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Legislative and regulatory framework

Tariff regulation

The distribution and metering of natural gas is regulated by the Regulatory Authority for Energy, Networks and Environment (ARERA). 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 related services.

The rate system establishes in particular that the reference revenue for the formulation of rates is determined so as to cover the costs incurred by the operator and allow for a fair return on invested capital. Three cost categories are recognised:

  • the cost of net invested capital for RAB (Regulatory Asset Base) purposes through the application of a rate of return of the same;
  • economic-technical amortisation/depreciation, hedging investment costs;
  • operating costs, hedging operational costs.

The main rate elements are reported below on the basis of the regulatory framework (Resolution no. 570/2019/R/gas as amended)

HIGHLIGHTS FIFTH Regulatory period (FROM 1/1/2020 TO 31/12/2025)
End of Regulatory period (TARIFFS) 31 december 2025
Calculation of net invested capital recognized for regulatory purposes (RAB) * Revalued historical cost Parametric method for centralised asset base
Return on net invested capital recognized for regulatory purposes (WACCpre-tax) Distribution and Metering: 6,3% Years 2020-2021
Incentives on new Investment Return on investments t-1 to offset regulatory time lag (from 2013)
Efficency Factor (X-factor) Distribution operating costs:
  • 3.53% for large companies (RDP > 300.000)
  • 4.79% for medium companies (RDP > 50.000)
  • 6.59% for small companies (RDP < 50.000)
Metering operating costs: 0% Commercialization operating costs: 1.57%

(*) The RAB of the companies currently included in the scope of consolidation, calculated by applying the criteria adopted by the Authority, with reference to investments made up to 31 December 2020, in the definition of the reference tariffs, is equal to € 7.8 billion.

Resolution no. 570/2019/R/gas, following the consultation process conducted with the documents for consultation no. 170/2019/R/gas and 410/2019/R/gas, approved the regulation of tariffs for gas distribution and metering services for the period 2020-2025.

In particular:

  • the Authority confirmed the six-year duration of the tariff regulation period, as well as the division into two half-periods of three years each;
  • with regard to the recognition of operating costs, the Authority provided that:
    1. the initial level for 2020 of recognised operating costs be fixed by applying equal weight to the actual and recognised costs of the reference year 2018;
    2. the rate of annual reduction of unit costs recognised to cover operating costs be set at:
      • for the distribution service:
        • 3.53%, for large companies (> 300,000 re-delivery points);
        • 4.79%, for medium-sized enterprises (> 50,000 re-delivery points);
        • 6.59%, for small businesses (< 50,000 re-delivery points);
      • 0% for the metering service;
      • 1.57% for the marketing service;
    3. the level of the recognised standard cost for each switch reading be confirmed, for the first half of the regulation period, at € 5;
    4. the recognition of costs relating to smart metering/remote management systems be confirmed based on the costs actually incurred for the first half of the regulation period, with the application of a ceiling and recognition in account;
    5. the recognition of costs relating to meter checks be confirmed on the basis of the costs actually incurred with the application of recognition in account;
  • with regard to the recognition of capital costs, the Authority provided that:
    1. the adoption of a ceiling to tariff recognition for investments in distribution networks applied to locations with year of first supply after 2017 be confirmed for the fifth regulation period, to the extent set out in Resolution no. 704/2016/R/gas;
    2. the weights to be applied for the recognition of smart meter investments made in the two-year period 2020-2021 be revised to 30% (from 40%) for the standard cost and to 70% (from 60%) for the actual cost and that the standard cost revision be referred to the investments in the metering service made in 2022;
    3. a time horizon be adopted for the full recovery of “frozen” contributions aligned with the time horizon for the reimbursement of contributions subject to depreciation (about 34 years);
    4. in relation to the recognition of residual costs of traditional meters class G6 or lower replaced with smart meters, an amount be set for the recovery of non-depreciation (IRMA), to be paid to the distribution companies over five years, equal to the difference between the residual non-depreciated value, calculated applying the pro-tempore regulatory useful life in force, and the residual value, calculated by applying a useful life of 15 years; also providing for the recovery of non-depreciation for traditional meters installed in the period 2012-2014 replaced with smart meters;
    5. following the Equalisation of the βasset parameter for distribution (0.439) and metering services (from 0.502 to 0.439), the rate of return on invested capital WACC be set at 6.3% until 2021, including for metering activities;
    6. incentive regulation schemes for capital costs related to the distribution service, based on standard cost recognition logics, be introduced starting from investments made in 2022;
    7. aspects related to the introduction of tools to support network innovation were addressed in a specific consultation document published in February 2020;
  • with regard to the methanisation of Sardinia, the Authority has established a specific tariff framework providing, for a period of three years, for a transitional Equalisation mechanism that allows the tariff of the Sardinian sector to be equalised with that of the southern Italy sector;
  • with regard to the application of the tariff regulation to isolated LNG networks and isolated networks supplied by gas supply trucks, the Authority has introduced transitional rules, providing that these networks may be assimilated to interconnected distribution networks for a period of five years, subject to submission of an application by the distribution company concerned.

The Company filed an appeal before the Regional Administrative Court of Lombardy, served on 24 February 2020, challenging the legitimacy of the resolution in several respects, including the planned reduction in recognised operating costs to the distributors, the reduction in the return on capital invested in metering activities, confirmation of the cap on investments in start-up locations, the proposed single tariff sector for Sardinia with equalization mechanism limited to the first three years only, and the proposal for a fixed x-factor throughout the regulation period. The setting of a date for the hearing is currently pending.

Resolution No. 571/2019/R/gas approved the mandatory tariffs for natural gas distribution, metering and marketing services and the bimonthly Equalisation prepayment amounts for natural Gas distribution service for the year 2020.

Resolution no. 106/2020/R/gas redetermined the reference tariffs for gas distribution and metering services for the years 2009-2018 based on the requests of several distribution companies to correct the data. The Resolution also redetermined the reference tariffs for distribution and metering services for 2018 for locations with first year of supply starting from 2017 based on the provisions of Resolution no. 570/2019/R/gas, in relation to the ceiling on the costs recognised to cover capital costs relating to the distribution service in start-up locations. In particular, for 2017 start-ups, the Authority no longer provides for application of the ceiling to the amount of recognised costs, which are therefore remunerated based on the costs actually incurred

Resolution no. 107/2020/R/gas determined the final reference tariffs for gas distribution and metering services for 2019, calculated on the basis of the actual balance sheet figures for 2018.

Resolution no. 127/2020/R/gas determined the provisional reference tariffs for gas distribution and metering services for 2020, based on the preliminary balance sheet data for 2019 pursuant to Art.3, subsection 2, letter a) of the RTDG.

Resolution no. 128/2020/R/gas amended the definition of the different gas sector as per Article 1, subsection 1, of the RTDG, introducing the type of gas distributed to the criteria for identifying the sector, and accepted the application to redetermine the tariff options for the year 2020 for the Sardinia different gas sector of Medea S.p.A., presented on 25 February 2020 by Italgas S.p.A., distinguishing, with effect as of 1 January 2020, the localities served with propane air from the localities served with LPG.

On 2 July 2020 the Company filed an appeal on additional grounds before the Regional Administrative Court of Lombardy against Resolutions no. 106/2020/R/gas and 107/2020/R/gas criticising such measures in the part where – purportedly in application of the tariff regulation introduced by Resolution 570/2019/R/Gas, approving the final tariffs for 2018 and 2019, for start-up locations first supplied in 2018 – they implemented the cap introduced by the aforesaid Resolution during recognition of CAPEX.

As part of the same appeal on additional grounds, the technical report published by ARERA on 6 May 2020 was also contested, as a precaution, in case it was to be regarded as a preparatory and investigative document on the basis of which ARERA adopted Resolution 570/2019 and the RTDG, rather than a later, not purely confirmatory document.

Moreover, in the same proceedings, with a further appeal on additional grounds filed on 4 November 2020, the company contested ARERA memorandums of 7 September 2020 and 15 October 2020, providing further grounds for criticism concerning the reduction in the return on capital invested in metering activities. A date is yet to be set for the hearing on the merits.

Resolution no. 544/2020/R/gas redetermined the reference tariffs for gas distribution and metering services for the years 2009 to 2019, based on the requests received from certain distribution companies to correct the data by 15 September 2020.

Resolution no. 568/2020/R/gas approved the amounts of operating costs, relating to smart metering/remote management systems and concentrators, incurred by the companies which submitted an application for the years 2017 and 2018. By 31 March 2021, the CSEA will determine the limit on revenue allowed for covering metering service-related centralised costs. Also, by 30 April 2021, it will settle any amounts in adjustment of the amounts already paid for the collection years.

Resolution no. 596/2020/R/gas approved the mandatory tariffs for natural gas distribution, metering and marketing services, the different gas tariff options and the bimonthly Equalisation prepayment amounts for the natural Gas distribution service for the year 2021. The Resolution also determined the values expressed in euro/re-delivery points, valid for the year 2021, of the components to cover operating costs related to the distribution, metering and marketing service, as well as the component to cover centralised capital costs.

Quality and safety of the gas distribution and metering service

In Resolution no. 65/2020/R/gas of 17 March 2020 the Authority determined the premiums and penalties relating to the safety recoveries of the natural Gas distribution service for 2015 for Toscana Energia for a total net amount payable to the Company of € 627,688.48.

With Resolution no. 163/2020/R/gas of 12 May 2020, the Authority determined the premiums and penalties related to the safety recoveries of the natural Gas distribution service for 2016. In particular, for subsidiaries and affiliates companies of Italgas S.p.A., the overall net amount in favour (total premiums and penalties) due for the odorization and dispersion components is approximately € 8,500,000.00.

On 9 July 2020, the Company filed an appeal on additional grounds against the aforesaid Resolution before the Lombardy Regional Administrative Court, both for the part relating to the non-recognition of the premiums, concerning 24 plants in 41 municipalities, and for the part relating to emergency intervention, the latter as a consequence of the proceedings already pending before the Lombardy Regional Administrative Court against Resolution no. 328/2019/R/gas. A date is yet to be set for the hearing on the merits.

On 17 July 2020 Italgas Reti was notified, by means of Resolution 266/2020/S/gas, of the imposition of a fine of € 531,200 for failure to update two company procedures with reference to the issue of supply activation (I55-1 Interventions on gas metering units and ITG-PRO-122 Documentary verification of the safety of consumer gas systems) to RQDG 2014-2019 (prior to the current) and to the technical standards, in force until 2017.

These procedures were already revised in 2018.

With Resolution no. 567/2020/R/gas of 22 December 2020, ARERA determined the premiums and penalties related to the safety recoveries of the natural Gas distribution service for 2017.

Commercial regulation of gas distribution and metering service

In Resolution no. 167/2020/R/gas of 19 May 2020, the Authority established the criteria for regulating the insurance against risks deriving from the use of gas downstream of the Delivery point in favour of final customers of gas distributed through local pipelines and transport networks, for the period 1 January 2021 – 31 December 2024 and defined the procedures for the stipulation of the related insurance contract.

In Resolution no. 183/2020/R/gas of 26 May 2020, the Authority partially accepted the appeal submitted by Italgas to obtain exemption from payments due for the omitted or late disconnection of re-delivery points served as part of the default Gas distribution service.

Specifically, it granted the Company the power to make a reduced payment of the amounts due and integrated Appendix 1 of the Unified Code on Gas Sales with the evaluation criteria for appeals submitted by the distribution companies.

In Resolution no. 219/2020/R/com of 16 June 2020, the Authority supplemented and amended the regulations on arrears in the electricity and natural gas sectors, providing for a notice obligation of not less than 40 days.

Energy efficiency

In Resolution no. 1/2020 – DMRT of 31 January 2020 the Authority defined the national energy efficiency quantitative obligations of natural gas end uses to be achieved in 2020 by distributors with more than 50,000 end users connected to its distribution network as at 31 December 2018. For subsidiaries and affiliates of Italgas S.p.A., the quantitative obligation for 2020, rounded off to the nearest whole number on a commercial basis and expressed as a number of White certificates, is: i) 1,073,333 for Italgas Reti; ii) 155,367 for Toscana Energia and iii) 7,942 for Umbria Distribuzione Gas.

On 17 July 2020 Resolution no. 270/2020/R/efr was published, containing the tariff contribution regulation for energy efficiency certificates acquired by obliged entities starting from the 2019 obligation year.

Through this Resolution, the Authority has introduced an additional component that may increase the tariff contribution beyond the cap – still established at an amount of € 250/EEC – to a maximum of € 10/EEC taking into account the following:

  • the availability of EECs on the market (measured by the difference between the total EEC target for obliged entities and the EECs available to those parties at the end of the obligation year);
  • the average market price (measured as the difference, increase, in average market price from the cap value of € 250/EEC).

Lastly, the Authority has planned an increase in the tariff contribution on account, from €175/EEC currently, to € 200/EEC.

On 13 October 2020, the company appealed against the aforesaid Resolution, challenging its lawfulness in several respects. The chamber proceedings were held on 16 December 2020 and the company is currently awaiting the decision of the Regional Administrative Court and the setting of a date, if necessary, for the hearing to discuss the application for annulment.

Overall, in 2020, the Italgas Group subsidiaries purchased, with commitment to buy, 589,108 EECs from the market for a value of € 154.0 million, and 457,962 short certificates for a value of € 4.6 million.

Following the COVID-19 epidemiological emergency pursuant to Article 41 of Italian Decree Law no. 34 of 19 May 2020, closure of the 2019 obligation year was deferred until 30 November 2020. In this context, the company therefore cancelled 502,945 EECs, for a total amount of € 128.0 million (calculated on the basis of the balance of the contribution of € 254.49/EEC pursuant to Resolution no. 550/2020/R/efr of 15 December 2020). It also cancelled 128,445 EECs for an overall value of € 25.7 million (calculated on the basis of the estimated tariff contribution of € 200.00/EEC pursuant to Resolution no. 270/2020/R/efr of 17 July 2020).

Lastly, the adjustment relating to the 446,371 EECs purchased in the period from June to November 2019 was determined, for an overall value of € 35.5 million.

Coronavirus emergency – main measures of the Authority

In Resolution no. 148/2020/R/com of 30 April 2020, the Authority further extended, for the period from 4 May 2020 to 17 May 2020, the provisions of Resolution no. 60/2020/R/com and subsequent amendments and supplements, which provide for the suspension of arrears management procedures in the natural gas sector, limiting their application only to domestic end customers and condominiums for domestic use with consumption of less than 200,000 Sm3/year. As a result of the new extension, judicial proceedings for disconnection of supply are also suspended, as well as the application of the relevant default penalties provided for in the event of failure to comply with such obligations.

With Resolution No. 192/2020/R/com of 28 May 2020, the Authority further extended to 30 June 2020, the exemptions to the provisions concerning the supply of natural gas distribution services introduced by Resolution No. 116/2020/R/com, as amended and supplemented, with reference to the management of possible payment default by users. This entailed suspending enforcement against each distribution user, of the guarantees provided by them or, failing such, the notice to comply, if at least 90% of the invoiced amount had been paid and giving the gas distribution companies the right to pay to CSEA the higher of the following sums i) 90% of the monthly turnover for general system charges relating to invoices due on 30 June 2020 and ii) the portion actually collected.

With Resolution no. 226/2020/E/com of 23 June 2020, the Authority extended to 31 March 2021, the deadline initially set at 30 June 2020 for the execution of the inspection programme pursuant to Resolution no. 531/2019/E/com on compliance with the Integrated Information System (IIS).

With Resolution no. 248/2020/R/com of 30 June 2020, the Authority approved urgent measures related to the COVID-19 epidemiological emergency following the consultation process developed in Document no. 193/2020/R/com aimed at reintegrating both the economic items for which payment by sellers to distributors was provisionally suspended and the general system charges not paid to CSEA and GSE by distributors on a transitional basis.

With regard to the balance of the amounts not paid by users of the Gas distribution service during the months of April, May and June 2020, the resolution provides that:

  • il the distributor is required to notify each seller by 31 July 2020 of the total amount due and not yet paid pursuant to Resolution no. 116/2020/R/com;
  • each seller can choose between: (a) a lump-sum payment (one-off payment) or (b) an instalment plan consisting of three-monthly instalments of a constant amount, without interest, in the latter case giving notice within ten working days following receipt of the notice;
  • in the event of non-compliance with the payment terms provided for in the instalment plan, the distributor is required to initiate enforcement of the guarantees given by the sellers or, in the absence of a guarantee given, to send them notice to comply;
  • the distribution companies shall pay the CSEA (within 60 days from the end of each two-month period), the General System Charges collected from the payment of the one-off sum or instalment plan, net of what has already been paid and up to the total sales in the period of application of Resolution no. 116/2020/R/com and subsequent amendments and supplements;
  • access to the reputational guarantee of the rating of sales companies continues to be granted to all those users who, starting from 31 January 2020, suffered a downgrade due to the economic context related to the COVID-19 epidemic, for 12 months from the time the downgrade took place and provided that the cause of the downgrade is the health emergency.

With Resolution no. 432/2020/R/com of 3 November 2020, the Authority introduced extraordinary measures regarding the output-based regulation of gas distribution services:

  • in relation to the slowdown in the replacement of network sections in non-compliant materials, it decreased the minimum obligation set for 31 December 2022 from 40% to 30%, leaving the deadlines for the subsequent intermediate and final obligations unchanged (75% in 2024 and 100% in 2025);
  • it stated that any applications for a derogation from the time frames provided for in the service quality regulation may be submitted by 30 June 2021, rather than 31 December 2020.

With Resolution no. 501/2020/R/gas of 1 December 2020, the Authority updated the deadlines of the gas smart meter commissioning obligations in at least 85% of existing redelivery points, with a metering unit class of less than or equal to G6, to 31 December 2021 for distribution companies with more than 200,000 end customers and 31 December 2022 for companies with between 100,000 and 200,000 end customers.