Service Concession Arrangements

The ACEA Group operates water, environmental and public lighting services under concession. It also manages the selection, treatment and disposal of urban waste produced in municipalities in ATO 4 Ternano–Orvietano via SAO and the ARIA Group.

Before going on to describe the individual service concessions, this section provides information on key issues regarding waste water treatment tariffs and the regulation of local public services, particularly focusing on the new measures issued in 2012 by AEEG, which took over water service regulation and control functions at the end of 2011.

 

Constitutional Court sentence 335/2008

Constitutional Court sentence 335 of 10 October 2008 declared Article 14, paragraph 1 of Law 36/94 to be unconstitutional, following inclusion of this article in the Consolidated Environment Act, under Article 155, paragraph 1 of Legislative Decree 152/2006. This legislation establishes that the tariff component covering waste water treatment is payable by end users “even if there are no treatment plants or such plants are temporarily inactive”.

The judgement is based on the opinion that the integrated water services tariff represents payment for services provided under contract and not a form of taxation. On this basis, the Court has therefore found fault with the part of the above provisions that establishes that the tariff component regarding waste water treatment is to be paid by end users even if there is no “direct link between the payment of this component and effective provision of the service for which the payment is due”. Basically, the Supreme Court ruled that “the congruity of a system for financing integrated water services, created on a unitary basis by lawmakers based on the concept of reciprocity, on the sufficiency of a utility contract to establish a payment obligation and, therefore, on a single tariff is, in conclusion, prejudiced by the application, as a method of financing, of a compulsory charge, the reason for which unjustifiably conflicts with the above unitary nature of the system, in that it introduces a payment obligation not matched by provision of a corresponding service”.

In implementation of the Constitutional Court sentence and to make up for the resulting regulatory gap, Law no. 13 of 27 February 2009 was approved. Article 8 sexies of this legislation, “Measures regarding integrated water services”, contains an all-round solution to be included in the tariff criteria ratified by the Consolidated Environment Act and the so-called Standardised Method (Ministerial Decree of 1 August 1996), and, above all, by Articles 149 and 151 of Legislative Decree 152/2006, which confirm the Area Authority’s obligation to safeguard the operator’s financial position within the ATO.

In this sense, the above Article 8 sexies contains a definition of the tariff component regarding waste water treatment linking it with the entire process involved in providing the services. In particular, it introduces a new binding component, consisting of the sum of the charges incurred, as expressly identified and programmed in the area plans, in carrying out the overall activities involved in water treatment, including the design, construction and completion of plants and the related investments. This new component “is payable to the operator by end users, in cases where there are no treatment plants or such plants are temporarily inactive, from the start-up of the tender procedures for the design or completion of the infrastructure necessary in order to provide the treatment service, provided that such procedures are implemented in accordance with the established schedule”.

The second paragraph of Article 8 sexies also governs the method of reimbursing the sums received from end users, as required by the Constitutional Court sentence: (i) the operator must reimburse the tariff component not due, either in a lump sum or in instalments, within five years as from 1 October 2009; (ii) the design, construction and completion costs incurred are to be deducted from the rebate; and (iii) the rebate must be calculated by the operator’s Area Authority within 120 days of the date the legislation comes into force (by the end of June 2009).

In compliance with legal provisions, in September 2009, the Ministry for the Protection of the Environment, Land and Sea issued a decree (published in Official Gazette no. 31 dated 8 February 2010) concerning the “Identification of criteria and parameters for the rebate to end users of the tariff component not due for water treatment services”. This decree – that defines the methods for the rebate of the water treatment tariff for the users connected to the sewerage network but not served by treatment plants according to the said Article 8 sexies, paragraph 4 – sets out three relevant points:

  • the prescription period for the reimbursement request is five years,
  • the rebate is subject to the user’s request supported by relevant documents,
  • the rebate must not be to the detriment of the full coverage of the investment and operating costs necessary for the realisation of the Area Plan and, as a result, the Area Authorities are authorised to make extraordinary tariff changes and, under specific conditions, also as an exception to the price "K" limit.

With regard to procedure, the decree sets out the following:

  • the operator makes available to the Area Authority any relevant information in order for the Authority to calculate the rebate amount, i.e. (i) the list of users connected to the sewerage network but not served by treatment plants or plants that are temporarily inactive; (ii) the tariff component covering water treatment charged to each user; and (iii) any information that is useful to calculate deductible charges pursuant to Article 5 of the decree,
  • the Area Authority – after having assessed the correctness of the information sent by the Operator – establishes the amount (including interest) to be returned to each single eligible applicant and sets out the timetable for the rebate, that should be carried out within five years from 1 October 2009;
  • the Area Authority is authorised to make extraordinary tariff amendments, also in derogation from the price “K” limits, in order to cover the rebate charges and, it should be reiterated, to avoid prejudicing the full coverage of the investment and operating costs necessary for the realisation of the Area Plan.

The procedure included in the decree – which complies with the general principles that regulate the integrated water services with regard to the obligations of the Area Authorities and operators, and to any related right – underlines that the charges resulting from the rebate obligation (still being identified by the Authorities for certain water companies) should be fully covered by the tariff measures that the Area Authorities will adopt in order to find all financial resources needed. Therefore, the regulatory assets resulting from the right to receive an extraordinary tariff will determine the liability associated with the rebate obligation.

 

Local public services

Abrogative referendums of 12 and 13 June 2011

Following the referenda carried out on 12 and 13 June 2011, article 23-bis of Law Decree 112/2008, converted to Law 133/2008 as amended and supplemented by article 15, paragraph 1 of Law Decree 135/2009, converted to Law 166/2009, regarding economically significant local public services, as well as article 154, paragraph 1 of Legislative Decree 152/2006 (Environmental Code), the part which referred to "the adequacy of the return on invested capital" amongst the criteria for determining the water tariff, was repealed. Furthermore, the approved referendum petitions require the abolition of Italian Presidential Decree 168 of 7 December 2010, including the regulation implementing the provisions of article 23-bis, while leaving the current temporary provisions of article 170 of Legislative Decree 152/2006 (not subject to referendum) unchanged, which involve the application of the Standardised Method pursuant to Ministerial Decree of 1 August 1996 until the adoption of a new tariff method.

In general the effects of the abrogative referenda, which in accordance with Law 352/1970 are declared by the President of the Italian Republic by his own decree of 20 July 2011, do not result in any restoration of the standards repealed by the regulatory provisions successfully passed by the referendum (rulings of the Constitutional Court 24/2011, 31/2000 and 40/1997) and effective ex nunc according to the provisions of article 75 of the Constitution.

Given the aforementioned circumstances, it must be considered that the lack of a transitional regime for prior concessions awarded pursuant to article 23-bis, also removed the series of reasons for their termination, with particular reference to in-house management, management assigned directly to mixed companies in which selection by tender did not consider both the quality of the partner and the attribution of operating tasks, as well as direct assignments as of 1 October 2003 to listed companies or their subsidiaries.

The interim effect of the phenomena described above was the removal from Italian law of the limits on in-house rights which led to a stricter governance than EU rulings on such issues, to leave room for the regulations and principles consolidated at European level (EU Treaty and Court of Justice case law).

Lastly, it must be noted that in the assessment of the effects of the abrogative referenda, the amendment to relevant regulations as a result of Law Decree 70/2011, converted with amendments to Law no. 106 of 12 July 2011, must be taken into consideration. This established the National agency for water regulation and supervision, redefining responsibilities and methods for determining integrated water service tariffs. In fact, based on the aforementioned regulation, the Agency - the functions of which as explained below were transferred to the AEEG in the interim - has to define the cost components to determine the water tariff and prepare the resulting tariff method, also taking into consideration "in compliance with the principles set forth by EC regulations, the financial cost of the service supply and the related environmental and resource costs, in order to fully realise the principle of cost recovery and the principle ‘who pollutes pays'". Under Italian Law 214/2011 the Agency was disbanded and the regulatory and control duties over water services were transferred to the AEEG (see below).

 

Local public service regulations between the “Stabilisation” Decree and Constitutional Court Sentence 199/2012

Law Decree no. 138 of 13 August 2011, “Additional urgent measures for financial stabilisation and development”, as referred to in the amendments introduced by Law Decree 1/2012, dictates the regulations for local public services of general economic interest (SGEIs). Specifically, art. 4 (Adaptation of local public service regulations to the public referendum and to EU regulations) - excluding the application of this article to the integrated water service (except in relation to rules on incompatibility), the electricity and natural gas distribution service and the management of municipal pharmacies, but confirming application of the regulations to the public lighting service - the legislator reintroduces almost all the former provisions of art. 23-bis into Italian law and to its implementation rules (Presidential Decree 168/2010).

It envisages verification of the feasibility of competitive management of local public services of general economic interest and the assignment of exclusive rights if, based on market analysis, a private economic initiative on the free market proves unsuitable in guaranteeing a service that meets the needs of the community. Upon the outcome of the verification the authority adopts a framework resolution (which for area authorities with a population of more than 10,000 inhabitants must be accompanied by a mandatory judgment from the Antitrust Authority) which illustrates the preliminary enquiry conducted and highlights, for sectors removed from liberalisation, the reasons for the decision.

The in-house assignment procedure may only be carried out if the annual economic value of the service subject to assignment does not exceed 200,000 euros.

Lastly, the provision regarding the transitional regime for non-compliant assignments is restored, previously identified in the repealed art. 23-bis with a mere postponement of the deadlines and the introduction of an exception to early termination of in-house or direct management combined with the option of assigning a new operator for a maximum three years. Important for the ACEA Group is paragraph 32d), according to which “direct assignments approved at 1 October 2003 to public limited companies already listed on the stock exchange as at that date and to their subsidiaries pursuant to art. 2359 of the Italian Civil Code, shall terminate on the expiry date envisaged in the service agreement, provided that the investment held by public shareholders as at 13 August 2011, or shareholders’ association, is gradually reduced by means of public procedures or forms of private placements with professional investors and industry operators to no more than 40 per cent by 30 June 2013 and no more than 30 per cent by 31 December 2015. Where such conditions are not met, the assignments shall terminate with no option to extend and without the need for a special resolution by the awarding party, respectively, on 30 June 2013 or 31 December 2015”.

Art. 3-bis of this regulation, in addition to envisaging the further restriction for in-house operators as being subject both to the internal stability agreement and to publicistic rules for the purchase of goods and services and for staff recruitment, establishes the minimum provincial catchment area into which the Regional Governments must organise the provision of local public services by 30 June 2012. The minimum size also affects the priority assignment of public financing, “except with regard to project financing for local public services of general economic interest co-financed from European funds”.

By sentence no. 199 of 20 July 2012 the Constitutional Court declared the constitutional illegitimacy of art. 4 of Law Decree 138/2011 (“Adaptation of local public service regulations to the public referendum and to EU regulations”), converted with amendments to Law 148/2011 in both its original and amended wording, in that it restores the regulations repealed by the referenda of June 2011. In the Court’s opinion, in fact, art. 4 - adopted after the post-referenda repeal of art. 23-bis of Decree Law 112/2008, containing the previous regulations on local public services of general economic interest - set forth new regulations on an issue identical to that repealed, furthermore reproposing almost literally the different provisions of the repealed art. 23-bis and its implementing rules (Presidential Decree 168/2010). The regulation in question in effect introduced a much stricter regulation than the EU rulings, a scenario that the referenda intended should be excluded.

As a result of the sentence in question, Acea has to consider that the series of conditions to which it was subject for termination of the concession agreements under the terms of previous regulations no longer apply.

 

Regulation of local public services after Law no. 221 of 17 December 2012 converting Law Decree 179/2012 (“Growth Decree 2”).

The measure in question is of particular interest due to its establishment of rules which, in fact, reintroduce a framework regulation of local public services of general economic interest into the domestic system. Specifically, art. 34 of Law 221/2012 collects the national regulations on local public services (networked or non-networked) with the purpose, as is noted in the Technical Report which accompanied the bill, “of ensuring compliance with European Union law and the certainty of rules for the management of local public services of general economic interest for the protection of the market, end users and competition”.

 

Assignment regulation. 

The awarding body is exclusively responsible for assessing the service assignment procedures, provided this is carried out on the basis of a dedicated, grounded report on the “reasons” and the “fulfilment of European legal requirements for the chosen form of assignment. The regulation also refers to the guarantee of equality amongst operators, the economic efficiency of the service” and a suitable disclosure to the reference community. For assignments existing when the regulation comes into force, the report in question must be published by 31 December 2013, the date by which assignments which are “not compliant with European regulatory requirements” must be updated. Failure to comply with one of the aforementioned directives is penalised with assignment termination on 31 December 2013. On that date, assignments which were not due to expire shall in any case be terminated.

Paragraph 22 of the law, which sanctions the termination of “direct assignments approved at 1 October 2003 to public limited companies already listed on the stock market as at that date and to their subsidiaries pursuant to art. 2359 of the Italian Civil Code” on the date set forth in the deeds governing the relationship, establishes the expiry of those assignments sine die on 31 December 2020, “with no option to extend and without the need for a special resolution by the awarding party”. Finally, the condition of the economic value totalling 200,000 euros or less, set for the direct acquisition of goods and services used in operations, pursuant to art. 4, paragraph 8, Law Decree 95/2012, is eliminated.

 

The organisation of local public services of general economic interest 

Instead, as concerns the criteria that should inform the organisation of networked local public services, the provision pursuant to art. 3-bis of the aforementioned Law Decree 138/2011, as supplemented by paragraph 23 of article 34 in question, remains within the regulatory system. The legislator introduces into art. 3-bis paragraph 1-bis, which sets forth “an exclusive reservation of functions” inherent to the organisation of the aforementioned services, attributed to the bodies which oversee the areas pursuant to paragraph 1 of art. 3-bis. The regulation refers in particular to the choice of management form, the determination of end user tariffs (insofar as they are responsible), the assignment of services and control over the regulation.

Art. 34, paragraph 29 also updates art. 154, paragraph 4, of Legislative Decree 152/2006 (Environmental code) with regard to the “integrated water service tariff” in order to create the necessary regulatory connection between sector regulations and additional legislative measures that have radically changed the structure of responsibilities within integrated water services. The regulation now sets forth that “in order to prepare the Economic-financial plan referred to in article 149, paragraph 1, letter d)”, the “competent party” “shall prepare the basic tariff, in observance of the tariff method pursuant to article 10, paragraph 14, letter d), of law decree no. 70 of 13 May 2011, converted with amendments by Law no. 106 of 12 July 2011, and send it to AEEG for approval”.

 

Elimination of the national agency for water regulation and monitoring and of Co.N.Vi.Ri (National Commission for Monitoring Water Resources)

Art. 21, Decree Law no. 201 of 6 December 2011, converted to Law 214/2011, containing “Urgent measures for the growth, balancing and consolidation of public accounts” envisages the disbandment of certain authorities and organisations from the date of entry into force of the decree. Table “A”, annexed to the decree law and relating to the disbanded authorities, also includes the National Water Regulation and Supervisory Authority established by Italian Law Decree 70/2011. The December decree establishes that the functions assigned to the disbanded authorities, the financial and instrumental resources, including implicit and explicit legal relations, are transferred - with no requirement to follow settlement procedures - to the corresponding administrations indicated in that same annex. Art. 21, paragraph 19 states “With regard to the National Agency for Water Regulation and Supervision, all functions relating to the regulation and control of water services are transferred to the AEEG, and exercised with the same powers assigned to the Authority by Law no. 481 of 14 November 1995”. The functions to be transferred are identified by the Decree of the President of the Council of Ministers on proposal of the Ministry for the Protection of the Environment, Land and Sea, to be adopted within 90 days from the date this Decree becomes effective. Then at the same time and without further indications, paragraph 20 envisages disbandment of the National Committee for Water Resource Supervision (Co.N.Vi.Ri.).

On 3 October 2012, Decree of the President of the Council of Ministers of 20 July 2012 was published. This decree precisely identifies the Integrated Water Service regulatory functions transferred to the AEEG and those pertaining to the Ministry of the environment and protection of the land and sea.

According to that decree, the Ministry shall continue to exercise the water service functions not transferred to AEEG. Specifically, it shall:

  1. adopt policies to ensure coordination of functions inherent to water resource usage at all levels of planning;
  2. adopt policies and set resource quality standards pursuant to Part III of Legislative Decree no. 152/06 and Com. Directives;
  3. define criteria to favour water savings and water usage efficiency and regarding waste water recycling;
  4. define criteria for the definition of the environmental cost and the resource cost for the various sectors of water use, also in proportion with the level of environmental pollution generated by the various types and sectors of use and the resulting costs to the general public in implementation of the full service cost recovery principle and the principle of “who pollutes pays”;
  5. define criteria for determining the coverage of costs relative to water services, other than the integrated water service and each individual service that it includes, as well as collection and abstraction services for multiple uses and water treatment services for mixed civil and industrial use, also in proportion with the level of environmental pollution generated by the various types and sectors of use and the resulting costs to the general public;
  6. define the general integrated water service quality targets, with input from the regions, the operators and consumer associations;
  7. be able to define policies to achieve solidarity-based equalisation amongst areas with differing water resource supplies by differentiating tariffs.

 

Elimination of the Area Authorities

Law no. 42 of 26 March 2010 - “Urgent interventions concerning local authorities and regions” – includes article 186-bis in the 2010 Finance Act (Law no. 191/2009). This sets out that, after one year from the entry into force of this law (i.e. as of 1 January 2011), the Area Authorities for the management of water resources and the urban waste integrated management referred to in articles 148 and 201 of Legislative Decree no. 152/2006, are eliminated. At the same time, Regions can award, by way of law, the functions that were exercised by the Authorities, in compliance with the principles of subsidiarity, diversification and adequacy.

On 26 February 2011, Law 10/2011 was published (which converted Law Decree no. 225 of 29 December 2010, the so–called "mille proroghe"), extending the terms set out in legislation and the urgent interventions concerning tax issues and support to companies and households. Article 1, paragraph 1 establishes the extension to 31 March 2011 of the deadline for disbandment of the Area Authority. Paragraph 2 of the same article sets out the possibility to envisage – by means of one or more decrees of the President of the Council of Ministers, in accordance with the Ministry of Economy and Finance - a further extension of the above-mentioned terms until 31 December 2011. By decree of the President of the Council of Ministers on 25 March 2011, the deadline of 31 March 2011 was extended until 31 December 2011. The subsequent “Decreto Mille proroghe” (Law Decree no. 216 of 29 December 2011), makes provision for the deferment of the expiry of the Area Authorities handling the integrated water service and integrated waste management from 31 December 2011 to 31 December 2012, based on the necessary guarantee of continuity in the provision of local public services and guarantee of an “additional transitory period, for the transfer of functions from the Area Authorities to new operators identified by the Regions, and for the adoption of the relevant proper coordination initiatives”.

Note that despite postponement of this deadline by one year from the end of 2011, the Tuscany Regional Government issued laws on this issue, arranging the global reorganisation of the integrated water service, starting with the reassignment of functions and powers now held by the Area Authorities. In fact, Regional Law no. 69 of 28/12/2011 established the Tuscan Water Authority which assumed all functions and responsibilities previously held by the Area Authorities and, as at 1 January 2012, which took on all income and expense generating legal relations of the eliminated authorities (art. 52). The AIT organisation will include a central structure at regional level and 6 branch structures (areas pursuant to art. 13) which faithfully reproduce the area distribution of the 6 Area Authorities. On expiry of the concession agreements existing at the date of entry into force of the regional law, the water service will be assigned to a single operator. In the service assignment documents the Water Authority will indicate the timing and methods for reimbursement to the outgoing operator for any investments not yet amortised.

Art. 50 of the same law states that the bodies of the Authority are to be established by 30 June 2012 and that, with effect from 1 January 2012 and until actual start-up of the Authority bodies, the functions of such bodies will be performed by six commissioners identified as the chairmen of the Boards of Directors of the disbanded Authorities in office at 31 December 2011, each of which operating in reference to their respective area and making use of the technical support of the directors of the disbanded Authorities as at 31 December 2011. The steps toward constitution of the new Regional Authority have commenced: the general meetings for the six areas have been held and the Authority’s bodies were set up in July, including appointment of the Director.

 

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 launched 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:

  1. costs of fixed assets, understood as the sum of finance costs, tax costs and investment repayment instalments (amortisation),
  2.  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,
  3. 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),
  4. 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:

  • 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,
  • procedures and tools to ensure that the aforementioned amounts are actually returned to end users,
  • 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 the 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 all 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.

 

Services under concession

The awarding party of the public lighting service is Roma Capitale under a thirty-year concession arrangement (effective from 1 January 1998), for which no fee is paid. The concession is implemented through signing the appropriate service contracts: the agreement in force until 31 December 2010, which regulated the period from June 2005 to May 2015, was amended by adding a supplementary agreement signed on 15 March 2011 and entering into force at the beginning of the year.

The supplements regard the following elements:

  • alignment of the term of the service contract with the expiry of the concession (2027), given that the contract is merely additional to the agreement;
  • annual update of the compensation concerning consumption of electricity and maintenance;
  • annual increase in the lump-sum payment with regard to the new lighting points installed.

Moreover, the investments for the service can be (i) required and financed by the Municipality or (ii) financed by ACEA: in the first case, such works will be paid based on a price list agreed by the parties (and subject to review every two years) and will result in a percentage decrease in the ordinary fee. In the second case, the Municipality is not bound to pay a surcharge; however, ACEA will be awarded all or part of the saving expected in both energy and economic terms according to pre-established methods.

Moreover, it has been established that qualitative/quantitative parameters shall be renegotiated in 2018.

Upon natural or early expiry - also due to cases envisaged under Law Decree no. 138/2011 - ACEA will be awarded an allowance corresponding to the residual carrying amount, that will be paid by the Municipality or the incoming operator if this obligation is expressly set out in the call for tenders for the selection of the new operator.

Finally, the contract sets out a list of events that represent a reason of anticipated revocation of the concession and/or resolution of contract by the will of the parties. Among these events, reference is made to newly arising needs linked with public interests, according to which ACEA has the right to receive an allowance according to the product, that is discounted based on the percentage of the annual contractual amount and the number of years until expiry of the concession.

On the basis of the number of public lighting plants as at 31 December 2009, the supplemental agreement establishes the ordinary annual fee as 39.6 million euros, including all costs relative to the provision of electricity to supply the plants, ordinary operations and ongoing and extraordinary maintenance.

Further information is provided in the section “Related Party Transactions”.

In relation to the effects of the repeal of article 23-bis on the ACEA concession, expiring on 31 December 2027, please see the paragraph on the abrogative referenda of 12 and 13 June 2011 and that regarding the Stabilisation Decree.

 

Integrated water-environmental services are provided under concession in the following regions:

  • Lazio, where ACEA Ato2 S.p.A. and ACEA Ato5 S.p.A. provide services in the provinces of Rome and Frosinone, respectively,
  • Campania, where G.O.R.I. S.p.A. provides services in the area of the Sorrento Peninsula and Capri island, the Vesuvio area, the Monti Lattari Area, as well as in the hydrographic basin of the Sarno river,
  • Tuscany, there the ACEA Group operates in the province of Pisa, through Acque S.p.A., in the province of Florence, through Publiacqua S.p.A., and in the provinces of Siena and Grosseto, through Acquedotto del Fiora S.p.A. It also provides the service in Lucca and province of Lucca through the companies Geal, Lunigiana and Azga,
  • Umbria, where the Group operates in the province of Perugia, through Umbra Acque S.p.A.

 

Lazio – ACEA Ato2 S.p.A. (Ato2 - Central Lazio - Rome)

ACEA Ato2 provides integrated water services on the basis of a thirty-year agreement signed on 6 August 2002 by the company and Rome Provincial Authority (representing the Authority for the ATO comprising 111 municipalities, including Roma Capitale). In respect of the award of the service, ACEA Ato2 pays a concession fee to all municipalities based on the date of actual acquisition of management which is expected to take place gradually: to date, the survey work (including that for municipalities already taken over) has been completed for 95 municipalities, equivalent to around 3,800,000 residents (source: ISTAT), equal to about 97.8% of the total.

As of 1 January 2011 the single area tariff is in place, as adopted by the Mayors' Conference of 14 December 2010 (resolution no. 6/2010).

On 17 April 2012 the Mayors’ Conference and Chairmen of Ato2 Central Lazio - Rome met to discuss and resolve upon various issues regarding the Average Area Tariff. The most important elements of the review concern:

  • the non-recognition of the 7% return on invested capital for investments included in the tariff after the outcome of the referenda with recognition only of the portion of amortisation: following the public decision expressed in the referenda of 12 and 13 June 2011 and subsequent Presidential Decree, repeal of a fair return on capital invested was acknowledged and it was decided that the effects of the repeal only refer to investments recognised in the tariff by the Mayors’ Conference after the date of the referendum, pending a new method for calculating the tariff (being prepared by the AEEG). In this case the Conference also envisaged a compulsory extraordinary tariff review to adjust the tariff to the new regulatory framework,
  • MALL parameter: the document “Application of the measurement parameter for MALL services” in which the STO (Technical Operations Secretariat) calculated the value of the parameter for 2006-2011 has been approved. Quantification of the amounts of penalties following application of the aforementioned values to operating costs used in calculating the tariff was defined in the Resolution on approval of the new average tariff for 2012-2032. It was decided to allocate this amount to investments in the elimination of non-compliant sewage disposal and to adapt the treatment plants to current regulations. The Operator will have sole liability for these investments, with no recognition in the integrated water service tariff. Furthermore, given the difficulty in calculating the MALL parameter, the Conference assigned the STO with the task of “preparing and proposing at the next Mayors’ Conference a system of additional contractual penalties for the Concession Agreement together with the adoption procedure for replacing the MALL”. Lastly, implementing the various indications of the Mayors, a series of provisions targeting the Operator were approved with a view to improving the service provided to end users,
  • tariff adjustments: the comparison between real and guaranteed revenue for 2006-2011 has generated tariff adjustments discounted to 2011 for approximately 94 million euros. This amount was generated by the increase in guaranteed revenue from recalculation of the reference costs, which took into consideration inflation for the period 1996-2003, from the effect of widening the gap between real and guaranteed revenue for previous years, from an error margin due to the differentiation of tariff increases in bands, from loss of real revenue for the Operator following Constitutional Court sentence 335/08 and from the drop in water consumption by end users. Reimbursement of these adjustments, including interest (totalling 118.4 million euros), will be arranged over six years at a constant rate (19.73 million euros) from 2012 as indicated in the table below.
€ millions 2012 2013 2014 2015 2016 2017
Guaranteed revenue 452.92 469.15 484.16 497.90 513.71 522.29
Tariff adjustments 19.73 19.73 19.73 19.73 19.73 19.73
Total 472.64 488.87 503.88 517.62 533.43 542.02

Consequently the new average tariff decided for the next three years is:

€ milioni 2011 2012 2013 2014
Ricavi garantiti 106 472.64 488.87 503.88
Volume d’acqua 106 m3 399.56 399.56 399.56
TARIFFA MEDIA cent. €/m3 111.98 118.29 118.29 126.11

and the resulting tariff increases planned are:

  • for 2012: 5.63%
  • for 2013: 3.43%
  • for 2014: 3.07%

The tariff review document of 17 April 2012 envisages that in the period 2012-2015 the Operator makes investments of 951.8 million euros, broken down as follows:

€ millions 2012 2013 2014 2015 Total
Investments from which no return on capital invested is due 50.00 50.00 150.00 150.00 400.00
Investments from which a return on capital invested is due 152.03 139.27 126.21 134.29 551.80
Total 202.03 189.27 276.21 284.29 951.80

The above investments must be in addition to those deriving from assessment of the MALL parameter, which must be completed by the Operator without recognition in the tariff. These total approximately 21 million euros distributed on a straight-line basis over the period 2012 to 2017 (around 3.5 million euros per year).

The Area Authority - through the STO - sent the text of the Resolution envisaging average tariff increases and annexed documents to the Ministry for the Environment and to the AEEG.

With reference to tariff adjustments, note that up to and including 31 December 2011 ACEA Ato2 recognised the sum of 53.6 million euros. This amount, compared with the total adjustments recognised by the Area Authority (94 million euros) in the review document described above generates a deviation in ACEA Ato2’s favour of approximately 40 million euros, which was recorded as revenue in 2012.

In fact, resolution 585/2012 confirms the inclusion of prior adjustments within the restriction on guaranteed revenues (VRG) provided they are approved by the applicable parties by 30 April 2012.

With regard to the FoNI (New investments advance fund) tariff component set forth in AEEG Resolution 585/2012, the Company estimated the allocation restriction established by article 7 of said resolution at 2.7 million euros.

With reference to the effects of ruling no. 335/2008, it should be noted that on 3 October 2011, the Operational-Technical Secretariat of the ATO 2 Authority sent ACEA Ato2 the appropriate document which makes provision for the quantification of the unitary deductible expenses in relation to untreated waste, whose elimination requires investments in treatment plants.

This quantification was performed for each plant, taking into account (i) the date of acceptance (in relation to management takeover of the Municipality in question), (ii) the date of elimination of the untreated waste following implementation of the investment made for that purpose.

As a result of said quantification for the 16 October 2003 - 15 October 2008 period, users will be entitled, upon specific request to be made on the basis of defined methods, to the reimbursement as follows:

  • in the case of users not relating to untreated waste analytically identified by the STO and the operator, the reimbursement, for each year of the treatment tariff applied to the user multiplied by the consumption in cubic metres billed,
  • in the case of users relating to untreated waste analytically identified by the STO and the operator, the reimbursement, for each year of the treatment tariff applied to the user, less expenses relating to each year for the corresponding year and the corresponding waste, multiplied by the consumption in cubic metres billed.

In the event in which the deductible expense is higher than the treatment tariff, the user is not entitled to any reimbursement.

As regards the tariff portion due by 16 October 2008, users not served by waste treatment must pay for the treatment service:

  • in the case of users not relating to untreated waste analytically identified by the STO and the operator, no amount will be charged,
  • for users associated with the untreated sewer systems as analytically identified by the STO and the operator, the tariff indicated in the STO notice multiplied by the cubic metres consumption billed. If this tariff proves higher than the waste treatment tariff in force in the Municipality for the year in question, the user will pay the latter tariff.

The maximum total amount of potential reimbursements is around 11 million euros before deductible costs.

The Area Authority must also identify the methods and timescales of repayments, as well as the related tariff coverage.

 

For information regarding the requirements of abrogated article 23-bis and the effects on the expiries of the ACEA Ato2 concession, expiring on 31 December 2032, please see the section dedicated to the referendums conducted on 12 and 13 June 2011

 

 

Lazio – ACEA Ato5 S.p.A. (Ato5 – Southern Lazio - Frosinone)

ACEA Ato5 provides integrated water services on the basis of a thirty-year agreement signed on 27 June 2003 by the company and Frosinone Provincial Authority (representing the Authority for the ATO comprising 86 municipalities). In return for award of the concession ACEA Ato 5 pays a fee to all the municipalities based on the date the right to manage the related services is effectively acquired.

The management of the integrated water service in the territory of ATO 5 - Southern Lazio-Frosinone involves a total of 85 municipalities (management still remains to be surveyed in the municipalities of Atina, Paliano and Cassino Centro Urbano) for a total population of around 480,000 inhabitants, about 460,000 inhabitants supplied and a number of end users equal to around 188,214.

No new acquisitions were formalised in the period.

The Mayor’s Conference of 14 January 2009 approved the exit from the ATO5 – Southern Lazio of the municipality of San Biagio Saracinisco; a formal document for the handover of the integrated water services was then signed on 6 October 2009.

The agreement requires that the price charged to each municipality should converge towards the price applied throughout the ATO within three years of management, and as of that same year there will be a tariff review every three years that takes account of the operating costs incurred and the investments made. On application of the price for each year the average tariff is adjusted to the total inflation rate, deriving from target annual inflation rates for each year since award of the contract.

Throughout the concession term the operator is responsible for the maintenance and upgrading of all assigned assets and of any assets subsequently constructed in compliance with the provisions of the Area Plan. New plants constructed in accordance with the Area Plan, which forms an integral part of the agreement, remain the exclusive property of the company and, pursuant to art. 35 paragraph 4 of the agreement, on expiry of the concession or in the event of its early termination, the company shall be paid an indemnity equal to the value of the assets yet to be depreciated. Such assets regard networks or portions thereof, plants and the related equipment constructed in accordance with investment plans.

As regards the effects of Constitutional Court sentence 335/2008, survey activities are basically complete: the portion of the water treatment tariff debited in the 2003-2008 period from active end users connected solely to the sewerage network amounted to 1.7 million euros. This amount does not take into account the estimated deductible charges due from end users according to the provisions of article 8-sexies, Law no. 13 of 28 February 2009 and article 5 of the Ministry of the Environment Decree of 30 September 2009, published in the Official Gazette on 8 February 2010, which the Area Authority is obliged to calculate. This amount therefore represents the maximum estimated rebates which ACEA Ato5 must pay following Area Authority identification of the quantification, methods and timescales of the rebates and the tariff coverage.

As regards the obligations set forth by the legislation to be fulfilled by the Area Authority, in January 2012, the Regional Administrative Court of Latina upheld the appeal filed by Consumer Association CODICI regarding the non-implementation of Constitutional Court ruling no. 335/2008 by the Area Authority.

Specifically, in accepting the appeal filed by Codici the Regional Administrative Court ascertained default by the AATO for not having implemented the powers of substitution pursuant to art. 152 of the Environmental Code and “declared that the regional government was obliged to remedy the situation in no more than thirty days from the date of notification of this decision. Only in the event of further inertia the powers of substitution shall be exercised, within an additional thirty days, by the Minister for the Environment and Protection of Land and Sea by appointing a special Commissioner.

As a result of the events mentioned in relation to applied tariff legitimacy, regarding which reference should be made to the section "Update on major disputes and litigation", in its bills the company applied the tariff that was published for 2005 until 31 December 2011, in compliance with the authority's instructions. However, it assesses its revenue on the basis of the minimum volumes guaranteed by the plan underlying the invitation to tender valued at the real average tariff, equal to that of the bid plus forecast and compound inflation.

By contrast, for the year 2012, on the basis of “Decree note no. F66 of 8 March 2012 - Determination of the integrated water service tariff applicable for 2012 in ATO 5 Southern Lazio-Frosinone” of the Commissioner for deeds appointed by the Regional Administrative Court of Latina, ACEA Ato5 will bill on the basis of the average real tariff and the associated tariff structure defined “in compliance with the regulations and applicable contractual relations”.

More specifically, "this was carried out to quickly deal with a service economic-financial imbalance, caused by the failure to update the tariff based on the trend in inflation and forecasts in the area plan and management agreement. Therefore, determination of the real average tariff is limited to restabilising normal contractual conditions of continuity of management and does not take into account the difference between planned and actual investments and, in general, area plan forecasts and the actual trend in the management of previous years given these obligations are to be fulfilled during the review phase.” “However, this does not involve any prejudice with respect to additional and subsequent reviews of area planning which will be adopted by the Commissioner for deeds, in which all obligations deriving from the ordinary and extraordinary review will be fulfilled".

The Commissioner for deeds has reconstructed the trend in the tariff curve from 2003 to 2012 to current values, applying the cumulative inflation factor for each year of operations to the real average tariff values envisaged in the original Area Plan. Consequently, the real average tariff for 2012 was identified by the commissioner for deeds on the basis of the original area plan, at 1.359 €/m3.

On 28 June the Commissioner prepared a Report - F 129/2012 - on the “choice of criteria, tariff verification and management for the years 2006 to 2011, estimate of the adjustments and service levels”. After reapplying the powers assigned under Sentence 529/2011 and subsequent administrative action implemented, the Commission verified (i) the real average tariff and related planning documents from 2006 and (ii) the operating performance 2006-2011.

To summarise, 56.6 million euros were estimated in favour of the company, to be taken into account in defining the values for the new Area Plan and 32.7 million euros not recoverable on review, but valid for the Area Authority as a result of A.ATO Instruction no. 3/2010 in which the real average tariff for 2005 was established for 2010.

The amount recognised to the company excludes the related portion of the concession fee, the review of which by the S.T.O. of ATO 5 is not yet complete.

On 4 June, with Note prot. F124, the Commissioner formally resigned from his position.

At the hearing held on 26 July, the Lazio Regional Administrative Court, Latina section, accepted the resignation and, by Order no. 607/2012, appointed the President of the AEEG as the new Commissioner for deeds (or an official that he delegates), who shall conclude the procedure within six months from the administrative notification or notice of the aforementioned Order.

The Company notified the AEEG of the aforementioned order on 13 August 2012 and, therefore, the six-month term expired on 13 February 2013.

On 20 December 2012, the new Commissioner for deeds requested a three-month extension on the deadline set forth in the Order, deeming that for the activities assigned to him to be fruitfully concluded, more time would be needed than that set forth in the aforementioned Order, besides being subject to the prior issue by the Authority of the new temporary tariff method for 2012 and 2013. The Judge set the deadline of 31 May 2013 for completion of the proceeding with Order no. 143 of 24 January 2013.

Revenues for the year 2012 amount to a total of approximately 55 million euros. This calculation was done in line with the criteria of AEEG resolution no. 585 of 28 December 2012 (and relative annex), also making use of the calculation model provided by that Authority on its website.

That estimate also includes the amount of 10.8 million euros, which represents the difference between the maximum growth set forth in article 7.1 of the aforementioned resolution - that of the Standardised Method plus planned inflation rates (6.5%) - and the amount of the VRG determined as indicated above. Article 7.1 provides that that spread should be subject to a dedicated AEEG enquiry, in order to “...ascertain, with the involvement of the Area Authorities, the data provided, the correct application of the temporary tariff method and the efficiency of the metering service...”. The same article also sets forth that the surplus compared to the maximum growth shall be recovered as an adjustment component in the subsequent tariff period.

 

Campania – GORI S.p.A. (Sarnese Vesuviano)

GORI provides integrated water services in 76 municipalities in the provinces of Naples and Salerno, on the basis of a thirty-year agreement signed on 30 September 2002 by the company and the Sarnese Vesuviano Area Authority. In return for award of the concession GORI pays a fee to the grantor (the Sarnese Vesuviano Area Authority) based on the date the right to manage the related services is effectively acquired. The perimeter managed has remained essentially unchanged compared to the previous year, since the process of acquiring management is, by now, complete. In fact, there are 76 municipalities managed, and that is, all of those falling within ATO no. 3 of the Campania Region.

 

2011 Tariff measures 

On 2 August 2011, by means of resolution no. 5, the General Meeting of the Sarnese Vesuviano Area Authority (EASV) approved, with a prior amendment, the proposed tariff plan of EASV’s Board of Directors, as approved by said Board of Directors on 30 December 2010 with resolution no. 34. In particular, said General Meeting resolved, among other things:

  • to invite GORI to sign a streamlining plan for the management of the integrated water service of A.T.O. 3 which involves an amount of total tariff costs relating to 2011 (operating costs, modernisation and return on already invested capital) of no more than 130 million euros (Group share 48.2 million euros). The resolution of the Board of Directors of December 2010 envisaged an amount of revenues equal to 136 million euros (Group share 50.4 million euros),
  • to approve the following tariff system, deemed suited to cover the aforementioned total tariff costs, with the exception of equalisation upon approval of the tariff system following the review of the area plan in progress:
    • tariff basins: the division of municipalities of ATO 3 is confirmed as the two tariff areas as per Resolution no. 9 of the General Meeting of 10 July 2009, with the following tariff system:
      • Basic basin "A” tariff: Basic tariff = €/m3 1.3210
      • Basic basin “B” tariff: Basic tariff = €/m3 1.1719
    • Tariff structure coefficient before domestic use bracket: 0.6 which cancels and replaces the corresponding coefficient of 0.5 in the tariff structure approved by means of resolution no. 9 of the general meeting of 10 July 2009,
    • The average area value of the basic tariffs in force in “basin A” and “basin B” pursuant to resolution no. 9 of the general meeting of 10 July 2009 stands at 1.2795 €/m3 (it was set at 1.3210 €/m3 in the resolution of the Board of Directors in December 2010).

The aforementioned Meeting Resolution no. 5/2011 was challenged before the Campania Regional Administrative Court in Naples which, accepting the appeal, cancelled the resolution by sentence no. 1809 of 18 April 2012. In particular, as the overall reason for cancellation the sentence first of all points out the failure to reach the decision-making quorum required under the Articles of the Area Authority General Meeting to adopt the aforementioned resolution no. 5.

Both the Authority and GORI have challenged sentence no. 1809/2012 through an appeal filed with the Council of State, also requesting that an injunction order be issued to suspend the effects of the sentence until a final decision on the merits is reached.

In any event the company immediately arranged for the various public institutions involved - Area Authority, Campania Regional Government and the AEEG - to be informed of the delicate nature of the issue and requesting urgent action to avoid financial crises.

In this respect it should be noted that the company asked:

  • the Area Authority to call its decision-making bodies to: (i) restore the tariff resolution cancelled by the Regional Administrative Court, (ii) complete the review of the Area Plan in such a way as to finally solve all tariff issues, (iii) approve the agreement already reached with the Campania Regional Government regarding the regularisation of relations with GORI and the Authority;
  • in the event of persisting inertia by the Authority, the exercise of powers of substitution by the Campania Regional Government and the AEEG with regard to regional and national regulations, respectively.

Therefore by notice no. 17029 of 5 June 2012 and based on claims submitted by GORI, the AEEG deemed “[...] necessary, in order to assess any grounds for action by the Authority, to first obtain all documentation concerned, useful information and figures relating to the calculation and updating of tariffs for the integrated water service in the ATO in question for the period 2007-2012 [...]” and then requested that “[...] the Area Authority submit to the AEEG all documentation concerned, useful information and figures relating to the calculation and updating of tariffs for the integrated water service in the Sarnese Vesuviano 3 ATO in Campania for the period 2007-2012, with particular reference to the following aspects: a. the methods for defining the tariff structure for 2008-2012, with specific regard to preliminary inquiries conducted to ascertain correspondence between the tariffs applied and the Real Average Tariff envisaged in the current Area Plan; b. the methods used to examine and deal with claims submitted by the operator in the period 2008-2012, with particular regard to the aforementioned issue of tariff structure adequacy; c. the method for determining the tariff approved by Resolution no. 5 of the General Meeting of the Sarnese Vesuviano Area Authority of 2 August 2011, that discussed in the Campania Regional Administrative Court sentence no. 1809 of 18 April 2012 [...]”.

As a result of the AEEG request, the Area Authority began the procedure for determining the 2012 tariffs, requesting the necessary information from the company in notice no. 5103 of 28/6/2012.

Note also that, on the basis of the appeal submitted by the company and the Sarnese Vesuviano Area Authority, the Council of State has suspended the effects of the Campania Regional Administrative Court sentence that had cancelled the aforementioned Resolution no. 5/2011 of the Sarnese Vesuviano Area Authority, adjourning discussion of the merits to 18 December 2012. It should be emphasised that the Council of State’s suspension order upon the Regional Administrative Court’s sentence allowed billing to once again apply the tariffs decided in Resolution no. 5/2011, with obvious benefits from a financial point of view. The company is awaiting the Council of State’s ruling.

 

2012 Tariff measures 

On 27 October 2012, the Area Authority’s General Meeting approved the proposals made by that Authority’s Board of Directors on 12 October. The decisions made concern:

  • the new tariff system for 2012 which envisages an annual revenue level of 127.3 million euros (Group portion 47.2 million euros),
  • the procedure for determining tariff adjustments recorded by GORI with reference to the years 2003-2011; that procedure resulted in (i) the recognition of receivables for tariff adjustments, until 2008, to the extent corresponding to what was already posted to the relative financial statements (a total of 75.4 million euros, with a Group portion of 27.9 million euros) and (ii) the recognition, for 2009, 2010 and 2011 of 73.5 million euros (Group portion: 27.2 million euros), taking into consideration the Regional Administrative Court’s cancellation of the 2011 tariff approved by the Area Authority’s General Meeting on 2 August 2011. Therefore, the Area Authority’s General Meeting verified tariff adjustments for the 2003-2011 period totalling 148.9 million euros (Group portion: 55.2 million euros), 13.1 million euros (Group portion: 4.9 million euros) higher than the amount reported up to and including 31 December 2011,
  • the approval of the draft agreement with the Campania Regional Government, aimed at normalising relations relative to the wholesale water supply and waste water collection and treatment services provided through regionally managed plants.

As part of the enquiry ordered by the Area Authority, which recalculated the adjustments described above, new criteria aimed at defining the cost components at the basis of the tariff determination were identified, also taking into consideration the consulting documents issued in the meantime by the AEEG. The most significant change regarded the treatment of portions of loans to be repaid to the municipalities, taken out to construct integrated water service infrastructure: those costs, with reference to the portion ascertained, have been included in operating costs while, on the basis of previous tariff determination procedures, they were classified as long-term costs. That changed classification resulted in the recognition of a net extraordinary expenditure of 9.1 million euros (Group portion 3.4 million euros).

On 25 January 2013, the Company was sent notice of an appeal before the Campania Regional Administrative Court in Naples by the Campania Federconsumatori Association for the cancellation of the part of Sarnese Vesuviano Area Authority resolution no. 5 of 27 October 2012 which approves the tariff regime for the year 2012 and the part which approves the corrective measures for the recovery of lost revenues accrued in previous years, by means of corresponding tariff increases to be included in future tariffs.

The company is proceeding with the appearance before the court, confident from the fact that the AEEG has also asked the Area Authority to adopt the tariff measures requested many times.

 

Relations with the Campania Regional Government 

With regard to the definition of the framework agreement for the normalisation of relations between the Regional Government (and, on its behalf, with the regional operator Acqua Campania S.p.A.), the Area Authority and GORI in relation to wholesale water supply services and the collection and treatment of waste water provided through regionally operated plants, an agreement was reached on this framework after intense work by the Technical Round Table set up by the Regional Government. The draft agreement - approved by both the company’s Board of Directors and the Board of Directors and General Meeting of the Area Authority - establishes:

  • the waiver of all pending litigation and the express recognition by the Area Authority and GORI of the amount payable accrued as due to the Regional Government, with subsequent reconciliation between the Regional Government’s accounts and those of GORI, and recognition by the Area Authority and GORI of the regional tariffs approved by Regional Government resolution no. 2196 of 27/06/2003 (later replaced and superseded by Regional Government resolution no. 1488 of 25/09/2009),
  • the express reduction by the Regional Government of the regional debt (calculated on the aforementioned approved tariffs), and at the same time the reduction of tariff adjustments accrued by GORI,
  • the definition of a twenty-year plan to repay the residual debt owed by GORI to the Regional Government, with annual instalments gradually increasing to a standard amount,
  • the commitment of the Operator to contractualise end users for regional water abstraction services and the collection and treatment of waste water,
  • emergence from and subsequent definition of the issue regarding waste treatment services provided by the Regional Government in favour of ATO 3 via the district treatment systems (also outside ATO 3), on the assumption that - to date - no such amount has been calculated or billed: as part of the inquiries conducted by the Regional Government with the Area Authority and GORI, in fact, the users served by the district treatment systems were identified,
  • the transfer to GORI of water abstraction and district treatment systems infrastructures covered by ATO 3 and, at present, still regionally operated, and the transfer of staff (approximately 400) employed in such regional works;
  • the commitment from GORI to establish a newco, controlled by the same Company, to which all regional works and related staff are transferred. Over a period of 6 years, the newco must then ensure efficiency improvements on the regional works, the costs of which will gradually be transferred to the integrated water service tariff: for the first 3 years they will be borne in full by the Regional Government, and thereafter gradually charged back to the integrated water service by 30%, 60% and 100% over years 4 to 6;
  • the Area Authority commitment, within the limits of its new attributions, to propose the adoption of tariff measures needed to allow GORI to pay the current payable and the instalments of the aforementioned repayment plan, in particular in the case of a plan to recover the remaining tariff adjustments correlated with the repayment plan in question,

Currently, we are awaiting approval of the aforementioned draft agreement, which could be changed, in terms of some formal and substantial aspects, compared to that approved by the aforementioned General Meeting of the Area Authority

 

Ruling no. 335 of 2008 

In relation to the problems concerning ruling no. 335 of 2008, it should be noted that, on 2 August 2011, the General Meeting of the Area Authority, by means of resolution no. 6, approved the lists of users not served by water treatment plants and the associated amounts to be reimbursed, authorising GORI to carry out the relevant publication and go ahead with the subsequent reimbursement to entitled parties, with reference to the period running from 16/10/2003 to 15/10/2008, in compliance with the provisions of the Decree of the Ministry of the Environment dated 30 September 2009 and art. 2033 of the Italian Civil Code. The resolution in question also established that the charges deriving from the application of ruling no. 335/2008 must be covered, on a priority basis, by the residual amounts allocated to the provisions set up in accordance with art. 14 of Law no. 36/1994 and subsequent amendments and additions and pertaining to the integrated water service operator (GORI); in the event in which said sums are insufficient to cover the expenses to be reimbursed, additional extraordinary tariff measures must be implemented beforehand - also as an exception to limit “k” set out by the Standardised Method - which ensure the required economic-financial funding. In 2011, the charges recorded as a result of the aforementioned ruling concerned the write-off of receivables relating to water treatment amounts not due, for an amount of around 3.3 million euros (Group share of 1.2 million euros), fully covered by using the sums as per the provisions of art. 14. In 2012, investigation activities continued concerning the cases received following the issue of procedures by the Area Authority with resolution no. 6 of 2 August 2011 and, in particular all credit notes were issued for those utilities which had a credit relative to the undue water treatment portion and refunds were made to approximately 365 end users.

 

Bridge loan 

With regard to problems relating to the bridge loan, note that by notice no. 17548 of 6 March 2012, GORI asked BIIS for a technical extension until 30 June 2012 on the 40 million euros bridge loan maturing 30 June 2011, attaching a specific debt rescheduling proposal prepared at the bank’s request and based on certain instructions given by the bank, which envisages repayment with a first amortisation instalment on 31 December 2012 and final maturity of 30 June 2018. In this respect the bank replied that it had submitted the proposal to its decision-making bodies. In order to define relations with BIIS and reschedule the 40 million euro debt, imminent developments are pending in the much hoped for framework agreement with the Campania Regional Government and the Extraordinary Commissioner of the Sarnese Vesuviano Area Authority (formerly the Sarnese Vesuviano Area Authority).

In order to overcome the uncertainties faced by GORI, in 2011 ACEA decided to allocate a provision of 44.1 million euros, of which 4.9 million euros has been used as a result of recognition in GORI’s 2011 financial statements, recently approved by the shareholders’ meeting, of revenue amounting to 108 million euros rather than the amount established (130 million euros) by the resolution of 2 August 2011 cancelled by the Campania Regional Administrative Court in April 2012.

Revenues for the year 2012 amount to a total of approximately 127.2 million euros (Group portion 47.1 million euros). This calculation was done in line with the criteria of AEEG resolution no. 585 of 28 December 2012 (and relative annex).

 

Toscana – Acque S.p.A. (Ato2 – Basso Valdarno)

The management agreement, which entered into force on 1 January 2002 with a twenty-year duration, was signed on 28 December 2001. In accordance with that agreement, the Management Body took over the exclusive integrated water service of ATO 2, comprising all the public water collection, abstraction and distribution services for civil use, sewage systems and the treatment of urban waste water. The Area includes 57 municipalities. In return for award of the concession, Acque pays a fee to all the municipalities, including accumulated liabilities incurred prior to award of the related contracts.

According to the provisions of the concession, on 22 December 2008 the general meeting of the Area Authority approved the tariff review for the years 2005-2007, in which checks were performed on the actual volume of investments made, operating costs, revenue generated, the amounts billed and the technical and organisational standards achieved. Based on the results of these checks, the adjustment was calculated (positive for the operator) for lost revenues for 2005-2007, given more than 0.5% lower than those forecast in the Area Plan.

Penalties were also applied during the revision, as provided for in the Agreement, for the failure to achieve certain technical and organisational standards.

During the second tariff review, the new Investment Plan was defined, later described in detail in the new three-year operating plan for 2008-2010 approved by the Authority in March 2009.

The third tariff review for the years 2008-2010 was approved by the Authority’s general meeting of 6 December 2011. During this review, checks were performed on the actual volume of investments made, the operating costs, revenue and inflows achieved, the extent of volumes billed and the technical and organisational standards achieved. Based on the results of these checks, the adjustment was calculated (positive for the operator) for lost revenue for 2008-2010, recognition in the tariff of lost collections recognised as a loss in the 2008-2010 financial statements and rebate claims from eligible parties made up to 31/12/2010 as a result of Constitutional Court sentence 335/2008. The rebates due to be paid by Acque in the period 2011-2013 total a little over 0.3 million euros. The third review also arranged for operating costs to increase from 2012 onwards, and penalties were applied as envisaged in the agreement for failure to reach certain technical and organisational standards.

The tariff review was accompanied by the review of the Area Plan which was performed on two separate scenarios. The first (2026 Plan) envisages a 5-year extension to the concession (until 2026), with an increase in investments of approximately 250 million euros in the period 2011-2026. The second (2021 Plan) envisages total investments that remain unchanged compared to the original plan and already financed, but with remodelling to ensure that the period 2011-2013 coincides with that of the previous scenario, followed by a decrease in the remaining period.

In the 2011-2013 three-year period, roughly 40 million euros more in investments are expected than in the original plan.

The 2026 Plan will only become effective following:

  • approval by the current Lenders
  • verification of the financeability of said plan

In the event the above conditions are met, the 2021 Plan will become effective.

The two plans only differ as regards the part relating to investments while they are consistent in all other aspects, including the tariff to be applied in the first three-year period (2011-2013).

Plan 2021, which makes provision in the first three-year period for higher amortisation due to the lower duration of financial amortisation, so that limit K of the increase in the fixed tariff set by the Normalised Method at 5% is not exceeded, envisages the reduction of the fee paid to the municipalities with recovery in subsequent years.

Following adoption of the AATO Resolutions two appeals were filed as follows:

  • An appeal filed by Federconsumatori Utenti Toscana against AATO 2 and Acque challenging the legitimacy of Resolution 12 by which AATO 2 extended the duration of the concession to Acque to 2026 and requesting its cancellation,
  • An appeal filed by the Forum Toscano dei Movimenti per l’Acqua and a number of individuals resident in ATO 2 against the AIT, AATO 2 and Acque is more wide-ranging than that mentioned previously, challenging - amongst other things - the legitimacy of Resolutions 12 and 13, requesting their cancellation and also challenging the fact that in the tariff reviews Resolutions 12 and 13 take into account the return on capital invested component despite the results of the June 2011 referendum.

With Decree of the President of the Regional Council no. 87 of 4 April 2012, a regional state of emergency was declared with respect to the entire regional territory, pursuant to art. 11 paragraph 2 letter a) of Regional Law 67/03, due to the water crisis situation. That situation was particularly felt in the area managed by the company, leading to a significant increase in operating costs, with particular reference to costs for transport with tanker trucks.

In October 2006, the Operator signed a contract with a pool of banks which provides for a total loan of 255 million euros to cover the financial needs of the investment plan from 2005 to 2021 estimated at around 670 million euros. The actual drawdown at 31 December 2012 was 212 million euros.

With regard to the impact of Constitutional Court sentence 335/2008, relating to the legitimacy of billing the tariff component covering waste water treatment to end users in areas where there are no treatment plants or where the plants are inactive, from October 2008 the company stopped including the waste water treatment component in bills for end users identified as falling within this category. The Area Authority intervened to ensure application in 2009 of the Average Tariff provided for in the Area Plan.

In 2010, the lists of end users entitled to rebates were published on the websites of Acque and the Area Authority. In the same year, the Authority approved guidelines to carry out repayments, according to which these will be made following the request of the user and the five-year prescription will be calculated as of the date the request was submitted. According to this resolution, the total potential debt not time barred at December 2010 amounts to approximately 6.5 million euros (Group share 2.9 million euros).

At December 2010, 1,139 claims had been submitted by eligible users, for a total of 0.4 million euros to be reimbursed taking into account deductible charges. The Authority will include this amount in the tariff review and the rebates are expected to be paid in the three-year period 2011-2013. Further claims were later received to reach a total of around 43,000 for which the rebates have not yet been decided by the Authority.

Revenues for the year 2012 amount to a total of approximately 101.2 million euros (Group share 45.5 million euros), including adjustments of so-called pass-through items (i.e. electricity). This calculation was done in line with the criteria of AEEG resolution no. 585 of 28 December 2012 (and relative annex).

The company did not include the amount of the FNI (New Investments Fund) component, which is estimated at roughly 5.1 million euros (Group share 2.3 million euros), within the period’s revenues, since on the basis of the provisions of resolution 585/2012, that component must be expressly recognised by the Area Authority which establishes if and to what extent that form of advance should be included in the tariff.

With regard to the other FoNI (New investments advance fund) tariff components set forth in AEEG Resolution 585/2012, the Company estimated the allocation restriction established by article 7 of said resolution at roughly 2 million euros (Group share 0.9 million euros).

 

Tuscany – Acquedotto del Fiora S.p.A. (Ato6 – Ombrone)

Based on the agreement signed on 28 December 2001, the operator (Acquedotto del Fiora) is to supply integrated water services on an exclusive basis in ATO 6, consisting of public services covering the collection, abstraction and distribution of water for civil use, sewerage and waste water treatment.

The concession term is twenty-five years from 1 January 2002.

In August 2004, ACEA – via the vehicle, Ombrone S.p.A. – completed its acquisition of a stake in the company.

In December 2011 the Area Authority approved the new Tariff Review for 2008-2010 and the review of the 2011-2026 Area Plan and Investment Plan, in line with the principles of sustainability and medium/long-term economic and financial balance. In this context and as invited some time ago by the company, the Area Authority took the opportunity to reduce remaining discrepancies between the operator planning (Economic-Financial Plan for project financing) and regulator planning (the Authority’s Economic-Financial Plan).

The volumes of water sold, included by the Authority in the new Area Plan are, therefore, in line with Acquedotto del Fiora expectations.

According to the provisions of the Decree of the Commissioner for the Tuscan Water Authority Conference, District 6 Ombrone no. 1 of 05/01/2012, the average tariff applicable by Acquedotto del Fiora for 2012 is 2.106 euros per cubic metre, including planned inflation and net of the rebates to eligible end users of part of the water treatment charge pursuant to art. 7, Ministerial Decree 30/09/2009.

With regard to the impact of Constitutional Court sentence 335/2008, relating to the legitimacy of billing the tariff component covering waste water treatment to end users in areas where there are no treatment plants or where the plants are inactive, the company took immediate action to implement the AATO indications. Therefore from October 2008 the water treatment component has no longer been billed in known cases covered by this situation and in 2009 the Area Authority took action on the tariffs to guarantee application of the envisaged average tariff.

On this issue the Area Authority General Meeting resolution no. 13 of 29/11/2010 approved the Extraordinary Review for rebates to users not served by water treatment of the water treatment tariff not payable under the aforementioned Ministerial Decree of 30/09/2009. The Area Authority reviewed the Plan tariff up to 2014 to guarantee rebates to eligible users.

In financial terms, on 5 March 2012 the Operator signed an extension for a further 18 months, i.e. to September 2013, to the bridge loan agreement, which increased from 80 million euros to 92.8 million euros after disbursement of a further 12.8 million euros. The operator is also continuing work on the definition of a project financing transaction to support the company’s financial needs on expiry of the concession, guaranteeing the implementation of the entire Investment Plan.

Revenues for the year 2012 amount to a total of approximately 76.6 million euros (Group share 30.6 million euros), including adjustments of so-called pass-through items (i.e. electricity). This calculation was done in line with the criteria of AEEG resolution no. 585 of 28 December 2012 (and relative annex).

The companies did not include the amount of the FNI (New Investments Fund) component, which is estimated at roughly 5.7 million euros (Group share 2.3 million euros), within the period’s revenues, since on the basis of the provisions of resolution 585/2012, that component must be expressly recognised by the Area Authority which establishes if and to what extent that form of advance should be included in the tariff.

With regard to the other FoNI (New investments advance fund) tariff components set forth in AEEG Resolution 585/2012, the Company estimated the allocation restriction established by article 7 of said resolution at roughly 1 million euros (Group share 0.4 million euros).

 

Tuscany – Publiacqua S.p.A. (Ato3 – Medio Valdarno)

The management agreement, which entered into force on 1 January 2002 with a twenty-year duration, was signed on 20 December 2001. In accordance with that agreement, the Management Body took over the exclusive integrated water service of ATO 3, comprising all the public water collection, abstraction and distribution services for civil use, sewage systems and the treatment of urban waste water. The Area includes 49 municipalities, of which 6 managed via agreements inherited from the previous operator, Fiorentinagas. In return for award of the concession the operator pays a fee to all the municipalities, including accumulated liabilities incurred prior to award of the related contracts.

In June 2006, ACEA - via the vehicle, Acque Blu Fiorentine S.p.A. – completed its acquisition of a stake in the company.

Please note that, on 17 December 2010, the general meeting of the Area Authority approved the 2010-2021 tariff development. The Board of Directors was entrusted by the General Meeting to draw up the new Chapter 6 of the Area Plan, containing comments and details concerning the approved tariff profile, as well as the tables of the economic-financial plan set out in art. 149, paragraph 4 of Legislative Decree no. 152/2006.

With resolutions no. 4 and no. 32 of 2011 and no. 8 of 2012, the Board of Directors of the Area Authority and the Regional water authority approved the area plan, the economic-financial plan and the action plan, respectively for 2010-2021.

As noted previously, Publiacqua filed an appeal against those deeds with the Regional Administrative Court of Tuscany. The appeal is based on various factors such as the lack of jurisdiction (given the object of the resolution is a matter for the General Meeting and not the Board of Directors), the non-adjustment of the analysis of service criticalities and investment objectives, and, therefore, incompleteness of the document, also shown by the absence of the definition of investments to be carried out. The Regional Administrative Court section I has not yet set the date for the first hearing.

Also in the regulatory area, in 2011 Conviri (Supervisory Committee for the Use of Water Resources) also filed a second-instance appeal with the Council of State against the Regional Administrative Court of Florence's judgment which, by ruling 6863 of 23 December 2010, cancelled that Committee's resolution no. 3 of 16 July 2008. The resolution challenged the legitimacy of the settlement agreed by the Area Authority and Publiacqua. This was designed to resolve numerous disputed items that, in the end, gave rise to the payment of 6.2 million euros to the operator. Ruling no. 5788 of the Council of State of 27/10/2011 overturned the judgment of the Regional Administrative Court of Tuscany, therefore accepting Conviri’s requests.

Publiacqua filed an appeal before the Supreme Court against the aforementioned sentence, which is set to be discussed on 26 March 2013. Note that the sentence has so far had no effect whatsoever on relations with the regional water authority: the company considers that the ineffectiveness of the transaction of March 2007 determines the revival of all original claims formulated by the Area Authority in 2006 and therefore requested to re-open the proceeding to review all items. With decree no. l6/2012, the Director of the Tuscan Water Authority resolved to temporarily exclude from 2013 tariffs sums inherent to the adjustment relative to the settlement deed, and re-opened the proceeding to verify the entirety of the items requested by Publiacqua, after which it will be possible to assess the resolution of the transaction.

Lastly, note that following completion of the inspection to ascertain the accounting methods for the investment costs, by letter dated 9 March the Regional Water Authority informed the operator of its intention to recognise only actual costs incurred by Ingegnerie to provide the various services to Publiacqua, therefore introducing a change to the current regulatory system, envisaged in the agreement, and not agreed with the operator. On this topic, an appeal was therefore lodged for the cancellation of the note of the Tuscan Water Authority Conference no. 3 Medio Valdarno prot. no. 1187/3/12 of 9 March 2012, sent on a subsequent date, concerning “The services assigned to Ingegnerie Toscane s.r.l. - 2011 inspection results” and with a subsequent appeal on additional grounds the note of the Tuscan Water Authority Conference no. 3 Medio Valdarno prot. no. 2907/12 of 14 May 2012, sent on a subsequent date, was also challenged. This latter note concerned “Response to Publiacqua’s letter of notice of 03/04/2012 (prot. 15342) on the services assigned to Ingegnerie Toscane s.r.l.”. The first hearing date has not yet been set.

In January 2012, the general management for protection of the area and water resources concluded the preliminary check on the proper drafting of the ordinary review of the Area Plan of ATO 3 Medio Valdarno, publishing it on Conviri’s website.

Certain provisions were made in the decision; the main ones in terms of the impact on the company’s economic-financial capacity are as follows:

  • amendment to the calculation method for the real average tariff, excluding profit sharing, i.e. the system for distributing operating economies achieved in the three years prior to the review between operator and user,
  • exclusion from the tariff calculation of the component of the return on invested capital relating to fixed assets in progress with subsequent damage on the actual coverage of costs connected with the realisation of the works,
  • modification of the term within which the operator has the right to update actual revenues within a maximum of three years,
  • elimination of the recognition of losses on receivables up to a maximum of 2% per annum which determine a deviation between the forecast and actual collection,
  • elimination of extraordinary contingent assets and liabilities from the cost calculation,
  • modification of the system for the calculation of the compensation due to the operator at the end of the assignment, therefore a matter which does not fall within the scope of the evaluation of the Plan as it involved in the composition of the average tariff, excluding the monetary revaluation of non-amortised capital,
  • exclusion from the tariff calculation of components of amortisation and remuneration of connections carried out in the 2005-2007 period and not covered by grants.

Lastly, it should be noted that said preliminary enquiry concluded with the disapproval of the fees to municipalities which are not linked to the actual coverage of instalments of previous mortgages taken out for water works

The rulings, many of which were subject to Conviri verification in other area plans without similar reprehension, concern issues that are not defined in sector regulations but which form part of the parties’ powers to reach agreements. Against this decree Publiacqua filed a self-protection claim and on 2 April 2012 filed an appeal for cancellation of the report on findings.

By Decree no. 3265/TRI/Di/viri the Ministry reopened the investigation on new elements for assessment submitted by the Tuscan Water Authority by notice no. 1061/2012. In particular, the investigation was reopened on issues concerning assets in progress, impairment of receivables and the recognition of concession fees to the Municipalities. Publiacqua submitted a claim to the Ministry to reopen proceedings on the full series of provisions applied, also in the light of AEEG resolution 585/2012 which appears to recognise the legitimacy of the points challenged by the Ministry.

The Ministry then decided to combine the two proceedings and, acknowledging the provisions of art. 21, paragraph 19 of Legislative Decree 201/2011, to transfer the proceeding for the review of the provisions to AEEG which, by resolution of 15 November 2012, initiated the preliminary enquiry to complete the verification of the Ato 3 Medio Valdarno area plan, for which dedicated supplementary briefs were prepared.

With regard to ruling 335/2008, the Area Authority provided for 10.2 million euros to be allocated in order to cover rebate claims of the water treatment tariff by users not connected to a treatment plant or connected to a plant that is temporarily inactive. This amount covers approximately 50% of the maximum amount estimated to be reimbursed (21.6 million euros, including VAT). If this tariff amount is lower than that actually paid by the operator to the users, the difference shall be used to reduce adjustments on past lost revenues. If the claims exceed expectations, the operator may request an adjustment in the subsequent Review. The payment of rebates began in June 2012.

In terms of financing sources, on 29 November 2012, the company took out a new bridge loan with a duration of 18 months minus one day, until 23 May 2014 for a total of 75 million euros, of which a total of 60 million euros was disbursed on the subscription date.

Revenues for the year 2012 amount to a total of approximately 167.9 million euros (Group share 67.2 million euros), including adjustments of so-called pass-through items (i.e. electricity). This calculation was done in line with the criteria of AEEG resolution no. 585 of 28 December 2012 (and relative annex).

The company did not include the amount of the FNI (New Investments Fund) component, which is estimated at roughly 18.9 million euros (Group share 7.6 million euros), within the period’s revenues, since on the basis of the provisions of resolution 585/2012, that component must be expressly recognised by the Area Authority which establishes if and to what extent that form of advance should be included in the tariff. Please note that this non-recognition also includes the part that Publiacqua has already billed with the 2012 tariff applied to customers: that decrease is allocated as a reduction to receivables for bills to be issued.

With regard to the other FoNI (New investments advance fund) tariff components set forth in AEEG Resolution 585/2012, the Company estimated the allocation restriction established by article 7 of said resolution at roughly 5.2 million euros (Group share 2 million euros).

 

Tuscany – GEAL S.p.A., Azga Nord S.p.A. and Lunigiana Acque S.p.A. (Ato 1 –Tuscany Nord)

 

GEAL S.p.A. 

GEAL S.p.A. manages integrated water services in the municipal territory of Lucca.

In 2011, on conclusion of a long dispute(1) with the Area Authority and also following the repeal of art. 23-bis of Law Decree 112/2008, converted into Law 133/2008 as amended and supplemented with Presidential Decree 113/2011 incorporating the results of the referenda of 12 and 13 June 2011, GEAL fully consolidated its operations in the Municipality of Lucca, under the current regulatory framework guaranteeing operational continuity until the natural expiry on 31 December 2025 of the concession agreement.

Therefore in a context of new and more tranquil relations with the Area Authority following the end of the dispute, on 29 December 2011 GEAL signed a Memorandum of Understanding with the Authority and the Municipality of Lucca awarding the water service which transferred planning power to the Area Authority (in any event to be exercised jointly with the Municipality of Lucca) and control of operations in the municipality of Lucca, with the introduction for GEAL of the tariff method based on the Decree of the Ministry of Public Works of 01.08.1996 (called the Standardised Tariff Method - MTN), replacing that no longer applicable by law (art. 10, paragraph 28 of Law Decree 70/2011, converted to Law 106/2011) based on resolutions of the Interdepartmental Committee for Economic Planning (CIPE), so that the company is guaranteed the conditions for growth and development.

On 30 April 2012, in implementation of the content of the Memorandum of 29 December 2011, the Tuscan Water Authority Conference no. 1 “Toscana Nord” (formerly AATO 1) issued Decree of the Commissioner no. 18, approving the municipality of Lucca’s area plan containing the integrated water service tariff determined according to the criteria pursuant to the aforementioned Decree of the Ministry of Public Works of 01.08.1996, and Decree of the Commissioner no. 16 of 30 April 2012, approving the 2012 - 2014 Investments Operating Plan, for a total amount of 25,639,951 euros, including 8,488,297 euros generated by public grants related to assets.

Although formally approved on 30 April 2012, the new tariff was applied to users beginning on 1 August 2012 after obtaining the favourable opinion - through the institution of silence/assent - of the Ministry of the Environment regarding the Area Plan prepared by the Tuscan Water Authority.

On 31 October 2012, the company sent the Tuscan Water Authority and AEEG statements with data and information concerning integrated water services, requested by AEEG with resolution 347/2012/R/IDR of 02.8.2012.

This information forms the basis for calculating the water tariff for the years 2012 and 2013 on the basis of the Temporary Tariff Method (MTT) approved by AEEG with its resolution 585/2012/R/IDR of 28.12.2012.

As it currently stands, and for all operators, the applicable Area Authority (for GEAL, the Tuscan Water Authority) is checking the data acquired from the company and making the relative calculations in compliance with the MTT to prepare a proposal for the new tariff for the years 2012 and 2013 by 31.03.2013, which must be definitively approved by AEEG.

The draft of the new concession agreement was prepared with the municipality of Lucca to ensure its consistency with the provisions of the Memorandum of 29.12.2011, and it must be approved by the Authority’s decision-making bodies presumably within the first four months of 2013.

Furthermore, on 27.02.2012, all appeals concerning the issue of the so-called “tax moratorium” were combined and discussed at the Florence Regional Tax Committee, which accepted the claims of the Tax Authorities, although limited to the principal component and not interest, therefore deeming the Office’s calculation of those amounts erroneous, as claimed by GEAL. The Tax Authorities filed an appeal before the Supreme Court. Without prejudice to the dispute under way, the company has settled all of its obligations with the Tax Authorities with regard to this issue.

 

Lunigiana Acque S.p.A. in liquidation 

As noted, Lunigiana Acque has been placed in liquidation after the resolution of the extraordinary shareholders’ meeting of 28.07.2011, recorded in the Massa Business Register on 02.08.2011.

After that date, the company continued managing the Integrated Water Service in the municipalities of Aulla, Podenzana and Tresana until 31.03.2012, as established by the shareholders.

On 1 April 2012 GAIA S.p.A., in-house operator of integrated water services for a large part of the Area since 1 January 2005, took over management from Lunigiana Acque, as set forth by ATO no. 1 “Toscana Nord”, which is now the Tuscan Water Authority following the entry into force of Regional Law 69/2011.

Relations between GAIA and Lunigiana Acque have been governed by a business unit lease agreement signed on 30.03.2012, which envisaged its definitive transfer by 30.09.2012,

a transfer which has not yet taken place due to the Tuscan Water Authority’s failure to complete the enquiry process regarding the non-amortised assets of Lunigiana Acque to be transferred for payment to the new operator and to be recognised in the tariff to the latter.

On this point, GAIA submitted requests to extend the term for signing the business unit transfer agreement pending the completion of the Authority’s preliminary enquiry process, the first on 01.10.2012 and most recently, since the enquiry had still not been completed, on 21.12.2012.

In particular, the last request asked to postpone signing the agreement to the end of February 2013, without prejudice to additional extensions.

The liquidators decided to accept that request, since no tools are objectively available other than the launch of a dispute, which was not the preferable choice due to opportunity reasons and in any event trusting that the situation would develop in a positive manner.

In that regard, on 17.12.2012 the Tuscan Water Authority formally asked Lunigiana Acque for more details on the non-amortised assets transferred to GAIA, in addition to the information already sent to the company - at that Authority’s request - on 25.09.2012 and 02.10.2012. That request, deemed indispensable by the AIT for the completion of the preliminary enquiry, was punctually answered on 23.01.2013.

Currently, we have become aware of the positive outcome of the preliminary enquiry by the Authority based on communications (at the moment only informal) from the Tuscan Water Authority and GAIA.

For this reason, it is deemed that there are no further elements to prevent the formalisation of the disposal agreement between Lunigiana Acque and GAIA and that therefore that agreement can be signed shortly.

The liquidators also continued the debt collection activity and, as a result, the payment of amounts due to suppliers to the extent possible.

In particular, all amounts due to Lunigiana Acque from the municipalities of Aulla, Podenzana and Tresana have been collected.

Moreover, there was a large-scale notice of injunction orders to delinquent (former) customers.

 

AZGA Nord S.p.A. in liquidation 

As noted, AZGA Nord has been placed in liquidation after the resolution of the extraordinary shareholders’ meeting of 15.12.2010, recorded in the Massa Business Register on 20.12.2010.

Although the company is in liquidation, it has remained and still is fully operative, as resolved by the shareholders, while waiting for the competent Authority to assign a new party to manage integrated water services in the municipality of Pontremoli.

The Authority of ATO no. 1 “Toscana Nord”, now the Tuscan Water Authority following the entry into force of Regional Law no. 69/2011, intends to proceed with directly assigning the service to GAIA, in-house operator of integrated water services for a large part of the Area since 1 January 2005. This transaction has not yet been completed due to the opposition of the municipality of Pontremoli.

For the purpose of complete information, it should be noted that the liquidators are aware of recent direct contact between the municipal Administration, the Tuscan Water Authority and GAIA, aimed at analysing the conditions for the transfer of management to GAIA.

From the operating perspective, there is nothing significant to note since the management of aqueduct, sewerage and waste water treatment services by AZGA Nord has proceeded regularly with no critical issues worthy of mention.

 

Please note that the company has satisfied the obligations to send AEEG the considerable quantity of data and information requested from all integrated water service operators by Authority resolution no. 347 of 02.08.2012, by 15.11.2012, as extended (only for operators, like AZGA Nord, which adopt a tariff method based on CIPE resolutions) by resolution no. 412 of 11.10.2012.

 

Umbria – Umbra Acque S.p.A. (Ato 1 – Umbria 1)

On 26 November 2007 ACEA S.p.A. was definitively awarded the tender called by the Area Authority for selection of the minority private business partner of Umbra Acque S.p.A. The tender procedure requires the successful bidder to subscribe a 11.335% increase in the share capital of Umbra Acque S.p.A. post-increase and to purchase 4,457,339 shares owned by outgoing private shareholders (ACEA already holds a stake in Umbra Acque through its subsidiary Crea), corresponding to 28.665% of the share capital of Umbra Acque S.p.A. post-increase.

Before the end of 2007, ACEA completed the subscriptions of the share capital increase and the purchase of shares owned by outgoing private shareholders, thus acquiring ownership of 40.00000257% of the share capital of Umbra Acque S.p.A.

By means of General Meeting decision dated 21/02/2011, the Area Authority approved 2011 tariffs, by establishing a 1.25% increase, plus the planned inflation rate of 1.5%. Therefore, the overall increase is 2.75%.

The current Area Plan was approved by the General Meeting of Representatives in 2004, though substantially retaining the format of the previous plan approved in 2002. In 2008 Umbra Acque underlined the need to carry out a total review of the current Plan, in consideration of both the new national (Legislative Decree 152/2006 as amended) and regional regulations (Regional Plan for water protection in Umbria, Sewage Directive, Regional Plan for Umbria aqueducts and Regional Law no. 25/09 "Rules for the protection and safeguarding of water resources") – according to which the programme of works included in the existing Area Plan will be adjusted to achieve the pre-defined objectives concerning water quality and aquifer protection – and in the light of the increase in several cost items (in particular, electricity consumption costs) that prevent achievement of the economic-financial balance as set out in the Standardised Method. During 2011 these additional costs increased further due to both new cost items not included in the current Plan and the increase in tariffs for the services used by the company.

In April 2012 the Authority completed its controls on the tariff period 2003-2007, recognising an adjustment in favour of the company for approximately 7 million euros. The right to receive such amounts, already recognised to the financial statements in previous years, is therefore formally confirmed by the Mayors’ Conference.

The Company is currently in a dispute with the Consumer Associations concerning the guarantee deposit. In this context, an initial, precautionary and temporary measure was issued by the sole judge at the Court of Perugia regarding the urgent action for an injunction lodged by Federconsumatori against Umbra Acque. With said measure, issued during a precautionary phase which is therefore still characterised by summary cognizance, the single judge ruled affirming the existence of the oppressive/unfair aspects of articles 21 and 21-bis of the Aqueduct Service Management Regulation resolved by the applicable Area Authorities, prohibiting the company from using the relative clauses.

This measure has numerous censurable features, given that sufficient consideration was not given to the details of the arguments punctually raised before the court by the Company and the public law profile of the issue, which concerns provisions that were issued by the applicable Area Authorities and that the operator is required to apply.

In particular, with that sentence the judge qualified the Regulation as a “framework contract”, thereby not recognising its nature as an actual public legislative instrument which the operator must apply in governing relations with end users, and therefore completely extraneous to the sphere of private agreements, and even considered the guarantee deposit as if it were any amount requested for fees/indemnities/other payments, therefore not recognising its function as a guarantee of the exact future fulfilment of obligations to the end user based on the exercise of the regulatory power of the municipalities within the ATI.

An analysis of the measure brings to light that the guarantee deposit was considered on the basis of a “compensation or penalty clause”, it was deemed that its application causes “an increase in the service price”, and the “justified grounds” were not found in the contract.

In the order, there is no mention of the fact that the deposited amount is returned, in addition to legal interest, when specific conditions are fulfilled, or of the stated function of being guaranteed the punctual and accurate execution of the contract, as clearly set forth in art. 21 of the Regulation. 

The correct consideration of the nature and function of this deposit would have made it possible to definitively exclude the existence of unfair profiles which were instead erroneously attributed to the provisions of the Consumption Code pursuant to art. 33 paragraph 2, letters f), m) and o).

Therefore, also in consideration of the effects which that measure could have on other pending disputes on this topic as well as the potential restitutory effects, the Company intends to prevent the consolidation of a ruling with that content, which was therefore challenged before the applicable courts, both during the precautionary stage with the current lodging of a complaint before the Court of Perugia en banc and, possibly, in the subsequent phase concerning the merits, characterised by more detailed cognizance.

(1) The dispute was launched given that Area Authority no. 1 "Toscana Nord" (North Tuscany), by means of the resolutions of its consortium meeting nos. 18 and 19 of 25.11.2004, had included the municipal area of Lucca, whose water service is managed by GEAL, in the perimeter subject to the assignment to the company GAIA, the latter wholly owned by Local Authorities (excluding the Municipality of Lucca).