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%