Regulations concerning the business sectors

Regulation transition period 2018-2019

Criteria for adjusting the tariffs for natural gas transport services for the transition period in the years 2018 and 2019

By means of Resolution 575/2017/R/gas, which was issued on 04 August 2017, the Authority approved the tariffs for the transport, dispatch and metering service for 2018 -2019. The resolution confirmed the main criteria of the regulation currently in force, with some modifications:

• the asset β parameter was confirmed for the Transitional Period 2018-2019. the WACC value of 5.4% in real pre-tax terms is therefore confirmed for 2018, and will be determined for the year 2019 by updating the basic parameters;
• from 2018 the investments made in the year t-1 will be included in the investment capital for the purpose of determining the tariffs for year t, replacing the 1% increase in the WACC to cover the regulatory time-lag. The 1% increase in the WACC covering the regulatory time-lag has been applied to investments made in the period 1 January 2014-31 December 2016;
• the input-based incentive scheme (1-2% for 7/10 years for regional and national networks respectively) will be applied to new development investments that have entered into service by 31 December 2017;
• an input-based incentive scheme (1% for 12 years for regional and national networks) will be applied to investments for the construction of new transportation capacity, launched as of 31 December 2017, which will start operating in the years 2018 and 2019. The incentive will also be recognised for investments that start operating during the transition period after 1 January 2018, included in the Development Plan and with a benefit-cost ratio higher than 1.5;
• the operating costs recognised in the fourth regulatory period will be updated according to inflation, and a productivity recovery factor (X-factor). The variable unit price (CV) will be calculated for the years 2018 and 2019 using a reference volume of 67.2 billion cubic metres.

Tariff regulations for 2018

By means of Resolution 757/2017/R/gas, published on 17 November 2017, the Authority approved the revenue recognised for the natural gas transportation and dispatching service for 2018. Revenue recognised for the natural gas storage service for 2018 amounted to 1,947 million euro. The RAB used to calculate 2018 revenues for transport, dispatching and measurement activities was 16 billion euros, and included the investments made in 2017.

The tariffs proposed for the natural gas dispatch and transmission service for 2018 were published by the Authority with resolution 795/2017/R/gas of 5 December 2017.

By means of subsequent Resolution 390/2018/R/gas, published on 19 July 2018, the Authority determined the revenue recognised for the natural gas transmission and dispatching service for 2018, in order to take into account the final values booked for 2017.

Tariff regulations for 2019

By means of Resolution 280/2018/R/gas, published on 10 May 2018, the Authority approved the revenue recognised for the natural gas transportation and dispatching service for 2019, which came to 1,964 million euro. The RAB used to calculate 2019 revenues for transport, dispatching and measurement activities was 16.2 billion euro, and included the investments estimated for 2018.

By means of Resolution 306/2018/R/gas, published on 01 June 2018, the Authority approved the proposed revenue for the natural gas transportation and dispatching service for 2019.

Regulation for the fifth regulatory period 2020-2023

Consultations no. 347/2018/R/gas and no. 512/2018/R/gas relative to the “Criteria for the tariff regulation for the natural gas transmission and metering service for the fifth regulatory period”

With consultation documents no. 347/2018/R/Gas and no. 512/2018/R/gas, published respectively on 22 June 2018 and 18 October 2018, the Authority gave guidelines on the criteria for tariff regulation for the natural gas transmission and metering service for the fifth tariff regulatory period. More specifically, the Authority proposed:

• confirmation of a 4-year regulation period (2020-2023);
• revision of the value of the β asset parameter in order to determine the rate of remuneration (WACC);
• confirmation of the revalued historic cost method to determine the RAB and the use of the gross fixed investments deflater recorded by ISTAT for value adjustment confirmation of a 4-year regulation period (2020-2023);
• confirmation of the recognition of flat net working capital of 0.8%;
• the inclusion of work in progress (LIC) in calculating the RAB, recognising remuneration equal to the WACC calculated with a D/E ratio of 4;
• confirmation of the useful lives of assets of the current regulatory period;
• determination of operating costs recognised on the basis of the costs of the last year available at the time of presentation of tariff proposals for 2020, i.e. costs relating to 2017, increased by the greater efficiencies achieved in the current period (profit-sharing 50% measured over 2017), envisaging subsequent balance calculations due to any differences, with the efficiency factor (X-factor) sized so as to return the greater efficiencies realised in the fourth regulatory period to users in 4 years;
• the annual update of the variable price (CV) on the basis of the volumes recorded in the year t-2;
• confirmation of the excess of ±4% of revenues correlated to volumes transported;
• limited to investments that will come into operation in the years 2020-2021, with a costs/benefits ratio of more than 1.5, application of an increase in the WACC of +1% for 10 years;
• introduction of a variable price applied to volumes carried intended to cover recognised operating costs, costs relating to the Emission Trading system and costs for the procurement of quantities to cover self-consumption, losses and CNG with a price risk hedging mechanism;
• the experimentation of some cost covering mechanisms based on total spending (“Totex”), deferring to the next regulatory period for a more complete application of the mechanism;
• the definition of regulatory criteria for the metering service in a subsequent consultation document.

The sending of observations for the second and last consultation document no. 512/2018/R/gas was concluded on 17 December 2018, so as to allow for the adoption of the final provision by end February 2019.

Update of the rate of remuneration of the invested capital for regulatory purposes (WACC) for 2019

By resolution 639/2018/R/gas published on 06 December 2018, the Authority performed the infra-period update of the basic parameters of the WACC, common to all regulated infrastructural services of the gas and electricity sectors, in accordance with the provisions of Article 5 of the TIWACC and the gearing level, according to the provisions of Article 6 of the TIWACC.

In the resolution, the Authority confirmed the level of the risk free rate (rf) parameter as 0.5% (floor) insofar as the average rates of return in real terms of government securities in EU countries with a rating of at least AA recorded in the period 01 October 2017-30 September 2018 fell below said value.

The Authority also set the other parameters as follows:

• Country Risk Premium (CRP), 1.4%;
• Tax shield, 24% and tax level 31%;
• Prospective inflation of 1.7%.

For infrastructural services other than gas distribution and metering, the Authority has arranged for a gearing level D/E of 1, whilst the Beta parameter will be determined during the rate regulation of the individual businesses, starting 2020.

On the basis of the values of the above parameters, for 2019 the Authority has set the rate of return on invested capital for the natural gas transmission service as 5.7% in actual pre-tax terms (5.4% for 2016-2018). The WACC for the years 2020 and 2021 will be determined after the beta parameter has been set for the 5 regulatory period.

Integrated Text on Balancing (TIB)

Resolution no. 480/2018/R/gas - “Definition of incentive parameters pursuant to Article 9 of the TIB (Integrated Text on Balancing), valid starting 01 October 2018”

By means of Resolution 480/2018/R/gas, which was published on 28 September 2018, the Authority defined the economic incentive parameters for the Balancing Operator with reference to the period 01 October 2018-31 December 2019. The resolution confirmed the general layout of the current incentive mechanism, modifying some parameters. More specifically, the performance objective p3 (residual balancing) was strengthened, envisaging an increase to the maximum value with respect to performance p2 (market TSO intervention price), the basic value of which is reduced from 3% to 2%.

The Authority has reduced the overall incentive by a fixed amount of 5,500 euro/day (approximately 2 mln euro/year), recognising the Balancing Operator an equal amount upon achieving additional improvement objectives (also with reference to the new “Settlement” system as set out below), in connection with which Snam Rete Gas will send a proposal to the Authority.

During thermal year 2017/18, a significant improvement was recorded to the overall performance of Snam Rete Gas with respect to the previous thermal year, in the pursuit of balancing consistently with the efficient function of the transmission network. This improvement has allowed for an increase in the total economic amount of incentives recognised to Snam Rete Gas (from approximately 3.9 to approximately 14.8 million euro).

Settlement

Resolution 676/2018/R/gas - Provisions on the terms and conditions for the disbursement of balances relative to the price differences determined upon completion of settlement sessions

By resolution 676/2018/R/gas, published on 21 December 2018, the Authority established that the management of balances of price differences, determined upon completion of previous adjustment sessions for the period 2013-2019, in accordance with Resolution 223/2018/R/gas, shall take place as part of the neutrality mechanism in relation to price differences. More specifically, it is established that, in order to determine the transmission tariffs relative respectively to the years 2020 and 2021, the revenues deriving from the application of price differences (RSCN and RSCR) relative to the years 2018 and 2019 shall be considered net of the amounts of the balance calculated upon completion of the adjustment sessions, the results of which are produced that same year.

Other provisions

Snam Rete Gas - Regulation criteria for natural gas transportation and dispatching tariffs for the period 2010-2013

By means of Ruling 2888/2015, the State Council rejected the appeal filed by ARERA for a review of the ruling of the Regional Administrative Court of Milan no. 995/2013, which had annulled the provisions contained in Resolutions ARG/gas/184/09, 192/09, 198/09 and 218/10 regarding natural gas transportation and dispatch tariffs for the period 2010-2013 relating, specifically, to the commodity/capacity distribution, reform of the entry/exit model and gas intended for consumption by the compression plants (self-consumption).

By means of Resolution 428/2015/C/gas, ARERA decided to file an appeal for the aforementioned ruling to be overturned on the grounds of factual errors; this was subsequently waived on 29 March 2018, given the onset lack of interest in proceeding. At the same time, the Authority complied with the aforementioned rulings under Resolution 550/2016/R/gas, with which, having reformed the rules for self-consumption, it justifiably confirmed the pricing criteria for the rest, in the light of consultations carried out.

Given the confirmatory nature of the aforementioned resolution, the original applicant filed an appeal for compliance with the aforementioned rulings and a declaration of the nullity of resolution 550/2016/R/gas. With ruling no. 494/2017, the Regional Administrative Court of Milan partially heard the appeal with specific reference to the issues of commodity/capacity distribution, believing that the Resolution challenged had inexactly and partially complied with ruling 995/2013 and that, therefore, the Authority should carry out an additional assessment of the effects of the decisions made.

The ruling no. 494/2017 was contested by the appellant, as well as, incidentally, by the ARERA. By recent ruling no. 1840/2018 of 23 March 2018, the Council of State, in partially upholding the incidental appeal brought by the Authority, rejected the claim for nullity due to violation of the ruling submitted by the appellant in the first instance and ordered the conversion of the rite into ordinary proceedings for annulment. The appellant consequently resumed the proceedings before the Regional Administrative Court of Milan.