SNAM Annual Report 2013 - Regulatory framework

Main factors of the regulatory framework

The transportation and regasification of LNG and the storage and distribution of natural gas are regulated by the Electricity and Gas Authority, in operation since 1997 and responsible for the regulation of the national electricity and natural gas markets. Among its functions are the calculation and updating of the tariffs, and the provision of rules for access to infrastructure and for the delivery of the relative services.

The tariff systems for the four business segments are based on shared principles and stipulate, in particular, that the revenue used to formulate tariffs are determined in such a way as to ensure that operators’ costs are covered and that return on invested capital is fair. There are three categories of recognised cost:

the cost of net capital invested for regulatory purposes (regulatory asset base, RAB) through the application of a rate of return for the same;
amortisation and depreciation, covering capital expenditure;
operating costs for the year.

For development investments aimed at upgrading infrastructure, the increase in the rate of return varies according to the investment type.

The following are the primary tariff components for each of the regulated activities carried out by Snam, based on the regulatory framework in force as at 31 December 2013.

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Regulatory framework as at 31 December 2013

TRANSPORTATION

REGASIFICATION

STORAGE

DISTRIBUTION

(a)	With Resolution 237/2012/R/gas, the Electricity and Gas Authority extended, for the 1 October 2012 - 31 December 2013 transition period, the criteria for determining the regasification tariffs.
(b)	With Resolution 436/2012/R/gas, the Electricity and Gas Authority extended, for the 1 January 2013 - 31 December 2013 transition period, the criteria for determining the distribution tariffs.

End of regulatory period

End of third regulatory period: 31 December 2013

End of third regulatory period: (a) 31 December 2013

End of third regulatory period: 31 December 2014

End of third regulatory period: (b) 31 December 2013

Calculation of net invested capital recognised for regulatory purposes (RAB)

Revalued historical cost

Revalued historical cost
Deduction of restoration costs

Revalued historical cost Parametric method for centralised assets

Return on net invested capital recognised for regulatory purposes (pre-tax WACC)

6.4% (transportation)
6.9% (metering)

7.6%
Transitional period:
1 October 2012-
31 December 2013
8.2%

6.7%

7.6% (distribution)
8% (metering)
Transitional period:
1 January 2013 - 31 December 2013
7.7% (distribution)
8% (metering)

Extra return on new investments

1% over 5 years
(on safety investments)
2% over 7/10 years
(on investments to develop capacity)
3% over 10/15 years
(on investments to develop entry capacity)

2% over 8 years
(on expansions of existing terminals by less than 30%)
3% over 16 years
(on expansions of existing terminals by more than 30%)

4% over 8 years
(on expansions of existing capacity)
4% over 16 years
(on development of new storage sites)

2% over 8 years
(on replacements of pipelines or cast iron and renovations of odorisation systems)

Efficiency factor (X FACTOR)

2.1% on operating costs

0.5% on operating costs

0.6% on operating costs

3.2% on distribution operating costs
3.6% on metering operating costs
Transitional period:
1 January 2013 -
31 December 2013
2.4% on distribution operating costs
2.8% on metering operating costs

REGULATORY FRAMEWORK FROM 1 JANUARY 2014

Through Resolutions 438/2013/R/gas, 514/2013/R/gas and 573/2013/R/gas, the Electricity and Gas Authority defined new tariff criteria for the fourth regulatory period, for natural gas regasification, transportation and distribution, respectively.

The main tariff components based on the regulatory framework in force as at 1 January 2014 are set out below.

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	TRANSPORTATION	REGASIFICATION	DISTRIBUTION
Calculation of net invested capital recognised for regulatory purposes (RAB)	Revalued historical cost	Revalued historical cost	Revalued historical cost Parametric method for centralised assets
Return on net invested capital recognised for regulatory purposes (pre-tax WACC)	6.3% for investments made by 31 December 2013 7.3% for investments made after 31 December 2013	7.3% for investments made by 31 December 2013 8.3% for investments made after 31 December 2013	6.9% (distribution) 7.2% (metering)
Extra return on new investments	1% over 7 years (on investments in developing the regional network) 1% over 10 years (in investments in developing the national network) 2% over 10 years (on investments to develop entry capacity)	2% over 16 years (new terminals or increasing capacity at existing terminals by more than 30%)	Incentives for service quality
Efficiency factor (X FACTOR)	2.4% on operating costs	Recovery of operating costs by terminal (% to be defined by subsequent order from the Electricity and Gas Authority)	1.7% on distribution operating costs

For more information on the new tariff criteria for the fourth regulatory period, please see the “Business segment operating performance – Regulation” section.

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