Gas Market Monitoring

As part of its evaluations of the gas wholesale markets, the Authority gave Snam the mandate, as a leading transportation business, together with Gestore dei Mercati Energetici, to support it in monitoring activities through: (i) the preparation of a transportation and balancing, storage and regasification services integrated data base, made available by the Regulator and supplied daily; (ii) providing indices and reports on a regular basis under the scope of the balancing function, the balancing of the system and the flexibility of procurement sources; (iii) further specific analyses at the request of the Authority.

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 4 August 2017, the Authority approved the tariffs for the transport, dispatch and metering service for 2018 -2019. The resolution confirms the main criteria of the previous regulation, with several amendments:

• The asset β parameter was confirmed for the 2018-2019 Transition Period. The value of the WACC equal to 5.4% in pre-tax real terms was therefore confirmed for 2018 and was recalculated for 2019 through the updating of the basic parameters.
• From 2018 the investments made in the year t-1 were 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 was 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) was 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) was 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 was also 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 were updated according to inflation, and a productivity recovery factor (X-factor). The variable unit price (CV) was calculated for the years 2018 and 2019 using a reference volume of 67.2 billion cubic metres.

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, dispatching and metering service for 2019, which totalled €1,964 million. The RAB used to calculate 2019 revenue for transportation, dispatching and metering amounts to €16.2 billion and includes estimated investments for the year 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.

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

Through resolution 639/2018/R/gas, published on 6 December 2018, the Authority carried out an interim updating of the WACC basic parameters common to all electricity and gas sector regulated infrastructure services, pursuant to the provisions of Article 5 of the TIWACC and the gearing level, according to the forecasts of Article 6 of the TIWACC.

In the resolution the Authority confirmed the level of the risk free rate parameter (rf) equal to 0.5% (the floor) as the average return rate in real terms of EU country government bonds with ratings of at least AA in the period 1 October 2017-30 September 2018 was lower than this figure.

The Authority also set the other parameters as follows:

• Country Risk Premium (CRP), at 1.4%;
• Tax shield, equal to 24% and taxation level at 31%;
• Future inflation at 1.7%.

For infrastructure services other than those of gas distribution and metering, the Authority set a D/E gearing level of 1, while the calculation of the Beta parameter was carried out during the tariff regulation of the individual businesses starting from 2020.

Based on the parameter values reported above, the Authority set the return rate on invested capital for the natural gas transportation service at 5.7% in real pre-tax terms in 2019 (5.4% for the years 2016-2018). The WACC for 2020 was calculated following the setting of the Beta parameter for the 5th regulatory period, outlined in the next section.

Regulation for the fifth regulatory period 2020-2023

Tariff adjustment criteria for the natural gas transportation and metering service for the fifth regulatory period (2020-2023)

Through resolution 114/2019/R/gas, published on 29 March 2019, the Authority defined the regulation criteria of the natural gas transportation tariffs for the fifth regulatory period (1 January 2020-31 December 2023).

The duration of the regulatory period was confirmed as 4 years. The valuation of the net capital invested (RAB) is based on the revalued historical cost method. The net invested capital remuneration rate Beta parameter (WACC) remains fixed at 0.364, with the WACC remaining unchanged at 5.7% before tax for the years 2020-2021, in line with the TIWACC framework. Works in progress are included in the calculation of the RAB predicting a real pre-tax return of 5.3%. The inclusion in the RAB of investments made in the year t-1 for the purpose of remuneration to compensate the regulatory time-lag is also confirmed.

Limited to the interventions included in the Development Plans that will come into operation in the years 2020-2021-2022 with a cost/benefit ratio of more than 1.5, a greater WACC of +1.5% for 10 years is applied.

The revenue component relating to the return and amortisation and depreciation is updated on the basis of an annual recalculation of net invested capital (RAB) and additional revenue from the higher rate of return for investments realised in prior regulatory periods. Amortisation and depreciation are calculated based on the useful economic and technical life of the transportation infrastructure.

Operating costs recognised for 2020 are calculated based on effective recurring costs for 2017, increased by the greater efficiency achieved in the current period (50% profit sharing), with the possibility of including any recurring costs for 2018 if adequately justified. The application of the price-cap method for the purpose of updating operating costs is confirmed, envisaging an X-factor to return the greater efficiency achieved in the fourth regulatory period to users in 4 years.

It is expected that the largest transportation business will procure quantities of gas to cover self-consumption, leaks and unaccounted for gas (GNC) under the scope of the centralised market. The quantities of gas recognised are assessed based on the weighted average price of forward products with delivery to the PSV (Virtual Trading Point) in the reference tariff year. The resolution includes the recognition of the difference between the price recognised for these volumes and the effective procurement price, deferring the definition of the detail mechanism to the next provision.

With regard to tariff structure, the current methodology for determining the capacity/commodity split was confirmed, providing for capacity revenue to cover capital costs (return and amortisation and depreciation) and commodity revenue to cover recognised operating costs. The current revenue correction factor applied to the capacity component (100% guaranteed) and to the component related to transported volumes (allowance ±4%) is confirmed. With reference to the metering service, a mechanism to cover revenues similar to that of the transportation service (100% guaranteed) was introduced.

The tariff structure based on the entry/exit model is confirmed, including not only the domestic network but also the regional network in the reference price methodology. The entry and exit capacity fees are calculated using the capacity weighted distance methodology (CWD) with the revenues distributed between the entry and exit points 28/72.

A variable fee was introduced, applied to volumes transported, intended to cover the operating costs recognised, the costs relating to the Emission Trading system, ratifying the principle of neutrality adopted by the business in relation to price risk and incentivising virtuous behaviour aimed at reducing CO² emissions, and the costs of procurement of quantities to cover self-consumption, leaks and CNG. This fee is applied to the transportation network entry points and is calculated annually based on the volumes effectively withdrawn in the year t-2.

Lastly, there are plans for the definition of the regulation criteria for the quality of the natural gas transportation service for the fifth regulatory period to be deferred, trialling the innovative use of transportation networks, as well as the restructuring of the metering service, following specific consultations carried out in 2019. In this regard, through resolution 554/2019/R/gas, published on 23 December 2019, the Authority approved the new Consolidated Act for the regulation of the quality of the gas transportation service which contains provisions on the continuity of the service, security and commercial quality, valid for the fifth regulatory period 2020-2023.

Approval of 2020 revenues

By means of Resolution 201/2019/R/gas, published on 28 May 2019, the Authority approved the revenue recognised and fees for the natural gas transportation and dispatching service for 2020. Revenue recognised for the natural gas storage service for 2020 amounted to € 2,096 million. The RAB used to calculate 2020 revenue for transportation, dispatching and metering amounts to €16.4 billion and includes estimated investments for the year 2019.

Settlement and balancing

Approval of the Snam Rete Gas S.p.A. proposal relating to the improvement and efficiency improvement targets subject to the incentive, pursuant to point 5 of the Authority resolution 480/2018/R/gas

Through resolution 57/2019/R/gas, published on 22 February 2019, the Authority approved the proposal of further improvement and efficiency objectives for settlement and balancing presented by Snam Rete Gas pursuant to resolution 480/2018/R/gas, point 5, functional to the recognition of the incentive of around €2.5 million set out in this resolution. Specifically, the objectives consist of the commitment to: (i) bringing forward the times for the completion of the activities of checking new dynamic profiling mechanisms function to the launch of the settlement reform pursuant to resolution 72/2018/R/gas of the Authority; (ii) ensuring greater transparency of these methods through disclosure and sharing with the operators involve as well as (iii) launching a trial in the period June-December 2019 to restrict the use of the storage capacity by the Balancing Manager, function to the implementation of the reform outlined by the Authority in previous consultations. The incentive is distributed equally between the objectives proposed by Snam Rete Gas and the recognition that will be modulated according to the activities concluded.

Regulation of previous corrective factors

In a letter dated 26 June 2019, the regulatory authority notified Snam Rete Gas, of the amount of the corrective factors relating to previous years to be paid to the CSEA by 31 July 2019, under the “Transport expenses account” as required by Article 4.3 of the resolution 114/2019/R/gas of the same Authority.

The amount of €180 million (€154 million net of activities compensated), calculated based on the reported revenues relating to 2018 sent to the Authority pursuant to Article 4 of resolution 114/2019/R/gas, refers to the corrective factors for 2018, net of deviation revenues and residual corrective factors for previous years (2016-2017). Snam Rete Gas made the relative payment on 30 July 2019.