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Regulatory framework

Regulatory framework

Reference regulations

In 2011, new legislation was introduced with a significant impact in terms of the reorganisation of the national and local governance of public services of economic importance, such as the integrated water service and the waste management sector. With regard to the integrated water service, Law no. 106 of 12 July 2011, converted from Decree-Law no. 70 of 13 May 2011, had provided for the creation of an independent national regulatory agency but, before it could be established, it was replaced by Law no. 214 of 22 December 2011, converted from Decree-Law no. 201 of 6 December 2011, which abolished the National Supervisory Commission for Water Resources (CONVIRI) and transferred the economic and non-economic regulatory functions, as well as control of the water sector, to the AEEG (Electricity and Gas Authority), tasks which will be defined by ministerial decree to be issued by March 2012. As regards the waste management service, Law no. 214 of 22 December 2011 introduces, in particular, the municipal tax to cover the costs of urban and related waste management as well as the jointly owned Municipal services (“TRES”). Every other levy of this kind will be abolished from 1 January 2013. With reference to the practical implementation of TRES, the governmental regulations are expected to be enacted by 31 October 2012 (and meanwhile the regulations under Presidential Decree no. 158 of 27 April 1999 shall continue to apply).

In regional terms, the organisation of the integrated water service and the waste management sector will be governed by the new Regional Agency of Emilia-Romagna, established by Law no. 23 of 23 December 2011, following the reorganisation of services required after the abolition of the Regional Area Authorities, which was delayed several times and finally scheduled for 31 December 2011, as determined by Prime Ministerial Decree of 25 March 2011. The key principle of the new structure of local public services for Water and Waste is to create one area which is the same as the territorial region. The new Agency, headed by a director with two technical and operational areas (at a regional and, structurally, at a provincial level), will have a governance which is also articulated over two levels, namely a Regional Council and nine Local Councils covering the territory of the province. The regulation also introduces special provisions for intermediate plant engineering for the treatment or final disposal of waste, providing for the exclusion of companies owned by private individuals from tendering for the award of the waste management services.

With regard to economically important local public services in general, Presidential Decrees nos. 113 and 116 of 18 July 2011 implemented the result of the 12-13 June 2011 referendum, which established the abandonment of the principle of “adequate return on investment” (Article 154, paragraph 1, of Legislative Decree no. 152 of 3 April 2006 and subsequent amendments). This applies to integrated water service tariffs and repeals Article 23-bis of Law no. 133 of 6 August 2008, converted from Decree-Law of 25 June 2008, as recently confirmed by Law no. 166 of 20 November 2009 converting Decree-Law no. 135 of 25 September 2009 (the “Ronchi” Decree). Concerning the repeal of the first regulation, it is expected that the new provisions will be implemented after the transfer to the AEEG of functions concerning the national tariff regulation of water services, while for the second repeal, several legislative actions followed in the second half of the year. Article 4 of Law no. 148 of 14 September 2011, converted from Decree-Law no. 138 of 13 August 2011, reintroduces the principle expressed in Article 23-bis of encouraging competition in economically important Local Public Services, i.e. introducing public tendering as the normal procedure for awarding contracts and the early termination of directly awarded contracts according to a procedure dependent on the type of the award itself (provided, however, that integrated water services are excluded from this rule, to which, in the absence of new measures at the national level, the principles of municipal legislation still apply).

This law was subsequently amended by Law no. 183 of 12 November 2011 and the following provisions of this later text are of particular interest to the Hera Group: awards granted to “mixed” companies which were publicly listed at 10 October 2003 will expire as provided for in their service contracts, on condition that the shareholding held by the public on 13 August 2011 is reduced (or syndicated down) to a holding of less than 40% by 30 June 2013 and of less than 30% by 31 December 2015; it also introduces the requirement for contracting local authorities to test the market before awarding a service according to criteria to be established by ministerial decree. These regulations continue to be amended in 2012, in particular by Decree-Law no. 1 of 24 January 2012 on deregulation.

As regards energy services, Legislative Decree no. 93 of 1 June 2011 has introduced the “Third Energy Package” and, in particular, European Directives 2009/72/EC and 2009/73/EC concerning common regulations of the internal markets for gas and electricity. These include, in particular: the provisions for security in domestic energy supply; the definition of “vulnerable” customers in the gas market and “protected” customers in the electricity market; regulations which encourage energy efficiency; the regulations on competition which concern the complete functional separation of gas transmission companies; and the rules confirming the principles of public tendering for awards of gas distribution services, in accordance with the decrees passed during the year by the Ministry of Economic Development. The decree confirms, in particular, that distribution concessions can only be awarded by tendering (according to the provisions of Decree no. 177 issued by the Ministry of Economic Development-Regional Affairs, in force since 1 April 2011), thus putting an end to doubts about the interpretation on the ability of Municipalities to proceed using individual tendering, while they wait for the effective scheduling of tenders; it also confirms the criteria for determining the value of compensation of the facilities to the outgoing operator for gas service tenders. With specific reference to gas distribution services and in addition to the aspects incorporated within Legislative Decree no. 93/2011, four decrees were issued by the Ministry of Economic Development during 2011 which now provide a clear perspective on the ways of implementing tenders, expected in the coming years.

With regard to incentives for renewable energy sources, Legislative Decree no. 28 of 3 March 2011, implementing EU Directive 2009/28/EC, aims to encourage the development of renewable energy sources in order to reach the target set in the National Renewable Energy Action Plan (NREAP) by 2020, by completely redefining and reorganising previous incentive schemes which suffered from too many successive layers of legislation, because of the need for continual adjustment to find a balance between development, demanding requirements, competition and the market. Particularly for support mechanisms, the decree defines the criteria and conditions (the gradual abandonment of the incentive system based on Green Certificates is of note), leaving a large part of the economic aspect to the issuance of specific implementing decrees, expected by the end of 2011 (the deadline was later extended to the first quarter of 2012). The decree provides for a transitional period of harmonisation with the current regulations for plants that will come on stream by 31 December 2012. After this, all plants will be subject to the new regulations. With specific regard to photovoltaic energy, note that the Fourth Energy Account has been issued, an interministerial decree approved on 5 May 2011 which clarified the incentive model in force since 1 June 2011.

In the field of cogeneration, Ministerial Decree of 4 August 2011 supplements Legislative Decree no. 20 of 8 February 2007, which redefines cogeneration technology, the calculation of cogeneration production and of the efficiency of the cogeneration process for the purpose of qualifying as High Efficiency Cogeneration (HEC). The Ministry of Economic Development’s subsequent decree of 5 September 2011 defines the new support scheme for high efficiency cogeneration. The incentive is part of the White Certificates market and is recognised by the Energy Services Operator, after recognition of the qualifications for HEC, on the basis of the real saving of primary energy.

Regulation of Electricity and Gas

Following the inauguration of the new Board on 16 February 2011, activity by the Electricity and Gas Authority accelerated significantly during the final quarter of the year.

The “new-born” Authority took its first steps to discontinue with the past - and in this sense, with reference to the gas sector - Resolution ARG/gas 36/11 is to be noted, which launched the process aimed at revising the provisions of Resolution ARG/gas 155/08, which in turn contained guidelines for the commissioning of electronic metering equipment with remote reading and management functions (the “smart gas meter”). Two consultation documents frame this process: DCO 17/11 which submitted a series of proposals for discussion with the aim of reforming tariff regulation of the metering service, in order to improve the adherence to costs and to differentiate the level of permitted revenues depending on the extent of fulfilment of the installation requirements required by Resolution ARG/gas 155/08; and DCO 40/11 in which, with a view to a cost/benefit analysis of the new electronic meters compared with new technological developments, the Authority proposed restructuring the originally set deadlines, maintaining the distinction between three categories of metering equipment: for metering equipment of a class greater than G40, it proposed completing the replacement of all installed meters by 31 January 2012; for metering equipment of a class between G6 and G40 the proposed target for complete replacement of installed meters is 2014; finally, for metering equipment dedicated to the mass market (classes G4 and G6), the replacement of 80% of installed meters is expected by 2018. Among the other innovations contained in the document, the proposed adoption of a standard cost system for recognising the rate of the investments made in electronic metering equipment is also noted. The consultation process also resulted in Resolution 28/12/R/gas, issued in February 2012, implementing the proposals made by DCO 40/11 in terms of replacement deadlines (only differing from the resolution of 29 February 2012 concerning the deadline for meters of a class higher than G40) but at the same time lowering the commitment to replace mass market meters to 60% by 2018, in an attempt to minimise installation costs. Resolution 28/12 also confirms the standard cost system for the recognition of investments in electronic metering equipment, even if tied to the costs in fact incurred, using a profit-loss sharing mechanism; finally, it introduces specific mechanisms for recognition of tariff costs for remote management and reading systems and the costs resulting from the obligations to test calibration.

More troubling, however, are the developments concerning the path of reform of the gas system, a path which will have, as its natural conclusion, the creation and commissioning of a Trading Exchange for Gas. The proceedings aimed at reform of Gas Balancing Services should be seen in this perspective, whereby the Authority has, by Resolution ARG/gas 45/11, established and defined the operating regulations for the Market in Balancing Services, the launch of which, initially expected by July 2011, took place with effect from 1 December 2011. Over the launch of that market hangs the shadow of litigation initiated by some dealers because of the huge financial guarantees required from dealers who trade on it. This litigation resulted in a Regional Administrative Court judgement which suspended application of the part regarding financial guarantees, for prudential reasons, pending the pronouncement of its judgement on the merits. A corollary of the reform of the market for Gas Balancing Services is expected to be the measure which will result from DCO 22/11, which makes a number of proposals regarding reform of the part concerning the determination of the physical and economic entries for the purposes of Gas Balancing.

Still on the subject of the gas sector, the Authority, by Resolution ARG/gas 99/11, set out, controversially, to fill the regulatory gap concerning the continuity of supply to be guaranteed to end users if, for reasons beyond their control, they find themselves without a supplier. In this regard, the Authority has selected, starting from 1 January 2012, the distributor qualified territorially as the person deputed to guarantee the continuity of supply (the Default Service).

Other than the broad interpretation by the Authority of its regulatory mandate issued by Legislative Decree no. 93/11, the most controversial aspects concern the ability for sales companies to “unload” to the Default Service end users who are in arrears and whom they cannot (either in fact or law) disconnect, the equivocal definition of such customers and the failure to guarantee the recovery of the costs incurred by the distributors in delivering the Default Service itself. For this reason and in response to the appeal submitted by certain Distributors, the Regional Administrative Court in Lombardy suspended implementation of the resolution until June 2012, pending the pronouncement of its judgement on the merits of the appeal. In response, the Authority, by Resolution ARG/gas 207/11, has postponed the coming into force of the order to 1 May 2012, date by which it must also prepare final proposals related to aspects of the organisation and the means of operating the Default Service, as suggested in DCO 44/11.

By DCO 47/11, the Authority has referred to consultation the proposals to reform the mechanism for determining the element covering the cost of supply of the raw material (CCI) for the supply of gas to protected gas customers. In this document, the Authority proposes the gradual replacement of the current updating mechanism in favour of a more market-oriented mechanism, taking as reference the market prices for Balancing Services, pending establishment of the trading exchange for gas. Because of the issuance of the Government's Decree-Law no. 1/12 and in anticipation of the same being converted into law, the Authority, by Resolution 16/2012/R/gas, has merged the consultation process, with the objective of defining, as soon as March 2012, the first tranche of that decree’s provisions and also of implementing those provisions of the decree in line with what is proposed by the DCO 47/11, so that they come into force from October 2012.

To complete the latest news about regulations for the gas sector, we recall that, by Resolution ARG/gas 200/11, the Authority has, for the two years 2012 and 2013, updated the element covering the marketing costs of retail sales (QVD) to end users for whom protective conditions apply. The main new development in this respect, in addition to an increase in the amount due to take account of the costs connected with delinquency as a function of a standard percentage on turnover and to the expected development of regulatory obligations, concerns the differentiation of the component between the PDR [a numerical code showing where the meter is located] in the ownership of a domestic customer and all the other PDRs (condominiums for domestic use, public utilities and other uses).

As regards the electricity sector, among the new regulations with the greatest impact for the Hera Group, the measures relating to tariffs and to the quality of electricity distribution for the Fourth Regulatory Period (2012-2015) are particularly of note.

By Resolution ARG/elt 199/11 the Authority approved the new supplementary texts for, respectively, the services of Transport and Distribution (TIT), Electrical Measurement (TIME) and Connections (TIC) which will be in place for the next regulatory period. As regards the distribution service, the main development is the introduction of a restriction on regulated revenue set for each company (following the same logic as for gas distribution), calculated for invested capital on a mixed basis (implicit in the definition of “asset” until 2007 and the actual historical cost of investment for the company from 2008) and for operating costs on national average values taken by the Authority from the Annual Separated Accounts for 2010. Drawing up a restriction for each company is more detailed than the previous tariff system and at the same time responds to the principles of “cost reflection” of recognised revenues. From the point of view of the recognition of capital costs, one new development, in addition to the adjustment of the rate of return on invested capital under the changed conditions of the economic and financial system, is the recognition of so-called “regulatory lag”, namely an increase in the rate of return on capital to cover the financial burden resulting from the delay of two years before the investments made are starting to be recognised in the tariff; this increase will amount to 1% and will apply to investments made in 2012 and, therefore, will have an influence on the tariff in 2014. Finally, the recognition of the full amortisation amount in the tariff, which will no longer discount the drag effect of the “price cap” applied in previous regulatory periods, is of note.

Again, with reference to the new regulatory period 2012-2015, the Authority has, by Resolution ARG/elt 198/11, also approved the new supplementary text on the Quality of Distribution Services and the Metering of Electricity (TIQE). Of particular importance are the new features which have been introduced: to the system of incentives and penalties for the recovery of continuity, by which incentives are reduced for the better served areas, while they are increased for the worst served areas; to the individual adjustment of continuity, the prerogative of medium voltage end users, which will be extended even to short interruptions (in the past only long interruptions were counted); and to activation of supply voltage monitoring.

As an intervention which crosses over between the two sectors regulated by the Authority, DCO 46/11 is of note, which proposes that retail sales operators implement high impact preventive and restorative measures in cases of “unsolicited” contracts and activation of electricity and natural gas supplies.

As regards the measures which directly involve the Hera Group, Resolution ARG/elt 163/11 is of note, by which the Authority has, as a result of Resolution VIS 82/11, recognised the charges incurred by Hera Comm for its role in operating Electricity Safeguarding with regard to the credits accrued and not collected for supplies to the chemical plant at Terni; and Resolution ARG/elt 96/11 by which the Authority, with regard to the launch of the trial of public service charging of electric vehicles, has included the project by Hera S.p.A. in collaboration with Enel Distribuzione among the projects worthy of being incentivised.

Finally, for the electricity sector, some of the consultations held during 2011 are of note, which will have a significant impact during 2012, such as those relating to DCO 24/11, containing proposals for the mechanism for repayment of unrecoverable costs by operators of Electricity Safeguarding and to DCO 33/11, which includes proposals for the regulation of private networks.

Finally, we recall that in 2011 the Authority permanently closed two preliminary inquiries launched against Hera S.p.A. in 2009:

  • concerning the obligation to replace cast iron pipes containing joints made of leaded hemp, the Authority, by Resolution VIS 39/11, imposed on Hera S.p.A. a fine of€55,000;
  • concerning the obligation to make electricity metering data available to the sales companies, the order imposing a fine of €84,900 was closed by Resolution VIS 86/11.

 

Also in 2011, the Authority has, however, three additional investigations which involve companies of the Group:

  • by Resolution VIS 5/11, the Authority launched a preliminary fact-finding inquiry into the provision of dispatching, transmission, distribution and metering services and of energy Safeguarding services to the chemical plant in Terni. The preliminary investigation directly involved Hera Comm as the territorially qualified Safeguarding operator, which has been summonsed for a hearing at the Authority’s offices, at which information was requested. The preliminary investigation was closed with Resolution VIS 82/11, which led to the issuance of Resolution ARG/elt 163/11 mentioned previously;
  • by Resolution VIS 42/11, a preliminary fact-finding inquiry was launched concerning the provision of a connection service for the network of facilities for the production of electricity by grid operators. The preliminary investigation concluded with Resolution VIS 99/11, in which the Authority published a report on the information it had gathered. Arrangements were also made for the collection of data concerning compliance with the regulation of active connections;
  • by Resolution VIS 76/11, fact-finding activity was initiated into unsolicited contracts for the supply of electricity and/or gas. As part of this investigation, Hera Comm has been summonsed for a hearing at the Authority’s offices.

 

Finally, it is noted that during 2011 the Group was not subject to inspections by the Authority.