Other problems

ACEA Ato5: Measures regarding the alleged illegitimacy of tariffs

Resolution 4, passed by the Mayors’ Conference held on 27 February 2007, recognised the higher costs incurred by the operator since taking over management of integrated water services compared with projections set out in the Area Plan. As a result, the Resolution proceeded “to approve revised tariffs with effect from 2006”.

The following Decision 1/2008 issued by the Chairman of AATO 5 proceeded “to modify the tariffs for 2006 to enable the operator to recoup the shortfall via increases in the amounts billed to its customers”.

Following introduction of the revised tariffs, Italy’s Supervisory Committee for the Use of Water Resources (COVIRI) passed Resolution 7/2008, putting forward two objections to the decision taken by the Authority:

  • firstly, it observed that the increase in the average real tariff for integrated water services exceeded the limit established by the MinisterialDecree of 1 August 1996, being over 5% for each year;
  • secondly, it cited “the principle of the non-retroactivity of administrative actions designed to guarantee certainty in legal relations, and the legal principle prohibiting unilateral changes with retroactive effect to legal relations between private parties”.

In fact, the Company believes COVIRI Resolution 7/2008 to be entirely illegitimate, leading it to file an appeal against the above ruling before the Regional Administrative Court of Lazio.

In fact, in the Company’s opinion, the argument put forward by COVIRI in the above ruling – according to which Resolution 4/2007 passed by the Mayors’ Conference raised the real average tariff by more than the limit established by art. 5 of the Ministerial Decree of 1 August 1996 – is completely illegitimate as it is in clear contrast with:

  • firstly, art. 117 of Legislative Decree 267/2000 and subsequent amendments and additions, which provides that tariffs for local public services must “ensure a fair return on investment and the related operations” and establishes the following criteria for calculating tariffs, which should take account of: “a) the need for revenues to cover the related costs, in such a way as to ensure that costs are fully covered, including charges for technical and financial depreciation; b) the need for a balanced debt-to-equity ratio; c) the cost of operating the infrastructure, bearing in mind investments and service quality; d) the need to provide an adequate return on invested capital, in line with prevailing market conditions”;
  • secondly, art. 154 of Legislative Decree 152/2006, in accordance with which the tariff “constitutes the price for integrated water services and is fixed by taking account of the quality of water resources and of the service provided, the necessary infrastructure and upgrading work, the cost of operating the infrastructure, an adequate return on invested capital and the operating costs for protected areas, in addition to a portion of the operating costs incurred by the Area Authority, in such a way as to guarantee full coverage of investment and operating costs according to the cost recovery principle …”;
  • thirdly, the Ministerial Decree of 1 August 1996, with specific reference to extraordinary changes to the tariff, above all with regard to the provisions of the last paragraph of art. 4, in accordance with which “The average real tariff may be revised as a result of: legislation or regulations that modify requirements regarding the quality of the product and service, subject to prior approval by the Area Authority; periodic checks on the services provided; changes to the normalised method established by the Supervisory Committee for the Use of Water Resources” – and art. 8, paragraph 2, according to which “The Area Authority may, aside from the three-year tariff review, at any time intervene in the event of significant differences between projections in the financial plan and the actual figures regarding: a) the achievement of the levels of service envisaged in the plan, following the related investments, assessing changes to the limits for price "K" or any penalties, and rebates due in accordance with the terms of the concession arrangement, especially with regard to the "depreciation" and "return on capital" components of the tariff; b) the match between revenues deriving from application of the tariff structure and revenues expected on the basis of the average tariff established in the concession arrangement, in order to make the resulting changes; c) the correspondence of operating costs with structural changes in production and distribution and the resulting changes to the reductions provided for by art. 6”.

The above considerations lead us to believe that COVIRI’s resolution is illegitimate and, consequently, that the tariff fixed by Resolution 4/2007, as passed by the Mayors’ Conference for ATO 5, is valid.

Subsequently, the Mayors’ Conference for AATO 5 issued Resolution 3 of 27 January 2009, opting “not to suspend, or cancel, Resolution 4 of 27 February 2007 passed by the Mayors’ Conference; not to appeal to the Regional Administrative Court against COVIRI Resolution 7; and to immediately launch procedures aimed at complying with all the requirements set out by COVIRI in Resolution 7/2008”.

As of today, despite the declared intentions and numerous requests sent by the company, the Area Authority has still not calculated a new tariff that, eventually, will acknowledge the observations formulated by COVIRI.

With resolution no. 5 of 21 December 2009, the Mayors’ Conference for AATO 5 cancelled previous resolution no. 4/2007, thus also cancelling the 2007 tariff referred to above. The content of the resolution, whose objective is to conform with COVIRI observations, is summarised below:

  • cancellation of resolution no. 4/2007 and all other deliberative and/or executive, required, connected and consequential acts;
  • conferral of the mandate to the President of AATO to cancel presidential resolution no. 1/2008;
  • delegation to the competent bodies, with the support of the STO, to draw up an average tariff proposal for the years 2006, 2007, 2008 and 2009 calculated on the basis of laws and the contract, and at the Mayor’s Council, to present said proposal to the Conference of Mayors called before and not after 31 March 2010;
  • notice to the operator, in the interim period, to stop issuing invoices with different tariffs from those provisionally authorised or different from those in force in 2005.

In February 2010 the company lodged an appeal to the Administrative Court of Latina, deeming the aforementioned resolution to be gravely vitiated on a number of grounds; the company then filed further issues to be added to the pending appeal.

In July 2010, the Regional Administrative Court of Latina referred the decision to the Regional Administrative Court of Rome as it did not hold regional competence.

The appeal is still pending.

In addition, the appeal before the Regional Administrative Court does not prevent the company from bringing civil proceedings to assert the contractual and/or non-contractual obligations of the Area Authority to ACEA Ato5 and obtain compensation for all damages incurred by the operator. This also applies in the event the administrative court judge essentially confirms the illegitimacy of the 2006 tariff (with reference to the profile of the tariff increase and/or its retroactivity).

Therefore, the company, supported by an authoritative legal opinion, is deemed to have valid grounds for having resolution no. 5/2009 of the Mayors’ Conference cancelled by the administrative court judge and, in any case, for launching direct, immediate and independent legal proceedings aimed at recovering its credit. However, management believe that, on the basis of prudential evaluations, it must make a provision in consideration of the maximum estimate of the potential liability deriving from said problems (25 million euros) relating to the 2006-2009 period.

On 8 April 2010, the Mayors’ Conference, during which members of the Area Council were appointed, resolved on the determination of the 2010 tariff, establishing the temporary application of tariffs in force in 2005.

This appears to be abnormal and illegitimate given that it does not take into account the legislative context regarding determination of the tariffs.

In June 2010, the Mayors’ Council resolved on a proposal to ACEA Ato5 to re-open negotiations, with the obligation of resolving the dispute connected to the 2003-2010 period, and drawing up and approving the new Area Plan before 31 December 2010. Negotiations are currently closed and the aforementioned appeal submitted by the company was discussed before the Regional Administrative Court of Lazio on 24 February 2011. Therefore, the company is awaiting the relevant ruling.

In fact, subsequent meetings of the Mayors’ Conference did not produce any solutions to the tariff problems.

In light of the above information, for billing purposes, the company applies the tariff published in 2005, in agreement with the taxation of the entity, however assessing its revenues in these Financial Statements on the basis of the minimum volumes guaranteed by the project put out to tender valued at the real average tariff, equal to that of the bid, plus forecast and compound inflation. In fact, based on events after the close of 2009, i.e. following various resolutions of the grantor, despite remaining convinced of the validity of the grounds adopted regarding the non-voidability of the provision resolved at the Mayors' Conference in February 2007, management decided to take a prudent approach to the valuation of revenues.

In support of the arguments put forward, on 8 July 2010, the Area Authority received a copy of a report from Co.N.Vi.Ri. stating that “it is incorrect to apply the average tariff determined for 2005 to 2010, and then calculate the non-retroactive equalisation” and “therefore the Authority shall apply the average tariff to the reference year and the Operator shall see that the related investments are made, provided that the average tariff is determined for that year”. By means of said report, Co.N.Vi.Ri. asked the Area Authority to “adopt the relevant measures by applying the real average tariff set out in the Area Plan for the year 2010”.

Subsequently, said Co.N.Vi.Ri. - by means of resolution no. 39/2010 – further clarified that the Area Authority is obliged to resolve, on an annual basis, a real average tariff which, "multiplied by the volume than can be provided, determines the total revenues which ensure the Operator has the possibility of carrying out the forecast investments” with the result that "a real average tariff not in line with the Area Plan would not allow the Operator to make the forecast annual investments”.

In this context, ACEA Ato5 – in the belief that a solution to the problem can no longer be put off and while awaiting a resolution of the ongoing dispute – notified all bodies and natural persons of the Area Authority of an extra-judicial demand so that they take all necessary and subsequent measures for the determination of the 2010 tariff and conclusion of the review process, taking into account the damages and inconvenience resulting from the delay in adopting the aforementioned provisions.

Gori

Regarding FY 2009, as it is well known, on 5 November 2009, after long negotiations, the Area Authority and GORI signed a Settlement Deed (hereunder the “Settlement Deed”), already ratified and approved by GORI’s Board of Directors (hereinafter also BoD) and General Shareholders’ Meeting. In particular, the Settlement Deed set out, amongst other, the following:

  • definitive regulation of the mutual relations established between 2006 and 2009, while acknowledging and confirming:
    • (i) tariff adjustments at 31.12.08, related to receivables for invoices to be issued, as resulting from the financial statements ended on 31.12.08 and totalling 74 million euros (Group portion, 27 million euros). With subsequent adjustment actions, the Area Authority not only will maintain the economic-financial balance of the reference financial year, but will also ensure the recovery of these receivables, including interest, within seven years starting from 1 January 2010;
    • (ii) a real average tariff, lower compared to the tariff applicable according to the Area Plan in force, but suited to ensure tariff revenues for 2009 equal to 135 million euros;
  • the Area Authority should review the current Area Plan and the related Tariff, Financial and Economic Plan (hereinafter “FEP”), in compliance with standards and obligations set forth by law and in view of ensuring long-term financing by Credit Institutes, while fulfilling requirements envisaged by the banking system;
  • GORI undertakes to adopt specific measures aimed at service efficiency and lower management costs.

The General Meeting of the Municipalities of the Area Authority rejected the Settlement Deed on 11 June 2010.
On 30 March 2010, the company sent a letter of default to the Area Authority to urge the same authority to adopt the tariff structure for 2010, through special order issued by the competent body and within thirty days after the receipt of the deed. Following the letter of default, by reason of the fact that no action was taken, GORI filed in an appeal to the Regional Administrative Court of Campania – Naples, pursuant to Art. 21 bis of Law no. 1034/1971, against the silence/non-performance of the Authority, in order to at least obtain the tariff structure for the achievement of a real average tariff for the year 2010, as envisaged by ATO 3's Area Plan.

In the meanwhile, the Mayors’ Conference met to neutralise the effects of the above-mentioned appeal and on 21 June 2010 resolved on an insignificant tariff increase, equal to the forecast rate of inflation (1.5%), certainly not sufficient to allow for the achievement of the real average tariff provided for by the Plan for the year 2010.

Following said resolution, it became impossible to proceed with the proposed appeal due to the lack of interest. Therefore, the company presented a second appeal to the Regional Administrative Court, requesting the cancellation (and, on a precautionary basis, a suspension of the effects) of Provision of 21 June 2010 and, at the same time, instructing the Area Authority to adopt measures regarding the tariffs set out in the Area Plan. By means of Order of 22 September 2010, the Regional Administrative Court promptly set a date for the hearing to deal with this matter, rejecting the request for precautionary measures, considering that:

  • art. 10.2 of the service assignment agreement envisages that the annual tariff adjustment be carried out by also “taking into account the quality of water resources and the service provided” and that “for the purposes of the annual update, account is also taken of the objectives regarding the improvement in the productivity and quality of the service supplied”; also, based on art. 9.3 of the service regulations, “the Authority, without prejudice to the three-year check on application of the tariff may, at any time, intervene in the case of significant variations in the forecasts of the Economic and Financial Plan regarding:
    • a) achievement of the service levels set out in the plan (...);
    • b) consistency between collections (...) and forecast collections (...);
    • c) conformance of operating costs with structural variations in production or distribution or the resulting reductions pursuant to art. 6”;
  • in accordance with art. 8, paragraph 2 of Ministerial Decree of 1.08.1996, the Area Authority would also appear to provide, for tariff purposes, for the possibility of checking that what has been planned matches what has been carried out.

Antitrust Authority investigation of the acquisition of Publiacqua

On 8 June 2006 ACEA was informed that Italy’s Antitrust Authority was about to start an investigation of an alleged violation of article 81 of the Treaty of Rome (anti-competitive agreements) in relation to the acquisition, in partnership with Suez, of a 40% stake in Publiacqua, which manages water services in the Florence area.

On the same date ACEA submitted the documentation relating to the transaction.

The investigation saw a number of key developments during the first half of 2007, with several Company representatives giving evidence during hearings held at the Authority’s offices and deposition of defence briefs (prepared with the assistance of the consultants hired by the Company). The most important event took place during the second half of July, when the report containing the results of the investigation was passed to the Antitrust Authority Board for its final decision.

On 28 November 2007, ACEA was notified of the Antitrust Authority’s ruling, in which it:

  • deemed that a horizontal agreement existed between ACEA and SUEZ in the integrated water services sector, which is managed by a public-private partnership in which the private partner is selected via a tender process;
  • ruled that the parties should take actions to avoid repetition of the sanctioned behaviour, with the Authority to be notified of the nature of such actions within 90 days, and also amend the rules governing the partnership regarding the part deemed to be in violation of competition regulations;
  • ordered ACEA and SUEZ to pay fines of 8.3 million euros and 3 million euros, (the difference in the amounts derives from their respective turnovers in the relevant sector in Italy).

ACEA appealed the Authority’s decision before Regional Administrative Court of Lazio, with the hearing on the merits of the case held in April: on 7 May 2008 the court announced the related sentence, finding in ACEA’s favour and cancelling all the rulings and the fine imposed. Details of the sentence, upholding all of the appellant’s arguments, were published at the end of June.

The favourable ruling passed down by the Regional Administrative Court of Lazio in 2008, which met to hear the appeals filed by ACEA and Suez Environnement, was executed by the Ministry of Economy and Finance that, on 11 June 2009, ordered the return of the penalty of 8.3 million euros paid by ACEA in February 2008.

The Antitrust Authority filed an appeal against the decision of the Regional Administrative Court of Lazio. A hearing is yet to be set.

Antitrust Authority Investigation on ACEA Distribuzione

Towards the end of the year, the Antitrust Authority started an investigation against ACEA Distribuzione and other Italian utility companies on the alleged violation of Article 82 of the Treaty of Rome in relation to switching activities allegedly prevented in the event the customer decides to switch to another wholesaler.

ACEA Distribuzione asked for the implementation of the so-called leniency programme to prevent the burden of abuse and remove any relevant consequence related therein.

The company is still waiting for the final decision to be taken by the Antitrust Authority.

By means of the provision adopted at the meeting on 8 September 2010, the Antitrust Authority accepted the commitments presented by ACEA Distribuzione, making them binding; as a result of closing the preliminary investigation of ACEA and ACEA Distribuzione, without verifying the breach, pursuant to art. 14-ter, paragraph 1, Law 287/90; that ACEA Distribuzione must submit reports, the first one after 120 days and subsequent reports on a six-monthly basis, for a period of two years, to actually prove that what was proposed was carried out as a “commitment”; that ACEA, with the same frequency, must present reports on actions taken to ensure the logical and physical unbundling between distribution and sales. The first of these reports was delivered to the Antitrust Authority on 18 January 2011.

The deadline for any interested party to present an appeal to the Regional Administrative Court of Lazio regarding the above-mentioned provision has expired, and said decision is final and binding.

The substance of the commitments can be summarised into two approaches: the first, of a temporary nature while awaiting the realisation and entry into operation of the new system, currently in progress as part of the so-called Programma Volta (Volta Programme), to guarantee the strengthening of current procedures for the provisioning of end users/ activations for access to the current NSIU system according to criteria which require more rigorous functional selection/unbundling, while A. Distribuzione initiated and made available new and more complete functionalities in its portal in which wholesalers manage switching requests; the second, a permanent type, shall occur with the realisation and entry into operation of the system included in the aforementioned Volta Programme.

E.ON. Produzione S.p.A. proceedings launched against ACEA, ACEA Ato2 and AceaElectrabel Produzione

These proceedings were launched by E.ON. Produzione S.p.A., as successor to ENEL regarding a number of concessions for the abstraction of public water from the Peschiera water sources for electricity production, to obtain an order against the jointly and severally liable defendants (ACEA, ACEA Ato2 and AceaElectrabel Produzione) for payment of the subtension indemnity (or compensation for damages incurred due to illegitimate subtension), which remained frozen in respect of that defendant in the 1980s, amounting to 48.8 million euros (plus the sums due for 2008 and later) or alternatively payment of the sum of 36.2 million euros.

The question of the amount and the assumptions appears to be based on dubious grounds and, in any case, the early stage of the proceedings does not allow for forecasts.

The only significant development of note is the decision of the TRAP (Regional Court of Public Waters), before which a ruling is pending regarding the matter in question, to arrange for CTU (court-appointed expert) as regards the values of subtension for branching off, and subsequent reduction in hydroelectric production, and indemnities due. The development phases of the court-appointed expert are at the initial stages.

Minority shareholder of ACEA Ato5

In October 2009, one of the minority shareholders of ACEA Ato5, which holds roughly a 5% stake in the company, filed a claim against ACEA for an alleged breach of shareholders' agreements. The minority shareholder claimed that this breach led to a reduction in the value of its shares amounting to roughly 40 million euros and, therefore, is requesting the payment of damages for the aforementioned amount.

In the second half of 2010, and in January 2011, several attempts were made by the plaintiff to reach a successful conclusion of the dispute, given the accumulation of interests that has seen the parties involved on other fronts. ACEA recently officially noted how the counterparty's claim lacks any grounds, and the only amicable solution of the litigation may therefore be the renunciation of the partner, also whereas, in response to the exorbitant demand, the plaintiff sent a conciliatory proposal for a few hundred thousand euros, thus undermining the grounds for said credibility of the request. Acea's defence counsel repeatedly reiterated its absolute conviction in obtaining a rejection of the opposing claims.

IPSE 2000

On 29 December 2006, Capitalia (now incorporated into Unicredit) purchased equity investments in IPSE 2000 previously involving other Strategic Shareholders, including ACEA. On said occasion, Capitalia issued the assignors a letter of indemnity on the basis of which it accepted any liabilities toward minority shareholders deriving from its management of acquired equity investments. Eighteen months have passed since that time to the end of June 2008 without Capitalia/Unicredit taking further advantage of said equity investments. As a result, the minority shareholders have repeatedly complained of the occurrence of one of the conditions (as such, sufficient) for their payment of the First Earn-out.

Unsatisfied with the replies – despite always being promptly produced - to said requests, in December 2009 the minority shareholders notified the Strategic Shareholders, including ACEA, of an “arbitrator appointment deed" to have their earn-out claims recognised and asserted.

In conformance with the letter of indemnity in our possession, also in agreement with the other strategic shareholders benefiting from the same protection, ACEA therefore urged Unicredit, as successor regarding the obligations assumed by Capitalia, to accept liability for any outcomes of prejudice that the arbitrator should reach and, in that sense, also assume any costs and take responsibility for coordinating the appropriate defence during arbitration proceedings. Based on the letter of indemnity, it is held that the legal initiative of the minority shareholders will not have any prejudicial effects on the company’s financial statements.

While Unicredit immediately acknowledged, by confirming it, the request for application of indemnity in the unlikely event of being the losing party, and subsequently took on the job of organising the defence, the board of arbitrators appointed in the meantime – by definitively pronouncing with arbitration award issued midway through July 2010 – fully rejected all the plaintiff’s claims, including preliminary, although compensating the expenses between the parties given the complexity of the point in question.

Acea Luce

By means of the act notified on 7 February 2011, the companies Manutencoop Facility Management (“MFM”) and SMAIL (formerly ACEA Luce) presented an application for arbitration as regards ACEA and ARSE, pro-quota sellers of 100% of the share capital of ACEA Luce: the applicants are requesting a ruling against ACEA and ARSE due to non-fulfilment or negligence as regards contractual obligations and, therefore, the termination of the purchase contract and subsequent return of the sum paid (3 million euros), plus additional costs, and compensation for damages of roughly 7 million euros.

In support of the requests, MFM essentially believes that the elevated number of claims raised by said party after the transfer, due to an alleged breach of the contractual guarantees, would demonstrate actual divergence between the facts in the summary obtained and the contents of first the due diligence and later the contract.

It can only be pointed out that ACEA and ARSE, in checking the claim notices presented by the acquiring party from the acquisition until the present day, have, in some cases, accepted responsibility for the facts revealed therein, by paying, or undertaking to pay at the time the associated obligation assumes a definitive nature, some amounts, although modest in said context.

Otherwise, the purchase contract for the equity interest envisages, on one hand, that the financial compensation constitutes the only solution actionable by the acquiring parties in the event of an incomplete or incorrect declaration and, on the other, that the associated liability of the grantors is restricted to a maximum limit of 1,250,000 euros, to be enforced in accordance with the methods and timeframes better detailed in said act.

The question of the amount and the assumptions appears to be based on dubious grounds and, in any case, the early stage of the proceedings does not allow for forecasts.