Lorenzo BardelliDirectorWater System Directorate

Bologna, 20th February 2016

OPENING IWA WATERIDEAS CONFERENCE

Water regulation for efficiency in water distributionmanagement: the way forward in Italy

2

NEW OBLIGATIONS FOR

SUPPLIERS

� Regulation of contractual quality of water service

� Rules about collection expenditure

� Standard framework for maintenance and new infrastructure investments

SHARING THE RISK IN

THE NEW REGULATORY

FRAMEWORK� Schemes of standard agreement between ATO and

service providers

INCREASING PRICE

REFLECTIVITY AND

PROMOTING BETTER

STANDARD FOR

ENVIRONMENTAL

PROTECTION

� Definition of tariffs for sewerage and treatment of industrial wastewater

� Explicit identification of environment and resource costs

� Unbundling (with definition of the “integrated water service” perimeter)

Fields of actionfor the definition of a clear and coherent framework of rules:

complements to tariff metodology

FIRST REGULATORY PERIOD

2012-2015

Authority approach to Water regulationPiecemeal activity within a comprehensive strategy

� Local decision making process� Empowerment: self determination at decentralized level � Coherency in Planning: infrastructural interventions – economic and financial

variables

Cost reimbursement rules� Constraints on Operating Costs (endogenous vs. exogenous)� Priority to Investments� Price Cap and Full Cost Recovery

Pricing to end-users� Tariff multiplier� Reorganise tariff structure applied to consumers

Rebalancing past disequilibria� Past credit billing� Investigation on above-the-cap proposals

Measures to avoid default� Urgent equalisation

Cost reimbursement rules depend on regulatory schemes for the years 2014-2015

OPERATING COSTS

NO VARIATIONS IN THE OPERATOR’SOBJECTIVES OR ACTIVITIES

PRESENCE OF VARIATIONS IN THE

OPERATOR’S OBJECTIVES OR ACTIVITIES

INV

ES

TM

EN

TS

SCHEME 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

SCHEME II� Opex: possibility to cover more opex

motivating the request (and taking in consideration scale economies)

� Capex: same as ordinary case

SCHEME III� Opex: same as ordinary case� Capex: more accelerated

depreciation admitted, together with (limited) anticipation on investments

SCHEME 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 notsufficient to finance investments

5,0exp3

≤∑+

MTT

t

t

t

RAB

PI

5,0exp3

>∑+

MTT

t

t

t

RAB

PI

not a constraint, but a way to evaluate the

most appropriate regulatory option

More investments

More activities

5

Definition of a specific regulatory scheme� Once defined the relation between investment needs from 2014 to 2017 and the value of

existing infrastructures and of the additional operating costs of any specific objectives, the localAuthority selects the rules for tariff determination that apply to the type of regulatory schemecorresponding to the chosen quadrant, and it adopts its own specific regulatory scheme, composed of the following acts:

6

Program of Interventions (PdI)

� Identifying critical issues� Defining specific objectives� Planning investments for the period 2014-2017,

determing

Economic and financial Plan (PEF)including the indication of economicand financial variables

Management agreement

and its modifications

OPERATING COSTS

NO VARIATIONS IN THE

OPERATOR’S OBJECTIVES

OR ACTIVITIES

PRESENCE OF VARIATIONS IN

THE OPERATOR’S OBJECTIVES

OR ACTIVITIES

INV

ES

TM

EN

TS

SCHEME I SCHEME II

SCHEME IIISCHEME IV

5,0exp3

≤∑+

MTT

t

t

t

RAB

PIexp2017

2014PI∑ Low

5,0exp3

>∑+

MTT

t

t

t

RAB

PI

Investments in relation to existing infrastructure

LOW

Investments in relation to existing infrastructure

LOW

Investments in relation to existing infrastructure

HIGH

Investments in relation to existing infrastructure

HIGH

High

PLANNEDINVESTMENTS FOR THE

PERIOD

2014-2017:

€ 5.797.156.103*

PLANNED ACTIONS :Maintenance of water supplying systems and plants;Development of new sewerage nets and wwtplants (higher compliance rates);Placing of meteringsystems

CRITICAL ISSUES:Old networks and plants;Partial coverage of the sewerage and waste water treatment (wwt);Water losses;Lacking of meteringsystems

Criticality & planned investments for the period 2014-2017

7[*data refered to 136 operators; 44 mln inhabitants] Planned investments (%) for regulatory Scheme

Focus on tariffs approved by aeegsi [years 2014-2015]

8

Tariffs approved (% inhabitants)

� AEEGSI approved tariffs for 1.971 operators regarding 53.316.205 inhabitants. � The new tariffs had an average yearly increase of 4.34% in 2014 and 4.55% in 2015

Trend of investments after the action of a central regulator

9

NET INVESTMENTS

2012 (€)

NET INVESTMENTS

2013 (€)

NET INVESTMENTS

2014 (€)

NET INVESTMENTS

2015 (€)

North-West 195.741.644 184.324.445 350.241.242 440.956.598

Nord-East 266.595.624 332.483.991 323.830.781 429.109.401

Centre 333.369.137 344.173.029 387.298.944 427.190.417

South 153.725.206 60.434.581 108.306.589 149.297.118

Islands 11.522.585 6.057.384 31.914.845 44.120.667

Italy 960.954.196 927.473.430 1.201.592.401 1.490.674.201

-

50.000.000

100.000.000

150.000.000

200.000.000

250.000.000

300.000.000

350.000.000

400.000.000

450.000.000

NordOvest

Nord Est Centro Sud Isole

Net

inve

stm

ents

(€)

2012 2015

Data referred to:

� 127 operators

� 40 mln inhabitants (2/3 of Italianpopulation)

+55%

4,99%

4,37%

6,65%

3,15%

0,25%

4,55%

0,00%

2,00%

4,00%

6,00%

8,00%Nord-Ovest

Nord-Est

Centro

Sud

Isole

Italia

10

Tariff variation - year 2015 Planned investments for the period 2014-2017

Tariff sustainability & resilience of investments

TARIFF

VARIATION AT

NATIONAL

LEVEL:+4,55%

131 €/ab

135 €/ab

186 €/ab

67 €/ab

68 €/ab

132 €/ab

0

50

100

150

200

Nord-

Ovest

Nord-

Est

Centro

Sud

Isole

Italia

ΣIPexp

(2014-2017) pro capite

- €/abitante

11

Value of RAB &need to invest in water infrastructures

�Reduced value of Regulatory Asset = 13 Billion euros

RAB per capita for geographic area

[Cross Section Analysis for the year 2014]

46%

28%

21%

3%2%

Opex-end

Opex-al

Capex

FoNI

RCtot

VRG configuration (%)

12

Development of the new tariff method on the base of t he collected information

OPEX/PROVIDED UNITS OF WATER (€/mc)

Min: 0,52 Average: 1,49 Max: 2,72

OPEX/SERVED INHABITANTS (€/per capita)

Min: 50,32 Average: 108,60 Max: 200,09

ENERGY COSTS/OPEX

Min: 3% Average: 17% Max: 36%

LABOUR COSTS /OPEX

Min: 4% Average: 25% Max: 47%

Cross Section Analysis for the year 2014 [data referred to 105 operators, 32 mln inhabitants]

SECOND REGULATORY PERIODMTI-2 [2016-2019]

14

� Tariffs applied in 2015 (calculated on the base of the MTI) have to be updated multiplying them by a factor ϑa, for each year a=(2016;2019):

:

•:

� Limit to annual price variation:

∑ −− +•=

u

ab

Tauu

aa

Rvscaltarif

VRG222015 )(

ϑ

]*)1(*)1(1[1

XKrpi XKa

a

γγϑϑ

+−+++≤−

Kγ Xγ

SCHEMA

I 0 0

II 0 1

III 0 -1

IV 0,5 0

V 0,5 1

VI 0,5 -1

Sharing factor:X=0,5%Sharing factor:X=0,5%

Price limit:K=5%Price limit:K=5%

Inflation rate:rpi=1,5%Inflation rate:rpi=1,5%

Tariff multiplier for the years 2016-2019

Regulatory Schemes for the second regulatory period

15

Average Opexper capitaAverage Opexper capita

Sharing factor, named as X, is applied to the maximum limit allowable increase for every single year considered. X = 0 where there are new specific ojectives related to the integration process required by d.l. Sblocca Italia, or improvements in the quality of services provided (Scheme III and Scheme VI)

Sharing factor, named as X, is applied to the maximum limit allowable increase for every single year considered. X = 0 where there are new specific ojectives related to the integration process required by d.l. Sblocca Italia, or improvements in the quality of services provided (Scheme III and Scheme VI)

≤

( )XKrpia

a

−++≤− 11ϑ

ϑ

NO VARIATIONS I THE OPERATOR’S OBJECTIVES OR ACTIVITIES

PRESENCE OF VARIATIONS IN THE OPERATOR’S OBJECTIVES OR ACTIVITIES:- Water system integration- Improvements of quality

OPMpop

OpexOPM

pop

Opex>

INV

ES

TM

EN

TS

ω≤∑

MTI

t

RAB

PI exp

SCHEME I

Limit to price variation::

SCHEME II

Limit to price variation::

SCHEME III

Limit to price variation::

ω>∑

MTI

t

RAB

PI exp

SCHEME IV

Limit to price variation::

SCHEME V

Limit to price variation::

SCHEME VI

Limit to price variation::

NO VARIATIONS IN THE OPERATOR’S OBJECTIVES OR ACTIVITIES

( )XKrpia

a

211

−++≤−ϑϑ ( )Krpi

a

a

++≤−

11ϑ

ϑ

( )XKrpia

a

−++≤− *5,111ϑ

ϑ ( )XKrpia

a

2*5,111

−++≤−ϑϑ

( )Krpia

a

*5,111

++≤−ϑ

ϑ

6,0%6,0% 5,5%5,5% 6,5%6,5%

8,5%8,5% 8,0%8,0% 9,0%9,0%

<_

DEFINITION OF THE COST COMPONENTS

[1] [2] [3] [4] [5]

[1] INFRASTRUCTURES COSTS

[2] COMPONENT IN SUPPORT OF SPECIFIC INVESTMENT OBJECTIVES

[3] OPERATING COSTS

[4] ENVIRONMENTAL AND RESOURCE COSTS RECOVERY

[5] COMPONENT TO RECOVER COSTS RELATED TO PREVIOUS YEARS BALANCE

aTOT

aaaaa RCERCOpexFoNICapexVRG ++++=

aFoNI

aFoNI

aFoNI

a CUITAMMFNIFoNI ∆++=

aal

aend

a OpexOpexOpex +=

aaa sCReEnvCERC +=

16

aCapex

aaaa CUITOFiscOFAMMCapex ∆+++=

( ) ( )∏−=

+++++=a

at

taALTRO

aERC

aws

aEE

aVOL

aTOT IRcRcRcRcRcRc

1

1*

COST COMPONENTS … Capex[1] INFRASTRUCTURES COSTS

17

aAMM FOLLOWED CRITERIA

• Useful lives• Monetary revaluation of

assets• Definition of terminal

value

EFFECTS

• Reduction of the cash flow in the short term, to be compensatedwith terminal value;

• Long term growth of Base Rate

is the cost component representing depreciation :

aOF aiscOF

FOLLOWED CRITERIA

• 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)a

ca RaitOFisc *=

( ) a

a

afp

ma CIN

CIN

CINKOF *1*

−+= α

invnonaaaa FoNIFAccLICCCNIMNCIN _−−++=

OF and OFisc 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

aCapex

aaaa CUITOFiscOFAMMCapex ∆+++=

( ) ( )( )

−−

−+

+

=

∑∑

∑∑

=c

a

t

aCFP

at

atc

atc

at

c

tctc

c t

atc

c

attca

FAdflCFPIMNdflVU

CFPIP

IMNVU

dflIPAMM

2012,,

,,

2011

,,

*;*min;0max

;*

min

( ) ( ) ( )CnSCS

CnSCStK

CnSCSWRPrK c

reald

realfm +

−++

+=1

*1*1

1*)(

)/1(

1**

CnSCSERP

+= βα

aCapexCUIT∆

Financial & Fiscal parameters

18

MTI-2

2016-2019

T 0,342

tc 0,275

CS/CnS 1,000

WRP 0,015

rf 0,005

Kd 0,028

Beta 0,800

ERP 0,040

rpi 0,015

Km 0,021

alfa 0,016

km+alfa 0,037

Tasso Rai 0,063

(km+alfa)+tc(Tasso Rai) 0,054

T e tc = Tax rates

CS/CNS = Debt/Equity ratio

rf = tasso risk free reale

WRP= Water Utility Risk Premium

Kd = rate of return on debt capital

Beta = measure of the risk of water sector

ERP = risk premium

rpi = inflation rate

INPUT DATA

COST COMPONENTS … FONI

[2] COMPONENT IN SUPPORT OF SPECIFIC INVESTMENT OBJECTIVES

aFoNI

aFoNI

aFoNI

a CUITAMMFNIFoNI ∆++=

19

aFoNIFNI is the cost component for financing new investments , determined by the competent local

Authority within the limit of the component:

where ψ =(0.4-0.8) 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 IV, V and VI, where the need for investments is very high

( )[ ]at

anew CapexIPFNI −= exp, *;0max ψ

aFoNICUIT∆

aFoNIAMM 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

are the endogenous costs :

if there is no variation of the objectives or activities of the operators(Schemes I, II, IV and V)

if there is variation of the objectives or activities of the operators (Schemes III and VI)

COST COMPONENTS … Opex

[3] OPERATING COSTS

20

aal

aend

a OpexOpexOpex +=

aendOpex FOLLOWED CRITERIA

• Rolling Cap mechanism, that allows the firm to partially earn the gains coming from cost reductions

( )∏=

+=a

t

tend

aend IOpexOpex

2015

2014 1*

( ) anewa

t

tend

aend OpIOpexOpex ,

2015

2014 1* ++= ∏=

are the updatable costs

( ) ( )

++= ∏∏=−=

−a

i

iATO

medioATO

a

ai

iaeffettivoATO

aATO IzpopCOICOCO

2014

20132013,

1

2, 1**)*(;1*min

aalOpex

( ) aaltri

p

ap

ap

aws

aEE

aal COACMTCOCOOpex ++++= ∑

ares

amor

aAEEG

aATO

aaltri COCOCOCOCO +++=

{ } ( )∏−=

−−− +=a

at

taamedioEE

aeffettiviEE

aEE IkWhCOCOCO

1

22,2, 1*]1,1*)*(;min[

aotherws

awaterws

aws COCOCO ,, +=

2,2015,

−+= aefffettiviotherwaterws

aws COCOCO

a=(2016; 2017)

a=(2018; 2019)

FOLLOWED CRITERIA

• Coaltri are the «passing troughcost» considered as exogenousones

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

21

aaa sCReEnvCERC +=

aEnvC

aeso

aend

a EnvCEnvCEnvC +=

asCRe

FOLLOWED CRITERIA

• ERC made explicit as VRG component from 2015

22

� AEEGSI approved tariffs for 42 operators regarding 14.031.23 inhabitants, with planned investments for 2.293.415.329 €referred to the period 2016-2019

Focus on tariffs approved by aeegsi [years 2016-2019]

Planned investments vs investments made

� Year 2014: 82% of plannedinvestmenteswere realized

� Year 2015: 77% of plannedinvestmenteswere realized

data referred to 105 operators, 40 mln inhabitants]

+5%+26%