Applicable regulatory framework and principal developments

Tariff regulation in Italy

By means of Resolutions 514/2013/R/gas, 438/2013/R/gas and 531/2014/R/gas, the Energy Grid and Environment Regulatory Authority (ARERA) defined the tariff criteria for the fourth regulatory period, in force from 1 January 2014, for transportation and regasification activities and from 1 January 2015 for storage activities. Furthermore, with resolutions 575/2017/R/gas, 653/2017/R/gas and 68/2018/R/gas, the Authority defined tariff criteria for the transition period, respectively for the transmission and regasification businesses (period 01 January 2018-31 December 2019) and for storage (period 01 January 2019-31 December 2019).

With reference to the transmission business, in 2018 the Authority published two consultation documents relative to criteria for determining the revenues recognised for the fifth regulatory period, starting 2020 (DCO no. 347/2018/R/gas and DCO no. 512/2018/R/gas), confirming the stability and continuity of the regulatory principles with respect to current regulations. More specifically, the Authority proposed confirming a 4-year regulatory period (2020-2023), the revalued historic cost methodology and the inclusion of works in progress (LIC) for the determination of the RAB, the recognition of a flat amount of Net Working Capital, the excess charge of ±4% of revenues correlated with the volumes transported, the useful lives of assets of the current regulatory period and the update of operating costs on the basis of the price cap mechanism. Moreover, the application is proposed of an increase in the WACC of +1% for 10 years for investments that will come into operation in 2020-2021 and with a ratio of benefits/costs of more than 1.5, deferring application of the cost coverage mechanism based on total spending (“Totex”) to the following regulatory period.

The following graphic shows 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 2018. Further information regarding major new rate developments occurred, with respect to each business sector, is provided in the chapter “Business segment operating performance – Tariff regulations” of this Report.

Regulation in European countries of interest to Snam: main features

TAG GCA Transmission

• RAB differentiated between the portion financed with equity (revalued historical cost) and portion financed with debt (book value). Moreover, different treatment is envisaged between old assets (pre-2012) and new investments;
• Different rates of remuneration are envisaged for the share of RAB financed with equity (Cost of Equity (*) 8.92% actual pre-tax) and for the share financed with debt (Cost of Debt 2.7% nominal pre-tax).

Terēga Transmission

• RAB value adjusted annually using the inflation rate (Consumer Price Index), considering new investments and amortisation/depreciation (Current economic cost method);
• Rate of remuneration of WACC equal to 5.25% actual pre-tax.

Terēga Storage

• Storage in regulated starting January 2018;
• Rate of remuneration of WACC equal to 5.75% actual pre-tax; RAB approximately 1.2 billion euro.

IUK Transmission

• Under exemption until October 2018;
• Transfer from an exemption system to a regulated system at expiry of the long-term contracts (October 2018).

TAP Transmission

• Third Part Access exemption on initial capacity (10bcm/y);
• Exemption from the tariff regulation on the initial and expansion capacity.

DESFA Transmission/LNG

• RAB based on historic cost, work in progress remunerated by WACC;
• Nominal pre-tax rate of remuneration of 9.22% for 2017 and 2018;
• The parameters for the new regulatory period are currently being reviewed;
• RAB of approximately 0.8 billion euro (Transmission + LNG);
• Socialisation of the cost of LNG in the transmission tariffs (75%);
• Recovery of the cumulative OLD recoverable differences 2006-2016 of approximately 326 million euro, spread out over 16 years, from 2017 to 2032.