Fitch Ratings says that the final tariff proposal for FY2012-2015 for Italian electricity transmission and distribution networks published on 30 December 2011 by the Italian industry regulator, the Authority for Electricity Energy and Gas (AEEG), is broadly rating neutral for network operators rated by Fitch, including Terna Spa ('A'/Negative), Acea Spa ('A'/Rating Watch Negative) and Enel Spa ('A-'/Stable).
Fitch Ratings says that the final tariff proposal for FY2012-2015 for
Italian electricity transmission and distribution networks published on 30
December 2011 by the Italian industry regulator, the Authority for Electricity
Energy and Gas (AEEG), is broadly rating neutral for network operators rated by
Fitch, including Terna Spa ('A'/Negative), Acea Spa ('A'/Rating Watch Negative)
and Enel Spa ('A-'/Stable).
The AEEG's price determinations are generally well balanced and, most
importantly, based on a methodological continuum with the past that strengthens
the regulatory framework's transparency and track record. The determinations
have also benefited from significant consultation with the industry during the
review process.
The review's main feature is the introduction of an interim re-determination of
the risk free rate that is a main factor for the calculation of the weighted
averaged cost of capital (WACC). According to the AEEG's final document, the
applicable WACC will be reviewed in November 2013, on the basis of a
recalculation of the risk free rate, and will be applied to the last two years
of this price cycle (2014-2015). The risk free rate is determined based on the
average past 12 months yield on
Italy
's
10-year treasuries.
Over the second half of 2011 the risk free rate was subject to an unprecedented
increase as a result of the sovereign debt crisis in European peripheral
countries, including
Italy
. The
gap between the 2008-2011 review's risk free rate and this review's amounts to
c. 80 basis points (bps; 4.45% in 2008 and 5.24% in 2011). The interim
re-determination underlines the regulation's enhanced flexibility. Whether this
will result in an increase of the WACC at the recalculation date is difficult
to determine at this stage, but Fitch's view is that it represents a useful
adjustment tool in a downside scenario.
The AEEG's final proposal includes a headline real pre-tax WACC of 7.4% for transmission
and 7.6% for distribution, an increase of 50bps and 60bps respectively from the
previous regulatory cycle (2008-2011). It should be noted that the AEEG's
corporate tax rate allowance determination does not include the increased tax
rate introduced with the August budget law on Italian energy companies (so
called Robin Hood tax) as the charge was not to be passed on to consumers.
The review also establishes the recognition of an additional 1% return
allowance on new investments (realised from 2012 and remunerated only from
2014) to compensate for the time difference between completion of investments
and the start of their remuneration in the tariff. This item was heavily
negotiated with industry players and the final rate achieved represents an
improvement on the initial AEEG proposal of 0.7%.
On a more negative note, from 2012 the incentive scheme for strategic
investments in transmission has been revised downward to 150bps and 200bps on
base WACC depending on the type of investment, from the previous period's
200bps and 300bps. For distribution the incentive scheme was revised to 200bps
and 150bps from 200bps on two investments categories and the number of
investment categories was widened to five types.
The AEEG has used 2010 as reference year for operating costs allowances. The
50/50 profit sharing was confirmed, while the X-factor (efficiency factor) was
increased to 3.0% from 2.3% for transmission and to 2.8% from 1.9% for
distribution.
On depreciation allowance for transmission some benefit will stem from the
recognition of the first depreciation rate calculated based on the gross
investment figure, versus a net investment figure used in the previous
regulatory period. The amount of regulatory depreciation in a given price
control period is equivalent to the amount of capex that will be funded
directly by customers (the balance of the capex will be funded by debt and
equity and will be remunerated by the WACC). Therefore, high regulatory
depreciation lowers the need to raise debt and equity to fund realised capex.
In distribution, the removal of the price cap on depreciation for assets put
into operation prior to 2008, bringing it in line with that already provided by
the regulation on depreciation in the third regulatory period (post 2008), will
result in a positive contribution.
The volatility of volumes experienced by network operators for the first time
in 2009 as a result of the economic downturn and consequent contraction of
consumption levels prompted the intervention of the regulator to introduce
interim measures to minimize the volume effects on revenues. Those measures
have now been introduced in the regulatory framework for transmission and
distribution tariffs.
For transmission, in 2013 the tariff will be split in two elements (binomial
tariff): one covering the capacity and the second covering volumes. According
to the AEEG's document, the exposure to volume effects of transmission revenues
should be limited to only 20% of allowed opex, representing c. 4% of total
regulated revenues. This is equivalent to 12.5% of volume reduction in
comparison to the previous maximum allowance. For distribution a stabilisation
system is provided for in the AEEG document but the actual mechanism is yet to
be detailed and will be reviewed by Fitch upon its publication.
The final determination assumptions are subject to the details of the technical
note to be published by the AEEG. To better appreciate the full impact of the
price control proposals it is necessary to assess the building blocks from
which the revenue proposals are derived - cost of capital, capex and opex. Fitch
will monitor the subsequent documentation and comment where appropriate.
While the price review is broadly credit neutral, Fitch expects to resolve the
Negative Outlook on Terna Spa's Long-term IDR in function of final details of
the technical note, the management's review of the investment strategy and the
dividend policy over the next regulatory period that will be unveiled in the
next business plan. The Rating Watch Negative on Acea Spa's rating will be
resolved once the legislative vacuum on investment remuneration for water
assets has been addressed
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