Regulatory Risks

With regard to the Energy market, each of the joint venture companies, through the Regulatory and Government Affairs department, monitors regulatory developments. This involves providing support both with regard to the preparation and the consistent application of regulations in corporate procedures and within the electricity and gas businesses, in order to reconcile regulatory compliance with the interests of the joint venture.

Management of regulatory risk takes the following form:

  • The management of relations of a technical and institutional nature;
  • Technical and regulatory support in respect of activities subject to regulation and control;
  • Reporting on and monitoring regulatory compliance.

During the third regulatory period for the energy Networks market, the Italian Authority for Electricity and Gas introduced various new regulations governing tariffs, which continue to give rise to a number of uncertainties.

This may represent a risk for the Company’s economic result, and requires further specific analyses that, in most cases, have already been launched together with the Authority’s technical departments.

As regards Company Specific Equalisation, the 2008 company-specific correction factor makes it possible to greatly reduce the risk of forecast amounts of company specific equalisation for 2009 and 2010.

With regard to 2009 and 2010, the company-specific correction factor was updated by applying the rules set out in the Integrated Code containing the provisions of the Italian Authority for Electricity and Gas for the delivery of electricity transmission, distribution and metering services for the regulatory period 2008-2011 (resolution no. 348/07 and subsequent updates), Annex A, Article 42.5. Any deviations from the estimates could result from the application interpretations by the Italian Authority for Electricity and Gas of art. 42.5, which currently cannot be identified.

There is also a degree of uncertainty regarding the general equalisation mechanisms, introduced during the current regulatory period, particularly for the costs incurred in the development of electronic metering systems and the marketing of transport services.

With regard to the equalisation of the costs incurred for electronic metering systems (equalisation of metering), the limited reliability of projections of the economic impact are linked to the weight assigned, in the related analytical formulation, to the creation of specific system parameters, exclusively developed by the Authority and, therefore, not retroactively available to individual operators. In addition to this uncertainty, for 2010 and 2011 there is also the impossibility of performing any simulation due to the cancellation of the mechanism for the determination of metering equalisation pursuant to art. 40 of the Transport Code and resolution ARG/elt/ 40/10.

More specifically, by means of resolution ARG/elt 40/10, the Authority defined the metering equalisation amount of 2008 for all distributors. Subsequently, following reports from some operators, a new data collection process was launched to redefine the metering equalisation for 2008.

The new data collection device envisages the recalculation of amounts for 2008 and definition of 2009 amounts before the autumn of 2010.

These amounts have still to be resolved. In addition, subsequent resolution ARG/elt 228/10 updating the 2011 tariffs for the delivery of electricity transmission, distribution and metering services temporarily suspended from 2010 the mechanism for equalisation of the metering service pursuant to art. 40 of the Transport Code, conferring a mandate to the Tariffs Department to carry out an in-depth examination of the problems relating to the application of the mechanism and drawing up any amendments to be submitted for public consultation before they are adopted. The company forecast the corresponding amount for 2010 based on the existing regulations while waiting for a confirmation or redefinition from the Authority regarding the operating methods for calculation of the metering equalisation system.

The uncertainty over the equalisation amount of the transport marketing costs has been greatly mitigated by the publication of resolution ARG/elt/227/10 which determined the equalisation amount of commercial costs of various distribution companies for 2008 (recognising the amount of 22,959.79 euros to Acea Distribuzione).

The Italian Authority for Electricity and Gas specified the criteria to be adopted, in the resolution in question, for the calculation of the aforementioned equalisation. Consequently, it was possible to estimate its value for the years 2009 and 2010, despite there still being the risk of equalisation amounts deriving from the possibility that commercial costs are not fully recognised by the Italian Authority for Electricity and Gas in accordance with evaluations that are currently not foreseeable.

Constitutional Court sentence 335/2008

Constitutional Court sentence 335 of 10 October 2008 declared art. 14, paragraph 1 of Law 36/94 to be unconstitutional, following inclusion of the article in the Consolidated Environment Act, under art. 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 scheduled 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).

Moreover, within two months of the law coming into force, at the proposal of the Supervisory Committee for the Use of Water Resources, the Ministry for the Protection of the Environment, Land and Sea is to issue decrees establishing the criteria and parameters for implementing the rebate. The decrees must also establish the minimum information that individual operators must periodically send to end users regarding the plan for the construction, completion, upgrading and rollout of the treatment plants provided for in the respective Area Plan, and the state of progress in implementing the plan, in addition to the related forms of publication, including indication in water bills.

In September 2009, the Ministry for the Protection of the Environment, Land and Sea issued a decree (published in the Official Journal 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, 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 (that are being identified by the Authorities) 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 linked to the rebate obligation.

On the basis of data currently available, revenues billed to users that, in line with Constitutional Court sentence 335/08, must be exempted from the payment of the waste water treatment service from 2003, amounted to roughly 38.2 million euros for consolidated water companies.

It should be noted that said value does not represent the amount that is to be repaid by the Operator, but the maximum theoretical amount of revenues achieved before deductible charges that are currently being defined by the respective Area Authorities. For more details please refer to the section "Information on service concession arrangements”.

Provisions relating to the landfill waste eligibility criteria (sewage sludge)

The Interministerial Decree “Definition of landfill waste eligibility criteria”, implementing Legislative Decree 36/2003, published in Official Journal no. 201 of 30 August 2005, not only reiterates the provisions of the previous Ministerial Decree of 13 March 2003 in relation to the concentration of dry waste (which must be no lower than 25%), but requires that the landfill eligibility criteria established for non-hazardous waste are complied with (with particular reference to levels of T.O.C. (total organic carbon).

Based on said Decree, effective from 1 January 2009, it is no longer possible to transfer solid matrixes produced by treatment plants to the landfills, if the extraordinary conditions envisaged are not met.

Along with the entry into force of the aforementioned Ministerial Decree, we need to take into account that the volumes of landfills used for the disposal of sludge are almost saturated, with a subsequent 15-20% increase, on average, in disposal costs.

In addition, the saturation of plant availability in the Lazio Region and neighbouring regions – Umbria and Tuscany – and the difficulty in obtaining agricultural authorisations in the Tuscany region, have made it necessary to use distance disposal solutions, more than 500 km from the point of production of the sludge. This has resulted in a greater incidence of transport costs, also in relation to significant growth in fuel prices.

In order to contain the effects of said risk factor, Acea ATO2 S.p.A. has undertaken a series of initiatives aimed, on one hand, at reducing the production of sludge and cut volumes through the installation of drying systems at Roma Nord and Roma Est (Rome North and Rome East) purification plants; on the other, it has adopted initiatives targeted at monitoring the entire integrated production/transportation/final disposal cycle (composting plant recovery, spreading for farm-related purposes and/or landfill disposal).

The impact of said risk factor on the economic, equity and financial position will be high, also in relation to the forecast scale of the problem relating to sludge disposal over the next few years.

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 Ministerial Decree 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 operations 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 to 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 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 Lazio Regional Administrative Court 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 be 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 from receipt of the deed. Following the letter of default, by reason of the fact that no action was taken, GORI filed 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 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 and 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.