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SETTING THE RIGHT PRICE II. Water pricing in an evolving institutional framework: recent trends within different national contexts The Italian Case: a.

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Presentation on theme: "SETTING THE RIGHT PRICE II. Water pricing in an evolving institutional framework: recent trends within different national contexts The Italian Case: a."— Presentation transcript:

1 SETTING THE RIGHT PRICE II. Water pricing in an evolving institutional framework: recent trends within different national contexts The Italian Case: a new entity for water pricing Bruxelles, 4 th December 2014

2 The “new entity” in the “national context”

3 AUTORITA’: CLASSICAL FUNCTIONS Regulatory functions  Setting tariffs for protected markets and for the use of monopoly infrastructures  Setting conditions for third party access to the network  Setting compulsory standards for quality of service by incentives, penalties, refunds  Setting rules for separation of vertically integrated companies  Setting conditions for service supply and contracts Monitoring functions (compliance of regulation, wholesale markets, liberalisation process) Enforcement functions (consumer protection, infringement procedures, dispute settlement) Advising functions (opinions to Government and Parliament on market structure and promotion of competition) 3 Law 481 of 14 November 1995 establishing AEEG as an independent regulator sets the powers for electricity and gas sectors Law Decree 201 of 6 December 2011 extended AEEG powers also to water sector Law Decree 145 of December 2013 extended the name, in AEEGSI

4 MULTI-LEVEL GOVERNANCE IN THE ITALIAN WATER SECTOR N ATIONAL LEVEL Italian Regulatory Authority for Electricity Gas and Water [AEEGSI] Ministry of Environment and the Protection of Land and Sea [MATTM] S OVRA -R EGIONAL LEVEL Basin Authorities R EGIONAL LEVEL Regions Arpa I NTER -M UNICIPALITIES L EVEL ATO [69] L OCAL L EVEL Municipalities Land Reclamation Authority With the law December 2011, n. 214, AEEGSI has competences also in regulating, controlling and monitoring water services. Main functions: -Design of rules for pricing -Tariff approval -Definition of quality levels -Control over the AMDP -Consumer protection 4

5 REGULATORY PROCESS 5 P HASE 1 AEEGSI defines tariff rules P HASE 2 Local Authorities approve the tariff proposal, composed of investment plan and related financial plan P HASE 3 AEEGSI collects all the proposal and all the other relevant data P HASE 4 AEEGSI investigates and verifies one-by-one the collected proposals, asking for further information or elements, if necessary P HASE 5 AEEGSI apporves – with or without modification or prescription, the proposal P HASE 6 AEEGSI carries out an enforcement activity

6 “Recent trends” in “water pricing”: the Italian Case Cost-Reimbursement Rules

7 CHRONOLOGY OF THE TARIFF COMPUTATION RULES ex-ante «K regulation» Capping revenues according to ex-ante «K regulation» ex post « regulation» Capping revenues according to ex post « regulation» - MTN - MTN (Normalized Tariff Method) [Ministerial Decree 1 August 1996] - Emilia-Romagna Tariff Method - Emilia-Romagna Tariff Method [Regional Decree no 49, 13 March 2006] - CIPE Tariff Method Previous method as modified by AEEG Del. 273/2013/R/idr - MTT – Transitory Tariff Method - MTT – Transitory Tariff Method [AEEG Del. 585/2012/R/idr] - MTC - Tariff Method for ex-CIPE - MTC - Tariff Method for ex-CIPE [AEEG Del. 88/2013/R/idr] - completing measures - completing measures [AEEG Del. 459/2013/R/idr] Regulatory Schemes & completing measures [AEEGSI Del. 643/2013/R/idr] 21 July 2011From 2012From 2014 To the end of 2015 WATER TARIFF METHOD (MTI) FIRST REGULATORY PERIOD Law Decree n. 201: elimination of former National Agency and same functions given to AEEGSI 6 December

8 AEEGSI’s building block regulatory process 8 -Transparency Phase Approval of a first transitional tariff method ( ) starting to homogenize national peculiarities -Coherency Phase Process of tariffs approval in order to ‘unblock’ stagnant situations. Given the priorities decided at local level,AEEGSI provided for a regulatory framework based on coherency among priorities and instruments -Efficacy & Efficiency Phase Approval of a new tariff method ( ) introducing first elements of investment incentives and operating costs efficiency process -Convergence Phase Promoting investments to reach convergence among different areas and to established quality standards. MULTIFACETED SUSTAINABILITY, CONSIDERING AFFORDABILIY AND WTP ELEMENTS, TOGETHER WITH QUALITY OF SERVICES, OF ENVIRONMENT, COHERENCY EFFICACY & EFFICIENCY COHERENCY CONVERGENCE EFFICACY & EFFICIENCY …? EFFICIENCY TRANSPARENCY

9 TARIFF METHODS: CHANGES IN REGULATION  From three tariff methods (MTN, CIPE and Emilia Romagna methods) …..to one single water tariff method  Today investments repaid ex post: no more negotiated tariffs (between local governments/administration and operators)  Tariff determination: 9 Tariff computation rule on the basis of the so called Metodo Normalizzato (MTN): (with all variables at constant value) ex-ante «K regulation» Capping revenues according to ex-ante «K regulation» MTT specifics that tariffs applied in 2012 (calculated on the base of the old Method) - and held constant in have to be updated multiplying them by a factor. For each year a=[2012; 2013], we have: ex post « regulation», Capping revenues according to ex post « regulation», introduced by MTT and confirmed by MTI

10 DEFINITION OF THE COST COMPONENTS IN MTI ( ) [1] [2] [3] [4] [5] [1] I MMOBILIZATION COSTS [2] C OMPONENT IN SUPPORT OF SPECIFIC OBJECTIVES [3] O PERATING COSTS [4] C OMPONENT TO COVER ENVIRONMENTAL AND RESOURCE COSTS [5] C OMPONENT TO BALANCE THE REVENUES LIMIT FOR THE OPERATOR IN THE PREVIOUS YEARS 10

11 COST COMPONENTS … Capex [1] I MMOBILIZATION COSTS 11 F OLLOWED C RITERIA Useful lives, Monetary revaluation of assets, A first definition of terminal value EFFECTS Reduction of the cash flow in the short term, to be compensated with terminal value; Long term growth of Base Rate is the cost component representing depreciation: F OLLOWED C RITERIA Monetary revaluation of assets Standardized Financial & Fiscal Costs Standardized D/E ratio EFFECTS Ceiling on the bilateral bargaining process between the service provider and the financial institution, to reduce financial costs It is not ensured the effective return on investment, rather taking into account a standard ratio between debt and equity (CS/CnS=1) OF and OF isc are calculated on the Net Invested Capital, evaluated ex post, according to the “historical cost” principle are Financial & Fiscal costs: and is the cost component defined in excess of the allowed cost for the use existing public infrastructure

12 COST COMPONENTS … FONI [2] C OMPONENT IN SUPPORT OF SPECIFIC OBJECTIVES 12 is the cost component for financing new investments, determined by the competent local Authority within the limit of the component: where ψ =( ) is the parameter that quantifies the need for additional funding, in order to achieve the planned investments, compared to reimbursment immobilization costs. This component will be present only in the Schemes III and IV, where the need for investments is very high is the cost component representing depreciation of non-repayable public transfers is the cost component defined in excess of the allowed cost for the use existing public infrastructure

13 COST COMPONENTS … Opex [3] O PERATING COSTS 13 F OLLOWED C RITERIA Rolling Cap mechanism, that allows the firm to partially earn the gains coming from cost reductions are the endogenous costs: if there is no variation of the objectives or activities of the operators (SCHEMES I and III) if there is variation of the objectives or activities of the operators (SCHEMES II and IV) F OLLOWED C RITERIA Co altri are the «passing trough cost» considered as exogenous ones, are the updatable costs:

14 are the environmental costs. They represent the costs of damage that water uses impose on the environment and ecosystems and those who use the environment (e.g. a reduction in the ecological quality of aquatic ecosystems or the salinisation and degradation of productive soils): Endogenous Environmental costs Exogenous Environmental costs are the resource costs. They represent the costs of foregone opportunities which other uses suffer due to the depletion of the resource beyond its natural rate of recharge or recovery (e.g. linked to the over-abstraction of groundwater) COST COMPONENTS … ERC [4] ENVIRONMENTAL AND RESOURCE COSTS 14 F OLLOWED C RITERIA ERC clearly expressed as VRG component from 2015

15 TARIFF REGULATION: REGULATORY SCHEMES O PERATING COSTS N O VARIATIONS IN THE OPERATOR ’ S OBJECTIVES OR ACTIVITIES P RESENCE OF VARIATIONS IN THE OPERATOR ’ S OBJECTIVES OR ACTIVITIES I NVESTMENTS S CHEME I – ordinary case Opex: more push on operating efficiency through a rolling cap, assuming the invariance over the period Capex recognised ex post using technical lives S CHEME II Opex: possibility to cover more opex motivating the request (and taking in consideration scale economies) Capex: same as ordinary case S CHEME III Opex: same as ordinary case Capex: more accelerated depreciation admitted, together with (limited) anticipation on investments S CHEME IV Opex: possibility to cover more opex motivating the request (and taking in consideration scale economies) Capex: more accelerated depreciation admitted, together with (limited) anticipation on investments Ordinary case is sufficient to finance investments Ordinary case not sufficient to finance investments not a constraint, but a way to evaluate the most appropriate regulatory option More investments More activities 15

16 16  Maximum limit to the variation of the tariff multiplier, except for any specific inquiry in case the limit needs to be passed in order to ensure that specific objectives are met K= 5% γ= 0,5  Tariffs applied in 2012 (calculated on the base of the old Method MTN) have to be updated multiplying them by a factor TARIFF REGULATION: 4 REGULATORY SCHEMES (2) Half margin from competitive water activities is used to reduce the tariffs of monopoly water activities

17 “Recent trends” in “water pricing”: the Italian Case Results after the Approval (first stage of tariff control)

18 SOME PRELIMINARY OUTCOMES: TARIFFS APPROVED BY AEEGSI MTT ( )  AEEGSI approved tariffs for operators concerning inhabitants  The new tariffs had an average yearly increase of 2.5% in 2013  The remaining tariffs are under accounting enquiries by AEEGSI MTI ( )  AEEGSI approved tariffs for operators regarding inhabitants.  The new tariffs had an average yearly increase of 3.96% in 2014 and 4.82% in

19 SOME PRELIMINARY OUTCOMES: INVESTMENT  From the specific received by AEEGSI from Local Bodies, 90 operators whose tariffs are already approved by AEEGSI (more than 33 mln inhabitants) plan to invest around € 4.6 bln in the next 4 years inhabitants inhabitants inhabitants inhabitants

20 Other activities

21 How AEEGSI is organizing information to support its decisions D ATA C OLLECTION DB Technical Data DB geography of operators DB Tariff components DB User Tariff & Consumption DB Balance Data DB Quality Data D ATA W AREHOUSE ( DW ) Integrating data from different sources, DW extracts, transforms and loads data into a central repository that could be used for reporting and data analysis R EPORTING ACTIVITY on: -W ATER SECTOR -W ATER SECTOR STRUCTURE [operators geographical mapping] S TATE OF WATER SERVICES - S TATE OF WATER SERVICES [state of infrastructures; investments requirement; water consumption..] C OSTS & T ARIFFS - C OSTS & T ARIFFS -I NDUSTRIAL OUTLOOK 21

22 PUBLIC CONSULTATIONS DateObject 22/05/ /2012/R/idr: adoption of Transitional Tariff Method –framework 12/07/ /2012/R/idr: adoption of Transitional Tariff Method – details of the method 02/08/ /2012/R/idr: adoption of regulatory decisions on transparency and billing 31/10/ /2012/R/com: facilities for populations hit by earthquake of 20 May /02/201382/2013/R/com: accounting separation for water service operators 07/03/ /2013/A: guidelines on measuring administrative costs of information obligations for regulated entities 25/07/ /2013/R/idr: investment needs and financial instruments to meet environmental quality and water resource targets 01/08/ /2013/R/idr: tariff decisions on 1° regulatory period ( ) – new method 28/11/ /2013/R/idr: tariff decisions on 1° regulatory period ( ) – details of recognised costs 07/02/201436/2014/R/com: revision/simplification of accounting separation rules 27/03/ /2014/R/idr: tariffs determinations for years 2010 and /04/ /2014/R/idr: management agreement models between contracting body and operator 19/06/ /2014/R/idr: tariff definition for sewerage and treatment of industrial customers 19/06/ /2014/R/idr: Environmental and Resource Costs (ERC) in MTI To be published: second document on tariff definition for sewerage and treatment of industrial customers To be published: contractual quality 22

23 23 THANK YOU!


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