Natural gas distribution

Natural gas distribution service

Italgas and Napoletana Gas – Municipal territories under concession at 31 December 2010The natural gas distribution business operates on a concession regime, between Italgas and Companies which are its subsidiaries, through the conferral of this service by local public entities; it consists of the service of gas distribution through local pipeline networks from delivery points at the metering and reduction stations (city gates) to the gas distribution network redelivery points at the end customers (families, businesses, etc.). Gas distribution service is carried out for sales companies authorised to market to end customers by the transportation of the gas through city networks. Italgas undertakes natural gas distribution activities by making use of an integrated system of infrastructures comprised of stations for withdrawing gas from the transport network, pressure reduction plants, local transportation and distribution network, user derivation plants and redelivery points comprised of technical equipment featuring meters at the end customers (families, commercial and tertiary businesses, and small industrial businesses).

Italgas is the leading Italian operator in the natural gas distribution business in Italy with 1,448 municipal concessions and more than 50,300 kilometres of medium- and low-pressure transportation network.

Introduction

As indicated previously, the results for 2009 include the effects of consolidating Italgas in the second half of 2009, as these were included in the group’s consolidated financial statements from 30 June of that year, the date when the acquisition of Italgas from Eni was completed. In order to fully assess operating performance, the results of the distribution business segment are analysed in comparison to those for the whole of 2009

Key performance indicators (€ million) 2009 2010 Change Change %
Core business revenue (*) 802 1,233 431 53.7
- of which, natural gas distribution revenue 776 1,197 421 54.3
Core business revenue net of IFRIC 12 802 884 82 10.2
- of which, natural gas distribution revenue 776 848 72 9.3
Operating costs (*) 291 640 349
Operating costs net of IFRIC 12 291 291
EBIT 398 455 57 14.3
Investments 334 386 52 15.6
Net invested capital at 31 December 3,419 3,519 100 2.9
Gas distribution (millions of cubic metres) 7,537 7,953 416 5.5
Distribution network (kilometres) 49,973 50,307 334 0.7
Active meters (millions) 5.771 5.848 0.077 1.3
Employees in service at 31 December (number) 3,545 3,119 (426) (12.0)

(*) From 1 January 2010, items include the effects of applying international accounting standard IFRIC 12, “Service Concession Arrangements”. Applying this interpretation had no effect on the group’s and the segment’s results, except for the equal recognition of revenue and costs relating to building and upgrading distribution infrastructures (€349 million). More information on this interpretation and how it applies to the Snam Rete Gas group can be found in the “Basis of presentation and consolidation principles” chapter of the Notes to the consolidated financial statements, to which reference is made.

Financial results

Natural gas distribution revenues totalled €1,197 million, an increase of €421 million (+54.3%) compared with 2009. Excluding the effects of applying IFRIC 12, distribution revenues totalled €848 million, up by €72 million (+9.3%) year-on-year. This increase was attributable mainly to the effects of applying the ‘graduality’ mechanism introduced by Resolution no. 79/09 of 1 June 2009 of the Electricity and Gas Authority12, increased revenues due to the return on investments in the distribution network and meter-reading services, which were transferred to distribution companies on 1 July 2009.

EBIT generated in 2010 totalled €455 million, up by €57 million, or 14.3%, year-on-year. This increase was due mainly to higher revenues from natural gas distribution (+€72 million, net of IFRIC 12) and more income from technical services performed at redelivery points (+€9 million). These factors were partially offset by higher amortisation, depreciation and impairment losses (-€22 million) owing to increased amortisation and depreciation (-€12 million) and the impairment losses on certain assets (-€10 million).

Operating review

Investments (€ million) 2009 2010 Change Change %
Maintenance 194 209 15 7.7
Extension and upgrade 92 113 21 22.8
New networks 17 27 10 58.8
Other investments 31 37 6 19.4
334 386 52 15.6

Investments in 2010 amounted to €386 million, an increase of €52 million, or 15.6%, compared with 2009.

Maintenance investments (€209 million) mainly involved renovating sections of pipes, by replacing cast-iron pipes, and continuing the meter-replacement programme.

Extension and upgrade investments (€113 million) involved extending existing networks in response to commitments arising from concession contracts.

Investments in new networks (€27 million) essentially related to infrastructure under construction in southern Italy.

Other investments (€37 million) mainly concerned real estate and IT investments.

In addition to the technical investments described above, in 2010 the group acquired the CNEA business unit for €9 million, essentially consisting of gas distribution infrastructure in seven municipalities in the Lazio region.

Gas distribution

During 2010, 7,953 million cubic metres of gas were distributed, an increase of 416 million cubic metres, or 5.5%, on 2009, mainly due to the different climatic conditions and the development of the network.

Share by investment type (% of total investments): 2009 - 58% Maintenance; 28% Network extension and upgrade; 5% New networks; 9% Other investments and 2010 - 54% Maintenance; 29% Network extension and upgrade; 7% New networks; 10% Other investments.

Active meters and volumes of natural gas distributed: 2009 - 7,537 volume distributed (millions of m³); 7,953 active meters (thousands) and 2010 - 5,771 volume distributed (millions of m³); 5,848 active meters (thousands).

At 31 December 2010, the group had concessions for gas distribution services in 1,448 municipalities (compared with 1,441 at 31 December 2009). It had 5.848 million active meters at gas delivery points to end customers (households, businesses, etc.), compared with 5.771 million at 31 December 2009.

Distribution network

The group’s gas distribution network at 31 December 2010 covered 50,307 km, an increase of 334 km, or 0.7%, compared with 31 December 2009.

The increase is due to the balance of increases and decreases in the network. The increases are primarily due to:

  • Acquisition of the business unit CNEA Gestioni S.r.l, holder of the gas concessions in 7 municipalities in the provinces of Frosinone and Latina;
  • The awarding of a new tendered concession;
  • Construction of new networks, particularly in Calabria;
  • Extensions of networks to meet commitments deriving from concession contracts.

Regulation

Resolution ARG/gas 159/08 - “Consolidated act on the regulation of the quality and tariffs for natural gas metering and distribution services for the 2009-2012 period regulatory period (TUDG): approval of part II, “Tariff regulation for natural gas distribution and metering services for the 2009-2012 regulatory period (RTDG).Temporary measures for 2009”.

With this resolution, published on 17 November 2008 (and subsequent amendments), the Authority defined the tariff criteria for the distribution and metering services for the third regulatory period, from 1 January 2009 to 31 December 2012. In summary, the resolution provides for:

  • Recognition of the capital invested for the site by the adjusted historical cost method and of the capital invested with respect to centralised operations (non-industrial buildings and other fixed assets) by the parametric method;
  • Recognition of the operating costs of distribution operations on a parametric basis and differentiated depending on company size and density of the customers connected to the network;
  • Recognition of the operating costs of metering and sales operations using equal parametric components for all businesses;
  • Assessment, at standard cost, starting in 2010, of all investments on the basis of a price list defined by the Authority (Modern Equivalent Asset Value (MEAV) method, based on the concept of new replacement cost);
  • Calculation by the Authority of the reference tariffs for each business, corresponding to the costs recognised for remunerating net invested capital, amortisation and depreciation, and operating costs;
  • Subdivision of the national territory into six tariff areas and calculation by the Authority of the respective mandatory tariffs that distributors must apply to users of their own networks;
  • Introduction of an equalisation mechanism, managed by the Authority through the Cassa Conguaglio Settore Elettrico (Electricity Equalisation fund), to guarantee equivalence between the revenue obtained by each company by application of the mandatory tariff, which, naturally, does not reflect the specific costs of each company, and the costs recognised for such company, using the reference tariff.

Resolution ARG/gas 114/10 - “Approval of the gas distribution and metering services tariffs for 2009”.

With this resolution, published on 30 July 2010, the Authority approved the reference tariff for 2009. At that time the reference tariffs for the sites managed by Italgas were also approved, and Resolution ARG/gas 197/09 provided for a fact-finding supplement on the public contributions received; the Authority found that there were sufficient explanations provided by the Company to justify the discrepancy between the data reported in the questionnaires given to the Authority and the data reported in the list provided by the Ministry of the Economy.

Resolution ARG/gas 115/10 - “Approval of the gas distribution and metering services tariffs for 2010”.

With this resolution, published on 30 July 2010, the Authority reapproved the reference tariffs for 2010.

Resolution ARG/gas 195/10 - “Recalculation, due to material errors, of the gas distribution and metering services tariffs for 2009”.

With this resolution, published on 9 November 2010, the Authority recalculated the reference tariffs for 2009, correcting several material errors contained in the preceding Resolution ARG/gas 114/10.

The new procedure for calculating the tariffs required sending an enormous amount of data and creating a complex system of algorithms in order to take into account the various types represented in the national scope of gas distribution.

Subsequent refinements of the data by the distribution companies and the repeated checking of those data by the Authority made it necessary to issue a new measure in response to material errors found in transmitting information or interpretation errors involving questionnaires sent and the information itself.

Resolution ARG/gas 235/10 – “Updating of mandatory tariffs for 2011 for the providing of natural gas distribution and metering services and tariff options for gas distribution and metering service other than natural gas by channelled networks. Start-up of the procedure for re-exercising the power of tariff regulation pursuant to the orders of the Regional Administrative Court of Lombardy, Sect. III, 11 October 2010, Nos. 6912, 6914, 6915 and 6916. Provisions on tariff options for gas distribution and metering service other than natural gas by channelled networks for 2010”.

With this resolution, published on 16 December 2010, the Authority approved the mandatory tariffs for 2011 and initiated a procedure to adopt modifications to the regulation in force on the subject of calculating tariffs for providing natural gas distribution and metering services and other gases in order to comply with the orders of the Regional Administrative Court of Lombardy which partially grant the appeals brought by several operators against the Consolidated Act for the regulation of gas distribution and metering tariffs for the 2009-2012 period, approved by Resolution ARG/gas 159/08 and subsequent amendments and modifications.

The elimination of several tariff regulation concepts voided by the Regional Administrative Court of Lombardy and the resulting implementation orders has made it necessary for the Authority to re-exercise the power of tariff regulation, after consultation with the entities involved, to fill the void left by this nullification, taking that established by the administrative court into consideration.

In order to comply with the Lombardy Regional Administrative Court orders, the Authority therefore started a procedure to assess the required modifications to the tariff regulation in force and, in the interim while the procedure is carried out, it has suspended calculation of the reference tariffs for 2011.

In addition, final approval of the reference tariffs for 2009 and 2010 has been postponed pending a further measure to be adopted at the appropriate time for calculating the remaining equalisation amounts for 2010 (or for the second half of 2011).

Finally, the resolution provides for a one year postponement, starting in 2012, of the introduction of the MEAV method for assessing the standard costs of investments for tariff purposes, pending definition of the pertinent price list by the Authority.

National legislative provisions

Provisions on competition and quality of basic services in the natural gas distribution sector

On 16 December 2010, the Joint Conference approved the two draft decrees of the Ministry of Economic Development relating to: (i) minimum geographical areas for holding calls for tenders for awarding gas distribution concessions (“Ministerial Decree on Areas”) and (ii) tender and proposal-assessment criteria for awarding concessions for gas distribution (“Ministerial Decree on Tender Criteria”).

The draft Ministerial Decree on Minimum Geographical Areas provides for: (a) a minimum of 177 geographical areas for holding calls for tenders and awarding concessions for gas distribution; (b) local authorities from each minimum geographical area to award concessions for gas distribution via a single call for tenders; the call for tenders may be extended to two or more adjoining areas subject to agreement by the local authorities of the areas in question; (c) concessions relating to all plants in the same minimum geographical area, including new distribution plants, to expire 12 years after the date the concession was awarded to the successful tenderer for the first plant in the area.

From the date the Ministerial Decree on Areas enters into force, concessions for gas distribution for which a call for tenders has not been published or the deadline for submitting tenders has not passed will be awarded exclusively with reference to the aforementioned minimum geographical areas. However, the outgoing operator will be obligated to continue providing the service until the date the new concession begins.

Pursuant to the draft Ministerial Decree on Tender Criteria, the contracting entity will prepare the call for tenders and tender regulations, in compliance with the outlines of and information contained in the standard call for tenders and tender regulations. The contracting entity will prepare the area guidelines with minimum development conditions. The minimum development conditions and the measures set out in the area guidelines must allow the operator to maintain financial stability and must be justified by an analysis of costs and benefits to consumers. The concession will be awarded to the most economically advantageous tender, based on the following criteria: a) financial terms and conditions; b) safety and quality criteria; and c) plant development plans.

The draft also sets out, among other things, the criteria for determining the amount to be repaid to outgoing contract- and concession-holders, and stipulates that the industrial value of the part of the plant owned by the outgoing operator be equal to its new-for-old value, less the cost of physical deterioration, including fixed assets under construction, as shown in the accounting records: the amount to be repaid to the outgoing operator can therefore be obtained by deducting advances and subsidies granted by local authorities and other public financial backers from the industrial value, and adding any premiums paid to the local concessionary bodies. In the event of a dispute, the call for tenders will allocate to the plant or section of a plant in question the greater of the following values: (a) the estimate of the local concessionary body; (b) the value of the site’s net fixed assets, according to the tariff system.

(12) With this resolution, which amended the tariff criteria in effect under prior Resolution no. 159/08, the Authority introduced a gradual increase in the amortised tariff component for the new regulatory period, which is in addition to that already provided for returns on invested capital.