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Gas, Electricity and Integrated Water Service Regulating

2012 was characterised by an important regulatory activity by the Regulatory Authority for Electricity and Gas, due also to the accompanying start and end of the different regulation periods regulation electricity and gas distribution, as well as formulation of the new tariff system for the integrated water service.

With reference to the gas sector, the first significant regulation of the year was the 28/12/R/gas resolution, with which the Authority amended and added to the ARG/gas 155/08 resolution regarding the directives for the installation of electronic measuring systems with remote reading and management functions (called smart gas meters). The 28/12 resolution, specifically, re-modulated the deadlines originally anticipated, though maintaining the distinction between measuring systems categories, and introduced a standard costs system for the recognition of the investments made in electronic measuring systems, even though connected to the costs effectively incurred by a profit-loss sharing mechanism. Finally, specific tariff recognition mechanisms for the costs of the remote management and reading systems were introduced, as well as costs deriving from metrological verification obligations. The 28/12/R/gas resolution was the subject of appeal before the Lombardy Regional Administrative Court from some distributors, including HERA SpA, in connection with the tariff recognition of costs themes, both with reference to the new meters ad those substituted by virtue of the obligations introduced; furthermore the appeals also referred to temporal installation obligations judged as incompatible with the sector's technological maturity. The 28/12 resolution was added to a number of times with subsequent ordinances during the year, lastly by resolution 575/12/R/gas. These additions, however, did not amend the main guidelines of the regulatory plan instituted with resolution 28/12. At present, the regulation provides for the measuring systems (GDM) of a higher class than G40 and the replacement of all the measurers installed by 29 February 2012. The replacement objectives for the GDMs of the classes between G16 and G40 are positioned, gradually and with intermediate obligations, between 2013 and 2015; finally, the replacement of 60% of those GDMs dedicated to the mass market (classes G4 and G6), installed, must be carried out by 31 December 2018, in any event except for the obligation to replacement by that date all the meters with expired metric stamp duty.

Furthermore, the Authority's regulations on the thematic inherent in Overdue Payments and the Default Gas Service continued in 2012. Specifically, the Authority started the transitory period for first application of the Consolidated Gas Overdue Payments Text (TIMG) with resolution 166/12/R/gas, and introduced some obligations for distributors directed at containing the overdue payments phenomenon. Amongst the main changes introduced there is the distributor's 'obligation to ensure a number of supply suspensions for overdue payments of the end customer, calculated by distribution plant, as well as interrupt gas supply in the cases where it is not possible, due to inaccessibility of the meter, to suspend it. The costs related to both the interruption and restoring the supply, incurred in relation to the obligations of resolution166/12, are covered by the Authority. Instead, appertaining the Default Gas Service, the Authority, with resolution 352/12/R/gas, defined the criteria for covering the costs of the service for the distributors in relation to the gas supply costs, operating costs as well as charges related to the customers' overdue payments. Furthermore, with the subsequent 540/12/R/gas resolution the Authority introduced further additions to the Default Service regulations directed at a first and provisional start thereof. The additions specifically regarded the postponement of the service start-up date to 1 February 2013 (compared to 1 January 2013 initially provided), meanwhile delineating the possibility for the distributor to alternatively make use of either the territorially authorised Last Resort Supplier (FUI) or a Transitory Supplier selected by a tender. However, subsequently to this resolution the Lombardy Regional Administrative Court acted, accepting the appeal presented by some distributors against resolution 99/11, de facto annulling the regulatory plan up to when it is promulgated relative to the Default Service and TIMG.

The Authority appealed against this ruling to the Council of State, requesting its suspension for serious and irreparable damages, this suspension was granted to the end of January 2013, by a one time and valid decree at least until the pronouncement on the true and proper suspension, anticipated for April 2013. Subsequently the Authority promulgated another resolution, 25/13/R/gas, with which it provided on the one hand the possibility for the FUI to choose not to run the default service, not even transitorily. On the other hand, because of the restrictness of the terms, there was the possibility for the distributor to make use of a directly selected Transitory Supplier and therefore without public evidence procedures.
Again, with reference to the gas sector, the Authority provided with resolution 436/12/R/gas for the extension to 31 December 2013 for the application period of the directives contained in the Consolidated Act for the regulating of quality and tariffs for the gas distribution and measurement services, valid for the regulation period 2009 - 2012 (TUDG). This allowed at the same time for a postponement of the Fourth Regulation Period start until 2014. From the tariff viewpoint, the main effect of the extension, as delineated by the Authority, was the determination of an anchored return on capital for 2013, common to the electricity sector, at the free risk return of 2011 This was contrary to expectations that anticipated the determination of a free risk rate on a 2012 base and its maintenance based on tariffs for the four-years 013-16, or at least for the two-years 2013-14. Simultaneously, again in the perspective of alignment with the electricity sector, the Authority raised the Debit/Equity ratio from 0.5 to 0.8 and revised the average taxation rate. Finally, as far as concerns the recognised operating costs, the productivity recovery rate was confirmed commencing from the costs determined for 2012, with application of the décalage already introduced previously.
Instead, with regard to the gas quality regulation, the extension to 2013 provided for maintenance of the same annual improvement rate on the dispersions notified by third parties that was fixed in the third regulatory period, with the consequence that the 2013 levels/objective will be more challenging. Furthermore, measures directed at mitigating the financial impact of the incentivation mechanisms in the regulation were identified, in the case of a gas accident that is the responsibility of the merchant. Again, with reference to the gas quality, it is noted that, with resolution 368/12/R/gas the Authority arranged to determine the incentives and penalties relating to the safety recoveries of the natural gas distribution service for 2010, which was for merchants participating in the incentives and penalties system, including HERA SpA.
A further change in 2012 came from resolution 229/12/R/gas, with which the Authority approved the Gas Settlement Consolidated Text (TISG). The Authority completed with this regulation reform of the gas balancing system introducing a new set of rules directed at increasing certainty and transparency in the determination of the physical items to which the terms and conditions determined in the same market (balancing price) must be applied. In the TISG, which will come into effect commencing from 1 January 2013, the most significant change is the transfer from the distributors to SNAM Rete Gas of the Allocation process responsibility.
Finally, in 2012 significant relevance has been given to the consultation process relating to the reform of the definition of the natural gas raw material component for the purpose of the determination of the economic conditions for the supply of the protection service. The Authority, with resolution 263/12/R/gas, adopting the provisions of article 13 of Legislative Decree 1/2012, continued on the path that it had already undertaken with resolution 116/12/R/gas, directed at the progressive insertion in the calculation formula of the Wholesale Marketing Component (CCI), new references to the market prices for gas procurement, alongside the customary parameters deriving from the importation contracts. It is useful to recall that the Authority, with resolution 116/12/R/gas had already amended the calculation formula of the CCI, taking effect from April 2012, in order that it might also progressively contemplate a "market index". The Authority, with resolution 263/12, increased the weighting of the market index, fixing it at 5% for the 2012-2013 thermal years. Finally, with the recent Consultation Document 58/13/R/gas the Authority made further proposals directed at completing the reform of the CCI calculation methods.

The Authority proposed in this document increasing the market index weighting to 20% for the period April 2013-September 2013 and taking it to 100% for the following thermal years, in the meanwhile anticipating a gradualism mechanism directed at containing impacts on the revenues and margins of the sales intermediaries.
As far as concerns the electricity sector, 2012 was the first year of the Fourth Regulatory Period on matters of tariffs and quality for distribution and measurement of electricity. The tariff regulation is based on the ARG/elt 199/11 resolution, which approved the integrated TIT, TIME and TIC texts, while the quality regulation is entrusted to the ARG/elt 198/11 resolution, which approved the Electricity Quality Consolidated Text (TIQE). As far as concerns the new tariff framework, you are referred to the subsequent specific section. In connection with service quality, the main changes certainly regard the incentives and penalties system for continuity recoveries, where the incentives for the better-served areas are reduced, but instead are increased for the worst served areas. In the second place the individual continuity regulation is changed regarding end customers for average voltage prerogative, extending this to brief interruptions also, while in past only long interruptions were included. Lastly, activation of the monitoring of the supply voltage is noted
Again, with reference to the electricity distribution, the Authority introduced with resolution 559/12/R/eel a change of the conventional loss coefficients of the distribution networks, specifically reducing the coefficients for average voltage withdrawals from networks. The Authority reserves the right to intervene subsequently to change the loss coefficients because of further elaboration for the average voltage networks also, after which the current equalisation mechanism will also be amended. The Authority reviewed for 2012 also, with resolution 559/12, the formula of the prevailing equalising mechanism provided by the Consolidated Sales Text (TIV), de facto halving the debit items of the operators with effective losses higher than the standards and consequently reducing the credit items of the operators with lower effective losses.
With reference to the electricity sales activity, the 538/12/R/eel resolution is certainly significant. This takes its movements from the consulting case conducted in 2012 on the reform of the recognition methods of the overdue payments charge to the operators of the higher protection service. The Authority's initial proposals regarded an increase of the security deposit, use of the unpaid ratio (invoices non-payment rate) as a parameter for the recognition of the charges and differentiation of the component for the territorial level (other than by domestic customers typology and not, however, already anticipated). The 538/12 resolution approved, with effect from 1 January 2013, the new values of the RCV (Sales Marketing Remuneration) component, differentiating it for two territorial macro-zones (Centre-North and Centre-South). Compared to the previous values, in general the component for the domestic customers is reduced for the Centre-North and increased for the Centre-South, while for the non-domestic customers it is increased for both the macro-zones, but higher (almost double) for the Centre-South. The values of the PCV (Marketing and Sales Price) consideration applied to the end customers were also updated. These remain unchanged for the domestic customers but increased for the non-domestic customers, nevertheless remaining solely domestically. Finally, the amount of the security deposit provided by the regulation is unchanged, and is equal to the expense of month's supply.
The overdue payments theme also involved the 2012 regulation as far as concerns the electricity safeguarding service. The ministerial decree of 21 October 2010 provided, for the purpose of minimising the credit risk adopted by the operators, for safeguarding with respect to the growing phenomenon of overdue payments, the definition, by the Authority of a reintegration mechanism for the non-recoverable charges incurred by the operators for safeguarding relating to the overdue payments of the end customers who can no longer be supplied. With resolution 370/12/R/eel the Authority defined the quantification criteria of the charges that are subject to the aforesaid reintegration mechanism, with reference to the receivables not recovered that accrued in the periods of exercise already in the course of implementation. Furthermore, with resolution 520/12/R/eel the Authority commenced a procedure directed at acquiring cognitive elements regarding the typologies of end customers that can no longer be supplied, but who are entitled to be safeguarded, and regard the overdue payments charges attributed to each typology. 
With regard to the production of electricity, resolution 281/12/R/efr responds to the need for making the renewable energy sources (FER) producers not programmable regarding the costs, starting a process that intends to gradually move part of such costs to these producers (presently interacted among the consumers), so as to incentivate greater attention to the activity of forecasting emissions. The resolution therefore establishes that, when fully operational, the regulation of the production units from FERs must be uniformed to that prevailing for the generality of plants, with an approach that will require producers to update their emission plans almost to real time for fully operational imbalances. To reduce the impact on the producers, the Authority has however established the introduction of a transitory regime, valid throughout 2013, below which determined excesses (20% for the first 6 months and 10% for the remaining months) the imbalances will continue to be evaluated at the market price. With regard to insignificant plants (installed power less than 10 MVA), for which the National Grid (GSE) has the dispatching responsibility, the imbalance charge shall only be applied to the producers that use the dedicated collection regime.
Furthermore, the Development Legislative Decree (83/2012) on the production of electricity entrusted the Authority with the task of defining a system to safeguard the flexible plants necessary for the electricity system, although without additional charges for the State. Consequently the Authority published the first of the reference documents anticipated, the DCO 508/12/R/eel, centred on the architecture of the dispatching service market (MSD) and revision of the enhancement of imbalances for the ancillary services.

Instead. amongst the 2012 interventions transversal to the two gas and electricity regulated sectors those relating to the protection of the energy consumers were inserted. In this context resolution 153/12/R/com is certainly significant. The Authority introduced with these preventative measures (called the welcome letter or confirming telephone call to the end customer) to counter the practices of the undue contracting of end customers by retail sales companies. Specifically, should, following presentation of a complaint from an end customer for a "not requested contract", it is established that there was a breach by the sales company of the preventative measures introduced by the 'Authority, the re-attribution of the supply point is provided for, at the first useful expiry date in the dispatching/transport contract of the previous seller. Also provided for is the periodic publication of a black list showing the number of complaints for a not requested contract recorded as founded, subdivided by each seller involved.

Also introduced with resolution 548/12/E/com, were more challenging timings for operators for acknowledgement of the information requests presented by the Consumer Counter of the Authority. It is recalled that the task of the Consumer Branch is to verify the criticalities in the operators' (distributors and sellers) conduct with customers in relation to effective implementation of the regulatory directives. Finally, resolution 260/12/E/com instituted the Energy Customers Conciliation Service in an experimental form from 1 April 2013. This refers to a form of joint conciliation, which therefore leaves each party - consumer and merchant - free to reach an agreement or not with respect to disputes. The change, with respect to the joint conciliation of the Group in effect to date is, however, the significant circumstance that, in the case under examination, the conciliator, who has the function of favouring a compromise settlement between the parties, is a third party identified by the Authority.

The change, with respect to the joint conciliation of the Group in effect to date, is however the significant circumstance that, in the case under examination, the conciliator, who has the function of favouring a compromise settlement between the parties, is a third party identified by the Authority.
As far as concerns enforcement of the regulations for the electricity and gas sectors, the adoption of the new regulations for disciplining penalty procedures through resolution 243/12/E/com is noted, with procedural methods for evaluation of the commitments that introduce a simplified procedure for the definition of the penalty procedures that the Authority can discretionally propose to the merchant, with the effect of application of a reduced penalty (one third) and the consequent extinction of the procedure, with determined undertakings from the merchant to remove the contested breach.
With reference to the water sector, the Authority commenced the well-known intricate consulting process on the new transitory tariff method in 2012, before the transfer to the Authority itself of the functions relating to the regulation and control of the integrated water service. The consultation, in which the HERA Group actively participated, saw numerous occasions of public comparison and the publication of two consultation documents. The consultation was followed by resolution 585/12/R/idr at the end of December 2012, which approved the principles of the transitory tariff method (MTT) for the determination of the costs recognised for the years 2012 and 2013. This method must be adopted by the Area Entities for preparation of the 2012 and 2013 tariff by 31 March 2013, which will be followed by final approval by the Authority before 30 June 2013. For the 2013 competences, application of the transitory method in customers' invoices (already provisional from 1 April, and definitively from 1 July) keeps the tariff structure unchanged and applies an appropriate modulation coefficient to the tariffs previously in effect that includes the effects of the new method. The 2012 competences, as well as the annual statement of the 2013 items, will be taken up in the tariff commencing from 2014. The final method will be in effect from 1 January 2014. The consultation procedure will be conducted during 2013 for the definition of this. Amongst the more significant aspects of the transitory method should be cited, with regard to the recognition of capital costs, is the valuation of the investments through the revalued historical cost method, with recognition of the investments after the fact with respect to the time of realisation, and net of the goodwill recorded. Recognition of the financial and tax charges (in place of the rate of return provided by the previous systems), is calculated on the capital employed through standard references, as well as a risk coverage considered correct for the sector. To offset the two-year lag with which the investments are recognised in the tariff, a 1% lump sum increase of the financial charges is provided commencing from the investments made in 2012. Also provided is the constitution of a specific reserve fund in which the part of depreciation recognised in the tariff covered by the contributions to the sinking fund converges. Finally, the method provides an efficiency improvement and gradualist path for individual territorial areas in four annual quotas. For capital costs these converge with the cost recognised by the new method provided by the Authority commencing from the costs anticipated in the area plans, while operating costs, known as "efficients" converge with the cost anticipated by the area plans commencing from the 2011 final cost figures.
Resolution 585/12 does not deal with the theme of the restitution to the end users of portion of tariff remuneration on capital employed for the period 21 July 2011 - 31 December 2011 following the referendum result of 20 July 2011. In this regard, the Council of State, with its opinion of January 2013, confirmed the Authority's prerogative on tariff matters, including with reference to this item. Consequently, the Authority with resolution 38/13/R/idr commenced the procedure for determination of the criteria and methods of restitution of the 2011 return on capital, with conclusion of the procedure expected in May 2013.

2012 was also characterised by the promulgation of the Authority's measures on matters of tariff concessions and payments Instalments for the populations hit by the seismic events of May 2012. The consequent ordinances transversally regard the three regulation sectors of the Authority (gas, electricity and integrated water service) and, with reference to the energy sectors, have impacts on both the distributors and sellers. These measures have a significant impact for the HERA Group, given its marked presence in the territories hit by the seismic events. Specifically, with resolutions 235/12/R/com and 314/12/R/com the Authority provided for the suspension, for the period from 20 May to 20 November 2012, of the payment terms of the invoices relative to the supply of gas, electricity and integrated water service. For the purpose of mitigating the financial exposure of energy sales operators, the Authority provided the facility for sellers to request an advance from the Equalisation Fund for the Electricity Sector (CCSE) on receivables deriving from the invoices with suspended payments.

The advances, from which HERA COMM Srl also benefitted, substantially adopted the form of an interest-bearing loan, but on concessional conditions. The subsequent resolution 6/13/R/com published in January 2013, other than commencing the instalment plan for appropriate periods of 2012, suspended receivables, introduced the awaited tariff concessions system., This was substantiated by a 50% reduction of the energy distribution tariffs and those for the integrated water service, valid retroactively from 20 May 2012 for a two-year period. The lower revenues for the operators subject to this obligation shall be reintegrated therewith by appropriate mechanisms currently being defined by the Equalisation Fund for the Electricity Sector. The concessions system, which also involves the interest-bearing additional tariff services, was extended to the 104 municipalities identified by the Ministry of Economy and Finance Decree of 1 June 2012, in which the Mantua and Ferrara municipalities are included.

Finally, it is noted that the Group was subject to two inspection visits by the Authority during 2012. The first, commissioned with resolution 198/12/R/eel, verified the figures relative to the continuity of the electricity service distribution for 2011, and concluded with the Authority's assessment of full compliance with the rules on recording and classification of interruptions. The second, in connection with a checks programme of three electrical network operators, commenced with resolution 104/12/E/eel, regarded the control of the correct application of the provisions of the Consolidated Text of Active Connections (TICA), with reference to the practices relating to the connection requests received in the period 2008-2012. Currently the result of the inspection visit is not known.