highlighted include the prohibition on confusion between the distributor’s brand and communication policies, selling on the free market and selling on the regulated market within vertically integrated businesses. In this regard, the Italian electricity and gas authority (AEEG) has been mandated to issue suitable measures, after consultation with operators;
  • with regard to gas distribution tenders, article 24, paragraph 4 of the Legislative Decree stipulates that from the date of its publication in the Official Gazette, distribution concessions may only be allocated through regional tender processes defined in number177 of the Mse-Regional Affairs decree in force since 1 April 2011, thus putting an end to doubts about the interpretation of rules allowing municipalitiesto hold individual tenders, while waiting for the introduction of actualregional tender processes. Other key aspects are: (i) a provision (amending Legislative Decree 164/2000) to reimburse the outgoing operator at a price (i.e. in the periods following the first round of the regional tender processes), based on the value of the net fixed assets at the distribution and metering service sites, calculated using the methods stipulated by the applicable tariff regulation; and (ii) a provision to allow the AEEG, exclusively during the first period in which the concessions allocated by region are exercised, to recognise in the tariff of the incoming operator the depreciation of the difference between the value of the repayment to the outgoing operator and the value of the net fixed assets at the sites, as calculated according to the applicable tariff regulation;  
  • regulations for increased consumer protection in both the gas and the electricity markets. With regard to gas, the definition of ‘vulnerable’ customers has been established, to include residential customers, uses relating to public service activities for social care purposes, and household and non-household customers consuming less than 50 thousand cubic metres per annum. With regard to electricity, the scope of the protection scheme has been defined as follows: household customers and low-voltage businesses with fewer than 50 employees and annual turnover of less than €10 million, who do not choose a supplier on the free market, provided, in addition, that monitoring of market performance and the existence of “effective competition conditions” is carried out (by the Ministry of Economic Development) at least every two years. Finally, the AEEG must take steps to ensure that the switching period does not exceed three weeks and that customers have access to their own consumption data and transparent information about tariffs and economic conditions;
  • new rules regarding penalties. Specifically, similar to the procedures of the Italian antitrust authority (Autorità garante della concorrenza e del mercato), the operator is now permitted to submit binding long term commitments, subject to validation by the AEEG, within 30 days of the launch of enforcement proceedings, which provides an opportunity to terminate the proceedings. This also applies in the event of breaches of rulings relating to EU areas of regulation.

 

With regard to incentives for renewable energy sources, Legislative Decree 28/2011 has been issued, implementing Directive 2009/28/EC, with the aim of supporting the development of renewable energy sources to achieve the target set by the 2020 National Action Plan (NAP), completely redefining and reorganising previous incentive schemes which were suffering from too many successive layers of legislation due to the need for continual adjustment to find a balance between development, being too burdensome, competition and the market. The Decree specifically defines the criteria and methods for the support mechanisms (note the gradual withdrawal of the incentive mechanism based on Green Certificates), postponing most of the economic issues until the publication of specific implementing decrees, expected by the end of 2011. The decree provides for a TRANSITIONAL bridging period with current legislation for plants entering into operation before 31/12/2012. Subsequently all plants will be subject to the new regulations. Specifically in terms of solar power, note that the ‘Fourth Energy Account’, a ministerial decree approved on 5 May 2011, has been issued, which sets out the incentive model in force from 1 June 2011. This is ‘emergency’ legislation in response to the solar power boom prompted by the generous incentive system established by the Third Energy Account, the ‘salva-Alcoa’ decree and, in particular, the simultaneous plunge in the cost of solar power modules. Without this measure, the cost of sustaining the sector would have become untenable (Gestore dei Mercati Energetici S.p.A. estimates that installed solar power will exceed 8,000 MW in 2011). The law provides for a steady and substantial reduction in the incentive tariff, with total spending caps for large plants imposed between 2011 and 2012, to be rolled out to other plants in 2013-2016. The target is to reach national installed power of 23 gigawatts by 2016, favouring small- to medium-sized plants and measures aimed at own consumption.

Finally, the State-Regions Conference is examining a measure to determine the municipalities to be included in the 177 regions for gas distribution tender processes, established by the Ministerial Decree of 19 January 2011 – ‘Determination of Regional Areas in the Natural Gas Distribution Sector’ – published in the Official Gazette on 1 April this year. Meanwhile, the Council of State is still examining the Regulation for Competition Policy, which represents the final regulatory foundation stone for future regional tender processes, since the Employment Protection Decree has also already been published (Official Gazette 4/05/2011).

2. Regulations

The following regulatory developments took place in the gas sector in the period under review:

  • with Resolution ARG/gas 45/11, the authority defined rules governing the evaluation of the economic merits of natural gas, introducing market mechanisms to increase the flexibility and liquidity of the natural gas offering. The new mechanism provides for the creation of a central platform (organised by Gestore dei Mercati Energetici S.p.A.) to enable the acquisition, based on criteria of economic merit (i.e. the best offer), of the resources required to balance its own positions and ensure the constant equilibrium of the network, in order to make the system more secure. Specifically, on the platform operators will offer the ability to reduce or increase the gas injected into or taken from stocks, and the company responsible for balancing, Snam Rete Gas, will acquire the resources required to ensure constant network equilibrium. Implementation of these rules was deferred by Resolution ARG/gas 81/11 until the first day of the following December;
  • Resolution ARG/gas 64/11 launched the procedure to draw up measures for gas distribution and metering service quality for the regulatory period 2013-2016. Issuance of the relative consultation document is pending.
  • with Resolution ARG/gas 71/11, the AEEG has reformulated the scope of persons benefitting from protection service for the supply of gas at regulated prices, establishing that, as well as residential end-customers covered by the original measure, schools, hospitals and other social service organisations carrying out activities of general and social interest in an approved way, as well as small and medium-sized enterprises consuming no more than 50,000 smc per annum, may continue to use the service;
  • also with regard to the protection service, a procedure has been implemented, by Resolution ARG/gas 77/11, to reform the relative economic conditions of supply, particularly theCCI component (a fixed component covering international transmission costs and wholesale margins), from 1 October 2012. This is partly in view of possible changes in the market due to the next implementation of the assessment of economic merit, as well as measures already in force designed to increase flexibility and competition, pursuant to Legislative Decree 130/10. Issuance of the relative consultation document is pending.
  • the consultation launched by the AEEG by Consultation Document 28/11 to define the switching process in a coherent manner, simplifying the procedures for operators and recognising, also in the gas sector, the key element in the switching procedure: the ‘Point of Delivery - Owner of the Point’ relationship.

 

Changes affecting the electricity sector can be summarised as follows:

  • in Consultation Document 24/11, the AEEG has proposed the introduction of a mechanism to reimburse non-recoverable expenses sustained by operators while safeguarding electricity provision to end-customers whose supply cannot be cut off because of their specific circumstances, as well as defining methods of recovery and management of the relative receivable;
  • Consultation Document 29/11 was subsequently published as part of the procedure launched by Resolution ARG/elt 6/11, aimed at setting up tariff measures for electricity transmission, distribution and metering services and economic conditions for the provision of connection services, for the regulatory period 2012-2015. With this consultation document, the AEEG has not only set out general aims but has also proposed preliminary guidelines for calculating recognised costs for electricity transmission, distribution and metering services. For the calculation of the recognised cost, with particular reference to operating costs, the AEEG – in line with the previous regulatory period – proposes a parametric method, providing for the uniform distribution of the largest efficiency gains compared with the revenue cap set for the previous regulatory period (profit sharing); for recognition of the cost of depreciation, the AEEG plans to use a valuation that is partly simplified/parametric and partly detailed (i.e. calculated on effective investments ‘by business’). Finally, the Regulator plans to adopt the historical cost valuation method as the general valuation criterion for invested capital; however, this valuation must be carried out using a mixed approach: a simplified/parametric valuation for the portion of capital relating to assets classified up to 2007 (in the first hypothesis) and a detailed valuation, based on effective investments declared to the AEEG by each business, for assets realised and put into operation in the subsequent years; for distribution, this method – according to the intentions of the AEEG – should lead to identification of invested capital 'by business'.  With regard to investment incentives, the AEEG identifies two types of measure (smart-grids and electric vehicles) and announces a subsequent, specific consultation. Subsequent consultation documents will address, in detail, the question of incentive mechanisms to promote investment, rules governing economic conditions for connection services, equalisation mechanisms, determining tariffs and caps and the regulation of system charges;

 

Finally, the following measures apply across both sectors:

  • the consultation launched by the AEEG by Consultation Document 10/11, in view of the forthcoming implementation of a monitoring system for the retail electricity and gas markets;
  •  the consultation (Consultation Document 4/11) which the AEEG plans to use to supplement the rules governing substitution of one seller with another with an open delivery point (switching) and with a simultaneous change in the end-customer (i.e. a change in contract);
  • Resolution ARG/com 92/11, by which the AEEG, following a long and complex consultation during the first half of 2011, suspended its provision for the publication of the comparative performance of electricity and gas sellers, in response to written complaints, and simultaneously launched a new consultation phase with operators, expected to end by 31 March 2012.