AEEG activities on water services

The Authority began its activities in the water services sector at the start of 2012 by setting up a working party to perform a reconnaissance exercise on the position of the sector, to map the sector’s operators and stakeholders and to propose potential organisation charts for performing the new duties assigned to it.

 

In terms of the activities carried out by the Authority in 2012, please note the following:

  •  by resolution no. 74/2012/R/idr of 1 March 2012 the Authority launched procedures for adoption of the tariff measures and for the start of water service data and information collection activities,
  • with consulting document no. 204/2012/R/idr of 22 May 2012, the Authority launched a public consultation for the adoption of water service tariff measures and, within the context of that public consultation process, a series of seminars were organised to illustrate the content of that document and collect comments and observations from all interested parties,
  • with consulting document no. 290/2012/R/idr of 12 July 2012, the authority launched an additional, more specific public consultation concerning a temporary tariff method to be applied from 1 January 2012 to 31 December 2013. The Authority decided to formulate a temporary tariff method proposal essentially as a result of the current level of heterogeneity in the tariff regulations applied throughout the country and the resulting need to analyse in more detail the various contexts and points of departure as well as the opportunity for a gradual intervention pending the more complete formulation of a fully applied tariff model,
  • with resolution no. 347/2012/R/idr, subsequently supplemented and amended by resolutions no. 412/2012/R/idr and 485/2012/R/idr, integrated water service operators were given some obligations to send significant data in order to define tariffs for the years 2012 and 2013,
  • with resolution no. 585/2012/R/idr of 28 December 2012, the Authority approved the temporary tariff method (MTT) for determining tariffs in the years 2012 and 2013,
  • with resolution no. 586/2012/R/idr of 28 December 2012, the Authority approved the first directive for transparency in integrated water service billing documents, establishing the obligation for operators to provide users with the service charter and information on the quality of water supplied on their websites by 30 June 2013, and to provide an online Glossary with the main terms used in the Integrated water service by 1 January 2014,
  • with resolution no. 587/2012/E/idr of 28 December 2012, the Authority launched an enquiry concerning some possible irregularities which emerged during the preliminary enquiries aimed at defining the temporary tariff method, in order to identify any behaviour which is not compliant with regulations in force or is damaging to user rights as regards the following aspects (i) operator compliance with the prohibition against billing the waste water treatment service to customers not connected to the sewerage network as well as implementation of Ministerial Decree of 30/09/2009 and (ii) the inclusion of local equalisation items in bills. The procedure must be completed within 180 days.

In the first few months of 2013, the Authority also issued the following documents:

  • resolution no. 73/2013/R/idr of 21 February 2013 concerning the approval of guidelines for verifying the update of the area plan’s economic-financial plan, for the purpose of the tariff proposal for the years 2012 and 2013, which must be prepared by Area Authorities by 31 March 2013 (article 6, resolution no. 585/2012),
  • resolution no. 86/2013/R/idr del 28 February 2013 governing the integrated water service guarantee deposit,
  • resolution no. 87/2013/R/idr of 28 February 2013 for the launch of a procedure to adopt provisions concerning the definition of obligatory contractual conditions for the management of delinquent end users of the integrated water service. The resolution sets the deadline for completing the procedure at 180 days from its publication, and also establishes, inter alia, that pending the adoption of the provisions, operators cannot suspend the supply of particular user categories,
  • resolution no. 88/2013/R/idr of 28 February 2013 regarding the approval of the Temporary Tariff Method for ex-CIPE (MTC) management for the determination of tariffs for the years 2012 and 2013. The resolution also approves some amendments and supplements to resolution 585/2012 (MTT),
  • consulting document 82/2013/R/com published on 1 March 2013 relating to the initial guidelines concerning accounting unbundling obligations for water service providers and concerning the revision and simplification of accounting unbundling provisions pursuant to resolution no. 11/2007. The deadline for sending comments is 30 April 2013.

The key principles of resolution 585/2012 concerning the tariff method are summarised below:

  • the temporary method identifies the methodology to be used at the national level to determine tariffs for the years 2012 and 2013, anticipating the general outline of the definitive methodology expected to apply beginning in 2014, and regards all services managed excluding those that currently adopt the CIPE tariff method,
  • the resolution identifies the role of Area Authorities for the purpose of determining the tariff, defining activities, methodologies and timing,
  • a procedure for gradually shifting from the criteria of the standardised method (MNT) to those of the temporary method (MTT) is introduced, along with some specific mechanisms to guarantee the maintenance of operator cash flows and current financial stability,
  • to protect end users (and operators) from the impact, for the two years in question, the obligation is introduced for a specific enquiry to be conducted on the validity of information provided and the correct application of the new criteria, in cases of tariff fluctuations above the limits set forth in the MNT,
  • the new methodology sets forth that a tariff breakdown by operator/tariff area analogous to the pre-existing breakdown shall be maintained during the transitory phase,
  • the new methodology reconciles the results of the referenda with European and domestic regulations on compliance with the principles - confirmed by the Constitutional Court - of full cost recovery and “who pollutes pays”,
  • the return on invested capital is cancelled and instead the cost of the financial resource is recognised in observance of the aforementioned principle of full cost coverage,
  • in order to avoid inefficient or opportunistic behaviour, the cost of the financial resource is not recognised based on the submission of documented expenses, but rather through standard references (finance and tax costs). The post-tax finance cost for investments is equal to 4.4%, plus IRES assessed on a lump-sum basis and IRAP assessed on the basis of 2011 actual data,
  • the revenue guarantee principle is established (confirmed), along with the requirement to adjust any differences between revenues ensured by the tariff breakdowns applied to end users and those recognised in the updated revenue restriction (net of the contribution of “other revenues”),
  • the temporary method is based on ex-post regulation criteria in place of the ex-ante regulation of the MNT (which in any event required ex-post verification during periodic tariff reviews); therefore, the tariff is calculated with reference to accounting data for the year n-2 (regulatory time lag) and the tariff adjustments are recognised in the year n+2,
  • the temporary method establishes the regulatory useful life for each category of fixed assets for the purpose of calculating depreciation and amortisation expense, as well as the principle that assets - of the operator and of third parties - are recognised in terms of the revalued historical production cost,
  • the MTT contains a detailed definition of the activities of the integrated water service and other water services and establishes that revenues generated by other water services must contribute towards covering eligible costs. In order to ensure that those important activities are carried out, profit sharing has been introduced for other water services, with the recognition of a lump-sum margin to the operator,
  • in compliance with the cost coverage principle, the new method updates operating and capital costs based on actual inflation in place of the planned inflation used in the MNT,
  • in the assessment of the operator’s net invested capital, an lump-sum amount has been introduced to compensate net working capital,
  • IRAP is considered to be an operating cost which can be made more efficient, subject to the gradually implemented mechanism,
  • a tariff component defined New Investments Fund (FoNI) has been introduced, which represents an advance to finance new investments subject to a restriction in terms of intended use. It is up to the Area Authority to decide whether and to what extent that tariff component should be included in the tariff.

With regard to the area of application, resolution 585/2012 establishes that the MTT applies to services that were compliant with Law 36/94 and Legislative Decree 152/2006 as at 31 July 2012 and those which, although not compliant, applied the standardised method or another tariff method other than the CIPE at that same date. Some of the services excluded from the tariff update are those which had not adopted the Service Charter on the aforementioned date as well as services which, in violation of applicable regulations, billed domestic users on the basis of minimum consumption commitment.

The Authority defines the following cost components of the service, to be recognised in the tariff:

(i) costs of fixed assets, understood as the sum of finance costs, tax costs and investment repayment instalments (amortisation),
(ii)
management costs which can be reduced, understood as operating costs arising in the context of service management, upon which the operator may act to increase efficiency,
(iii)
management costs which cannot be reduced, understood as external operating costs, the determination of which does not depend upon management decisions in the period considered (electricity cost, wholesale supply cost, loans and fees recognised to local bodies, Authority operating costs, other cost components),
(iv)
any advance component to finance new investments.
The tariff components described above, recognised for the years 2012 and 2013, derive from a process of gradual convergence, over four years, of operating costs which can be reduced and capital costs according to the plan towards costs based on the tariff method.

The Authority also establishes the inclusion in the tariff restriction of tariff adjustment items relating to years prior to 2011 provided they are approved by the applicable parties by 30 April 2012; resolution 585/2012 establishes the suspension of adjustments for 2011 pending the response from the Council of State to the request for an opinion sent by the Authority on 23 October 2012, to which any definition of calculation procedures and methods relative to the return to users of the return on invested capital component for the 21 July - 31 December 2011 period is also subject, following the proclamation of the results of the popular referendum.

The request for opinion put forward by the Authority regards the legitimacy to act in relation to issues regarding periods prior to the transfer of sector regulatory functions. In response to the query, the Council of State issued on opinion on 25 January 2013, establishing (i) the responsibility of the Authority in the period of 21.7.2011/31.12.2011, based on the assignment to that party of the functions formerly under the responsibility of the now defunct National agency for water regulation and supervision (art. 21, paragraph 19 of Law Decree 201/11) and (ii) the conflict of the criterion “of the adequacy of the return on invested capital” (so-called 7%), contained in Ministerial Decree 96, with the regulatory framework resulting from the referendum.

Therefore, the Council of State ordered the Authority to take the opinion into consideration when adopting new tariff measures, without prejudice to compliance with the overall and articulated national and European regulatory framework, which requires cost coverage to be ensured.

On 31 January 2013, the Authority approved resolution no. 38/2013/R/idr with which it launches a procedure to determine:

a)   the criteria based on which Area Authorities will have to identify, without prejudice to the full cost recovery principle, the amounts unduly paid by each user for return on invested capital in the period 21 July 2011 - 31 December 2011, to be returned to the user,

b)   procedures and tools to concretely ensure that the aforementioned amounts are returned to end users,

c)    the methods that the Authority will use to verify and approve Area Authority decisions,

It also confers broad powers upon the Person responsible for the proceeding - the Head of the Special Tariffs and Water Service Quality Office - to obtain all information and elements for assessment needed to complete the proceeding, and, for the parties that may be called to participate, provides for the application of penalties in the event of refusal, omission or delay, without justified cause, in providing the information requested, or in the event of the transmission of false information or documents.

It is also sets forth that all parties concerned - with particular reference to associations representing consumers and users, operator trade associations, Area Authorities, the Regions and other public bodies concerned, as well as other collective and widespread stakeholders involved in this proceeding - may submit documents, briefs and observations within 30 (thirty) days of publication of this resolution.

The proceeding duration has been set at 120 days, beginning on the publication date.

The Group has estimated that the cost of the return resulting from the 2011 referendum outcome is 7.9 million euros.

 

With respect to the procedural provisions:

  • by 31 March 2013, the Area Authorities shall update or prepare, if not yet drawn up, the financial and economic plan for each area plan on the basis of the new methodology. Changes made during the update of the economic-financial plan which cause an increase in the difference between plan costs, as identified prior to the update, and costs calculated pursuant to Annex A of resolution 585/2012, net of costs which cannot be reduced, are deemed void,
  • if not updated by 31 March 2013, the contractual clauses and deeds governing relations between operators and the applicable authorities which are incompatible with the resolution shall be void,
  • the tariff shall be set forth by the Area Authorities and transmitted to AEEG and the operators by 31 March 2013. Within the three subsequent months, the Authority shall approve the tariffs pursuant to article 154, paragraph 4, Legislative Decree 152/206, possibly also determining the tariffs on the basis of information available, with a view to user protection, if the Area Authorities do not send them by the established deadline, 
  • beginning on 1 January 2013, operators are required to apply to users (i)until the Area Authorities determine the tariffs, the tariff applied in 2012 with no change or the 2013 tariff if determined by the Area Authorities prior to the approval of resolution 585/2012 provided the operators have not changed the tariff breakdown, (ii) subsequent to determination by the Area Authorities and until approval by AEEG, the 2012 tariffs multiplied by a factor (theta2013) determined by the Area Authority, (iii) following the Authority’s approval of the tariffs, the 2012 tariffs multiplied by the theta2013 approved by the Authority,
  • the difference between tariff revenues determined by the application of the temporary tariffs pursuant to points (i) and (ii) and those calculated on the basis of point (iii) shall be subject to adjustment subsequent to AEEG’s approval,
  • by 30 June 2013, operators are required to provide the Authority with the data useful for determining the revenue restriction update (volumes, pass-through costs, changes in the basis of consolidation, etc.). The adjustment, adjusted for inflation, shall be recognised in the tariff in the year n+2.

 

Please note that the main Group Companies submitted an appeal to the Lombardy Regional Administrative Court against the Italian Authority for Electricity and Gas for the cancellation of resolution 582/2012.