Main factors of the pricing framework

15

Snam Rete Gas Annual Report 2010 / Main factors of the pricing framework

Main factors of the pricing framework

The criteria for determining of the tariffs for the regulated natural gas transportation activities, regasifi cation of LNG, distribution and storage of natural gas are established by the Electricity and Gas

(3) To ensure that complete information is provided for the natural gas storage business segment, the main pricing factors applicable as of 1 January 2011 which are effective from the third regulatory period (1 January 2011-31 December 2014) are also indicated. The information on the regulatory framework is provided, for each business segment, under the paragraph titled “Regulation”, which contains the main resolutions of the Electricity and Gas Authority in regard to the determination of the tariffs applied in 2009 and 2010.

(4) The business segments (transportation of natural gas, regasifi cation of LNG, distribution and storage of natural gas) as presented in the internal reports, were identifi ed by their management and refer to the main activities carried out by Snam Rete Gas S.p.A, GNL Italia S.p.A, Stogit S.p.A, Italgas S.p.A and its subsidiaries, respectively.

Authority. Following are the main pricing factors for each of the reg-ulated activities of Snam Rete Gas S.p.A, based on the regulatory framework in force as at 31 December 20103.

End ofregulatory period

Return onregulatory asset

base (pre-tax WACC)

New investmentincentives

Efficiency factor(X FACTOR)

• 31 December 2013 • 30 September 2012 • 31 December 2012• End of secondregulatory period:31 December 2010

• End of thirdregulatory period:31 December 2014

• 6.4% (transportation)• 6.9% (metering)

• 7.6% • 7.6% (distribution)• 8% (metering)

• 7.1%Starting 1 January 2011• 6.7%

• 1% for 5 years (oninvestments in safety)

• 2% for 7-10 years(on investments fordevelopment of capacity)

• 3% for 10-15 years (oninvestments for develop-ment of input capacity)

• 2% for 8 years(on upgrading of existingterminals of lessthan 30%)

• 3% for 16 years(on upgrading of existingterminals of morethan 30%)

• 2% for 8 years(on replacement ofcast-iron pipes andrenovation of odorizationsystems)

• 4% for 8 years(on upgrading of existingcapacity)

• 4% for 16 years(on development of newstorage fields)

• 2.1% of operating costs • 0.5% of operating costs • 3.2% of distributionoperating costs

• 3.6% su of meteringoperating costs

• 2% of operating costs• 1.5% of amortisation and

depreciationStarting 1 January 2011• 0.6% of operating costs

Calculation ofregulatory asset

base (RAB)

• Revalued historical cost • Revalued historical cost • Revalued historical cost• Parametric method for

centralised assets

• Revalued historical costStarting 1 January 2011• Revalued historical cost• Deduction of recognised

clean-up costs

Transportation Regasification Storage Distribution

In the paragraphs below, the main performance indicators are presented for each business segment4 in which the Group oper-ates. As indicated in the previous chapters, following Eni’s acqui-sition of Italgas and Stogit which was concluded on 30 June 2009, the results for 2009 include the effects of the consolidation of the

newly acquired companies from the third quarter of the year. In order to fully assess the operating performance of the respective activities, the results of the natural gas distribution and storage business segments are analysed in comparison to those for the whole of 2009.

16

17

Snam Rete Gas Annual Report 2010 / Natural gas transportation

Natural gas transportation

18


The natural gas tran sportation service Natural gas transportation is an integrated service which involves providing transportation capacity and the actual transportation of the gas delivered to Snam Rete Gas S.p.A. to the entry points of the Italian gas transportation network 2 up to the redelivery points of the regional network, where the gas is redelivered to the users of the service (the Users). The transport capacity which is expressed in standard cubic meters per day represents the maximum volume of gas that each User can inject or withdraw from the system at the aforementioned points each day. Snam Rete Gas S.p.A. provides transportation capacity to the entities that request it and they acquire the right (as Users) to inject and withdraw on any day of the thermal year to and from the entry and exit points of the National Network, the redelivery points along Snam Rete Gas S.p.A.’s regional transportation network and the Virtual Exchange Point6, a quantity of gas not to exceed the daily fl ow provided.The natural gas introduced into the National Network originates

(5) The list of pipelines comprising the National network and the criteria for defi ning it are provided in the Decree issued on 22 December 2000 by the Ministry for Industry, Trade and Crafts as currently applicable, pursuant to the provisions of Legislative Decree No. 164 issued on 23 May 2000 (the Letta Decree).

(6) A virtual point at which Users can exchange and trade gas injected into the National network on a daily basis.(7) Number of entry points as at 31 December 2010.

Snam Rete Gas S.p.A. – Network Infrastructure as at 31 December 2010

GORIZIA

TARVISIOSAN DONATOMILANESEGRIES PASS

PANIGAGLIA

MAZARA DEL VALLO

GELA

CAVARZERE

National Transportation Network

Import Entry Points

Regional Transportation Network

LNG Regasifi cation Terminal

Dispatching Centre

Compression Station

Maritime Terminal

Regional Boundary

from imports and, to a lesser extent, national production. The gas from abroad is injected into the National Network via seven entry points where the network joins up with the import pipelines (Tarvi-sio, Gorizia, Gries Pass, Mazara del Vallo, Gela) and the LNG regasifi -cation terminals (Panigaglia, Cavarzere). Domestically produced gas is introduced into the Network through 51 entry points7 from the production fi elds or their collection and treatment centres. Gas storage fi elds are also connected to the transportation network (two virtual entry/exit points towards the storage hubs). The gas leaving the National Network is transported on the Regional Network up to the redelivery points from which the gas is withdrawn by the users.Snam Rete Gas S.p.A. is the leading domestic Italian natural gas transportation and dispatching operator, and owns almost all the transportation infrastructures in Italy, with over 31,600 kilometres in use of high- and medium-pressure gas pipelines (approximately 94% of the entire transportation system).

19


Financial r esults Natural gas transportation revenue amounted to €1,873 million, an increase of €25 million, or 1.4%, compared with 2009. The increase was attributable to higher volumes of natural gas transported (+€20 million) and to recognition by the Electricity and Gas Authority of the additional expenses incurred for the acquisition of fuel gas in the pe-riod 1 October 2008 - 31 December 2009 (€55 million; +€21 million compared with the contribution of €34 million recorded in the 2009 fi nancial statements as recognition of the additional expenses in-curred in the 2007-2008 thermal year). These factors were partially absorbed by the application of new tariff criteria in effect from 1 Janu-ary 2010, due essentially to the payment in kind by the users for the gas used for the transportation service8.

EBIT for 2010 was €1,185 million, up €211 million, or 21.7%, compared with the previous year. The increase was attribut-able mainly to: (i) lower operating costs (+€133 million, net of components offset in revenue), owing to the payment in kind of natural gas used in the transportation business and to the net use of provisions for risks and charges in relation to a provi-sion made in 2009 (+€23 million); (ii) lower amortisation and depreciation (+€69 million) due mainly to the extension of the useful life of pipelines (from 40 to 50 years), which was con-sidered in the Electricity and Gas Authority’s tariff review; and (iii) higher transportation revenue (+€10 million, net of compo-nents offset in costs).

Key performance indicator (€ million) 2008 2009 2010 Change Change %

Core business revenue (*) 1,882 1,865 1,929 64 3.4

- of which, natural gas transportation revenue 1,867 1,848 1,873 25 1.4

Operating costs (*) 388 399 343 (56) (14.0)

EBIT 1,017 974 1,185 211 21.7

Investments 1,038 926 902 (24) (2.6)

- of which with incentives 916 793 763 (30) (3.8)

- of which without incentives 122 133 139 6 4.5

Net invested capital at 31 December 9,736 10,060 10,404 344 3.4

Volumes of natural gas injected into the gas transportation network (billions of cubic metres) 85.64 76.90 83.32 6.42 8.3

Transportation network (kilometres in use) 31,474 31,531 31,680 149 0.5

- of which national network 8,779 8,871 8,894 23 0.3

- of which regional network 22,695 22,660 22,786 126 0.6

Employees in service at December 31 (number) 2,252 2,254 2,636 382 16.9

(*) Before consolidation adjustments.

(8) As of the start of the third regulatory period on 1 January 201 0, the Electricity and Gas Authority, enacting the new tariff criteria laid down by Resolution ARG/gas 184/09, has defi ned methods for payment in kind, by shippers to transporters, of gas volumes to cover fuel gas, network losses and unaccounted-for gas, owed as a percentage of the volumes respectively injected into and withdrawn from the transportation network. Applying these criteria entailed, on the one hand, reduced operating costs from lower charges for supplying the gas used to provide service and, on the other, reduced revenue in the amount which had been al-located to cover the operating costs.

(9) The investment incentives were the same as for the second regulatory period.

Operating review

Investments (€ million) 2008 2009 2010 Change Change %

Development 813 692 671 (21) (3.0)

Investments with 3% incentive 578 451 456 5 1.1

Investments with 2% incentive 235 241 215 (26) (10.8)

Maintenance and other 225 234 231 (3) (1.3)

Investments with 1% incentive 103 101 92 (9) (8.9)

Investments with no incentives 12 2 133 139 6 4.5

1,038 926 902 (24) (2.6)

Investments in 2010 amounted to €902 million, a decrease of €24 million, or -2.6%, compared with the previous year. The investment s were classified in accordance with Resolu-

tion ARG/gas 184/09 of the Electricity and Gas Authority, which identified various categories of project with different incentive levels9.

20


Eighty-five per cent of these investments are expected to ben-efit from incentive-based return. The breakdown of investments in 2010 by category will be submitted to the Authority when the tariffs are approved for 2012.

The main investments with a 3% incentive (€456 million) were:· as part of the connection project for the Offshore LNG Toscana

(OLT) regasification terminal at Livorno (€136 million), the construction of infrastructure to connect with the plant lo-cated off the Tuscany coast, primarily offshore;

· as part of the project to upgrade the import infrastructure in Sicily and Calabria (€101 million): (i) materials for and con-struction work on the Montesano station in Campania; (ii) completion works on operating sections and construction of the tunnel section of the Montalbano-Messina pipeline in Sic-ily; (iii) turbocompressors at the Enna station in Sicily; and (iv) construction work on the Bronte-Montalbano section of the Enna-Montalbano pipeline in Sicily;

· as part of the new transportation infrastructure project on the Adriatic coast (€93 million): (i) construction work on the main line and the design of connection points for the Massafra-Biccari pipeline in Puglia and Basilicata; and (ii) de-sign completion and the purchase of private permits for the Sulmona-Foligno-Sestino-Minerbio pipeline in Abruzzo and Emilia-Romagna;

· as part of the Villesse-Gorizia pipeline project in Friuli-Venezia Giulia (€40 million), construction work and materials.

The main investments with a 2% incentive (€215 million) were:· as part of the project to upgrade the transportation infra-

structure in the Po Valley, with an aim to increase national transportation capacity (€55 million): (i) construction work on the Cremona-Sergnano pipeline in Lombardy; and (ii) de-sign completion and purchase of permits for the Zimella-Cer-vignano pipeline in Veneto and Lombardy;

· as part of the Palaia-Collesalvetti pipeline project in Tuscany (€23 million), infrastructure construction materials.

The main investments with a 1% incentive (€92 million) in-volved several projects aimed at maintaining adequate safety and quality levels at the stations.Investments without incentive (€139 million) included projects to replace assets and plants, as well as projects relat-ing to the implementation of new IT systems, the development of existing ones and the purchase of other key operating assets.

Distribution on the Italian Gas Transportation Network

Availability of natural gas (billions of m³) 2008 2009 2010 Change Change %

From imports 76.52 68.67 75.17 6.50 9.5

From domestic output 9.12 8.23 8.15 (0.08) (1.0)

Total gas injected in the network 85.64 76.90 83.32 6.42 8.3

Net balance of storage withdrawals/injections (*) (1.12) 0.78 (0.64) (1.42)

Total natural gas available 84.52 77.68 82.68 5.00 6.4

(*) The balance between the withdrawal from storage (+) and introduction into storage (-).

Withdrawals of natural gas (billions of m³) 2008 2009 2010 Change Change %

Redelivery to domestic market 83.34 76.66 81.54 4.88 6.4

Exports 0.60 0.48 0.54 0.06 12.5

Snam Rete Gas consumption and emissions 0.42 0.34 0.47 0.13 38.2

Unaccounted-for gas and other changes (*) 0.16 0.20 0.13 (0.07) (35.0)

Total natural gas withdrawals 84.52 77.68 82.68 5.00 6.4

(*) Includes the change of the network capacity For the defi nition of Unaccounted For Gas (UFG) please see the paragraph below titled “Withdrawals of natural gas.”

(%)

2010

Investments with 2% incentive


2008 2009

Investments with no incentive


5155 49

2423

26

1010 11

1512 14

Effect of investments with incentive (% of total investments)

21


(%)

2008

Tarvisio

Mazara del Vallo

2009 2010

Gela

Cavarzere

Gries Pass

Other

3532 32

3032 33

1313 13

1021 18

32 2

Natural gas injected into the network by entry point (% the total injected)

33

3333

11

1119

2

Imports by entry poin (billions of m³) 2008 2009 2010 Change Change %

Entry points

Mazara del Vallo 24.77 21.66 26.29 4.63 21.4

Tarvisio 24.58 22.92 22.49 (0.43) (1.9)

Gela 9.87 9.17 9.41 0.24 2.6

Gries Pass 15.69 12.02 7.83 (4.19) (34.9)

Cavarzere (LNG) 1.53 7.04 5.51

Panigaglia (LNG) 1.52 1.32 1.98 0.66 50.0

Gorizia 0.09 0.05 0.13 0.08 160.0

76.52 68.67 75.17 6.50 9.5

Year-on-year imports rose by 6.5 billion cubic metres, or 9.5%, to 75.17 billion cubic metres compared to 2009. In addition to the contribution of gas from the LNG terminal injected at the Cavar-zere entry point and operational from the third quarter of 2009 (+5.51 billion cubic metres), the higher imports from the entry

Volumes of natural gas injected into the Network per User (billions of m³) 2008 2009 2010 Change Change %

Eni 51.80 39.58 35.45 (4.13) (10.4)

Enel Trade 9.82 8.65 10.34 1.69 19.5

Other 24.02 28.67 37.53 8.86 30.9

85.64 76.90 83.32 6.42 8.3

Withdrawals of natural gasThe natural gas withdrawn from the National Transportation Net-work in 2010 (82.68 billion cubic meters) is mainly: (i) for redeliv-ery to users at the network exit points (81.54 billion cubic meters); (ii) exports (0.54 billion cubic meters), mainly to Slovenia; and (iii) consumption by the compression stations and the gas emissions from the network and the Snam Rete Gas S.p.A. plants (0.47 billion cubic meters).In the energy report compiled by Snam Rete Gas S.p.A. the natural difference between the quantity of gas metered at the entrance to the network and the quantity of gas metered at the exit, due to the technical tolerance of the metering devices, is traditionally de-fi ned as the Unaccounted For Gas (UFG). With Resolution ARG/gas 192/09, published on 15 December 2009 in application of the new tariff criteria set by Resolution ARG/gas 184/09, the Electricity and Gas Authority defi ned as from 1 January 2010 the terms for pay-ment in kind by the users of the service to the major transportation company of the gas quantities to cover the un-accounted for gas, due as a percentage of the quantities withdrawn from the transpor-tation network.

point at Mazara del Vallo (+4.63 billion cubic metres; +21.4%) were partly offset by less gas injected at the Gries Pass entry point (-4.19 billion cubic metres; -34.9%) following the blockage in Switzerland of the import pipeline linking Italy to northern Europe.

Availability of natural gasThe availability of natural gas in Italy in 2010 was 82.68 billion cubic meters, up 5 billion cubic meters (+6.4%) compared to 2009. The quantities of gas injected into the National Transportation Network increased by 8.3% to 83.32 billion cubic meters. The increase in the quantities of gas injected into the National Transportation Network is due mainly to higher imports (+6.50 billion cubic meters or + 9.5%). The domestic production of 8.15 billion cubic meters has remained essen-

tially unchanged compared to 2009 (8.23 billion cubic meters). The positive balance of around 0.6 billion cubic metres of injections into (+) and withdrawals from (-) the storage system also contrib-uted to the increase in volumes injected into the network, com-pared to the opposite situation in 2009 where withdrawals from storage exceeded injections by around 0.8 billion cubic metres. The analysis of imports by entry point is:

22


The demand for gas in Italy in 2010 was 82.98 billion cubic me-ters, up 4.96 billion cubic meters (+6.4%) compared to 2009, following the recovery of consumption after the recent eco-nomic crisis. The increase has affected all sectors, in particular residential and tertiary (+7.1%), industrial (+7.0%) and thermo-electric (+4.4%).

In thermal year 2010-2011, the development and upgrading work on the transportation infrastructures have made it possi-ble to increase the network’s transportation capacity to 368.4 million cubic meters/day (+0.8% compared to the 2009-2010 thermal year).

The increase is mainly attributable to the increase in transporta-tion capacity at Gela and Mazara del Vallo, following the deploy-ment of an upgrade on the infrastructures for the imports from North Africa.

Reconciliation of the quantities withdrawn from the Network and Italian demand (billions of m³) 2008 2009 (*) 2010 Change Change %

Quantity withdrawn 84.52 77.68 82.68 5.00 6.4

Exports (-) (0.60) (0.48) (0.54) (0.06) 12.5

Gas injected in the regional network of other operators 0.09 0.08 0.06 (0.02) (25.0)

Other consumption (**) 0.87 0.74 0.78 0.04 5.4

Total demand Italy 84.88 78.02 82.98 4.96 6.4

(*) The demand for gas has been aligned with that published by the Ministry of Economic Development.(**) Includes the consumption of the LNG terminal at Panigaglia, the consumption of the compression stations for storage and the production treatment stations.

Demand for gas in Italy (billions of m³) 2008 2009 (*) 2010 Change Change %

Residential and services 30.18 31.60 33.83 2.23 7.1

Thermoelectric 33.90 29.02 30.31 1.29 4.4

Industrial (**) 19.31 16.07 17.19 1.12 7.0

Other 1.49 1.33 1.65 0.32 24.1

84.88 78.02 82.98 4.96 6.4

(*) The demand for gas has been aligned with that published by the Ministry of Economic Development.(**) Includes t he consumption of the Industrial, Agricultural and Fishing, Chemical Synthesis and Automotive sectors

Transportation capacity (billions of m³/day)

Entry points 2008-2009 thermal year 2009-2010 thermal year 2010-2011 thermal year

Avai

labl

e ca

paci

ty

Capa

city

al

loca

ted

Satu

ratio

n (%

)

Avai

labl

e ca

paci

ty

Capa

city

al

loca

ted

Satu

ratio

n (%

)

Avai

labl

e ca

paci

ty

Capa

city

al

loca

ted

Satu

ratio

n (%

)

Tarvisio 106.0 97.8 92.2 119.7 102.8 85.9 119.2 110.3 92.5

Mazara del Vallo 101.8 93.2 91.6 103.6 98.7 95.3 105.0 98.9 94.2

Gries Pass 64.9 60.8 93.7 64.9 59.0 90.9 64.8 55.0 84.9

Gela 30.5 30.5 100.0 33.0 32.9 99.7 35.2 34.3 97.4

Cavarzere (GNL) 26.4 21.0 79.5 26.4 24.6 93.2

Panigaglia (GNL) 13.0 11.4 87.7 13.0 7.2 55.4 13.0 7.2 55.4

Gorizia 4.8 4.8 4.8 0.5 10.4

321.0 293.7 91.5 365.4 321.6 88.0 368.4 330.8 89.8

Gas demand by sector (% of total gas demand)

(%)

Thermoelectric

Residential and services

2008 2009

Other

Industrial

40

37

21

2

2010

41

36

21

2

35

40

23

2

23


The capacity available on the network has made it possible to address the capacity demand of all Users in thermal year 2010-2011, with an increased capacity of 2.9%.In addition to the aforementioned capacities which concern the entry points interconnected with foreign countries and the LNG terminals, transportation capacity totalling 37 million cubic me-ters/day is available at the domestic production entry points.Snam Rete Gas S.p.A. put out its long term plan for transporta-tion capacity, which was disclosed to the Ministry of Economic Development on 21 June 2010 and published on the Snam Rete Gas S.p.A. website. The document shows the capacity data on all entry points interconnected with foreign countries and the LNG terminals for the 2010-2011 thermal year and subsequent years up to 30 September 2020.

Regulation

Resolutions no’s. 166/05 and 102/08 - “Criteria for the determina-tion of tariffs for natural gas transportation and dispatching” and “Approval of the tariff proposals for natural gas transportation and dispatching prices”. With Resolution no. 166/05 “Criteria for the determination of tariffs for natural gas transportation and dispatching” published on 30 July 2005, the Authority for Electricity and Gas outlined the criteria for defi ning the natural gas transportation tariffs on the national and regional gas transportation network for the second regulatory period (1 October 2005 – 30 September 2009). The mechanisms already in effect in the fi rst regulatory period were confi rmed for the determination of the price levels and a real return on invested capital was fi xed at 6.7% before taxes. Investment incentives were

provided for the second regulatory period as well through a return rate increased by 1 to 3 percentage points compared to the rate for capital existing at the end of 2004 (6.7%) for a duration of between 5 and 15 years. Both the rate of return and the duration are differ-entiated according to the various types of investment. The returns associated with the new investments will be recognized starting from the thermal year following that in which the costs were in-curred (“spending”) and are guaranteed regardless of the volumes transported. The updating method for the “price cap” tariffs is applied only to rev-enue components that relate to operating costs and the amortisa-tion and depreciation which is updated for infl ation and decreased by a productivity coeffi cient set at 2% for the capacity component and 3.5% for the component related to volumes transported. The revenue component which is correlated with returns is determined on the basis of the annual update of net capital invested as at 31 December 2004 (RAB).The tariff structure which is based on the entry/exit model was con-fi rmed for the second regulatory period as well, except for the fi xed fee, which was replaced by a special measuring fee.

With Resolution ARG/gas 102/08 - “Approval of the tariff proposals for natural gas transportation and dispatching prices, in implemen-tation of the Resolution no. 166/05 issued on 29 July 2005 by the Electricity and Gas Authority,” published on 31 July 2008, the Elec-tricity and Gas Authority approved the natural gas transportation tariffs for the thermal year 2008-2009. The tariffs are determined on the basis of the base revenues, the additional revenues of €39 million for development investments made during the fi rst regu-latory period and additional revenues of €233 million for invest-ments realised in 2005, 2006 and 2007.The net capital invested as at 31 December 2007 (RAB) is €12.2 billion. The Authority also confi rmed, for thermal year 2008-2009, the introduction of an additional fee for coverage of the higher ex-penses incurred for the purchase of gas for compression and the network leaks.

Resolution ARG/gas 184/09 - “Approval of part II – Regulation of the tariffs for the natural gas transportation and dispatch service for regulatory period 2010-2013 (RTTG), approval of part III - Regula-tion of tariffs for the gas transportation metering service for regu-latory period 2010-2013 (RMTG), provisions on the transitory fee for the gas transportation metering service for 2010 and amend-ments to Attachment A of Resolution no. 11/07.” With Resolution ARG/gas 184/09, published on 2 December 2009, the Electricity and Gas Authority issued the criteria for defi ning nat-ural gas transportation and measuring tariffs on the national and regional gas transportation network for the third regulatory period (1 January 2010 - 31 December 2013)10. The Authority also set €33.6 million as the amount to be paid to Snam Rete Gas S.p.A. for additional costs incurred in thermal year 2007-2008 for the purchase of fuel gas used to power compression stations.

365.4

321.0 321.6

293.7

88.091.5

50

100

150

200

250

300

350

400

450

500

2009-2010

Capacity allocated (milions of m³/day)

Available capacity (millions of m³/day)

2008-2009

% saturation (Capacity allocated/Available capacity)

368.4

331.0

89.8

2010-2011

Gas transportation capacity and saturation

(10) Resolution ARG/gas 135/09 of the Authority, published on 28 September 2009, extended the validity of tariffs approved for the 2008-2009 thermal year to the period 1 October 2009 - 31 December 2009.

24


The valuation of the net capital invested (RAB) is based on the re-valued historic cost method. The return rate (WACC) of net capital invested is set at a real rate of 6.4% before taxes. The incentives for new investments were confi rmed and provide for a higher return compared to the variable base rate (WACC), in rela-tion to the type of investment, from 1% to 3% and for a period from 5 to 15 years. The revenues associated with new investments are paid starting from the second year following that in which the costs were incurred (“spending”) and are guaranteed regardless of the volumes transported. The method for updating the “price cap” tariffs is applied to reve-nue relating to operating costs and is equal to approximately 15% of the revenues in question, which are updated for infl ation and decreased by an annual recovery coeffi cient set at 2.1% (3.5% in the previous regulatory period). The revenue components which are related to returns and amortisation and depreciation are de-termined on the basis of the annual update of net capital invested (RAB). In particular, in the third regulatory period, the amortisation and depreciation is deducted from the price-cap mechanism and calculated on the basis of the useful economic and technical life of the transport infrastructure which is 50 years (40 years in the previous regulatory period). The tariff structure is based on an entry/exit model and was con-fi rmed for the third regulatory period as well, together with the ca-pacity fee for the metering service.

Finally, fuel gas is treated as a pass-through cost which is payable in kind by the users and is excluded from the price cap mechanism.

Resolution ARG/Gas 192/09 - “Amendments to Resolution no. 137/02 of 17 July 2002, for defi ning criteria on the treatment of non-metered natural gas (gas consumed internally, network leaks, withdrawals/injections into the network and unaccounted-for gas) as part of the balancing service.”With Resolution ARG/gas 192/09, published on 15 December 2009, in application of the new tariff criteria established with Resolution ARG/gas 184/09, the Authority for Electricity and Gas defi ned the terms for payment in kind by the users of the service to the major transport company, the gas quantities for coverage of the fuel gas, the network leaks and the unaccounted-for gas due as a percentage of the quanti-ties injected and withdrawn from the transportation network.

Resolution ARG/gas 198/09 - “Approval of the proposals for the nat-ural gas transportation and dispatch service tariffs and the transi-tory fee for the gas transportation metering service for 2010.”With Resolution ARG/gas 198/09, published on 23 December 2009, the Authority approved the transportation, dispatch and metering tariffs for 2010. The tariffs were determined on the basis of the base revenues of €1,703 million (net of all pass through costs, including fuel gas and network leaks), the additional revenues relating to develop-

25


ment investment incentives realised in the fi rst regulatory period of approximately €28 million and the revenues associated with the system balancing costs of approximately € 23 million.The revenues in effect from 2010 will have to take account of the in-crease volumes transported compared to the base amount of 75.7 billion cubic meters. The portion of the revenues associated with the transportation ca-pacity is guaranteed and is equal to approximately 85% of the base revenues.The RAB as at 31 December 2008 for transportation, dispatching and metering is €12.8 billion.

Resolution VIS 8/09 - “Closure of the preliminary investigation be-gun following Authority for Electricity and Gas Resolution VIS 41/08 of 15 April 2008 on the correct application of the provisions con-cerning unaccounted-for gas in the natural gas transportation net-works from 2004 to 2006”.With Resolution VIS 8/09, published on 5 February 2009, the Au-thority for Electricity and Gas concluded the preliminary investiga-tion for acquisition of the information relating to Unaccounted for Gas (UFG) within the transportation system during 2004-2006 and began a survey on the service and maintenance of a portion of the transportation network’s metering installation, which was sched-uled to be completed on 30 September 2009 but was extended to 31 March 2010 with Resolution VIS 96/09; the survey was con-

cluded with Resolution VIS 93/10 on 6 September 2010. Several irregularities were discovered concerning the management of the metering plants owned by entities other than Snam Rete Gas S.p.A.

Resolution ARG/gas 218/10 - “Approval of the tariff proposals for natural gas transportation and dispatch, the transitory fee for the gas transportation metering service for 2011 in implementation of the provisions set forth in Resolution ARG/gas 184/09 issued by the Authority for Electricity and Gas on 1 December 2009.”Based on the criteria described, the Authority approved the trans-portation, dispatch and metering tariffs for 2011 with Resolution ARG/gas 218/10. The tariffs were determined on the basis of the base revenues which amounted to €1,817 million net of the third party portion (of which €113 million relate to development investment incentives and approximately €36 million to revenues associated with sys-tem balancing costs).The actual revenues for 2011 will have to take into consideration the increase in the transported volumes compared to the base value, which is 75.7 billion cubic meters.Furthermore, the amount payable to the company for higher costs incurred for the purchase of fuel gas from 1 October 2008 to 31 December 2009 was set at €54.9 million.The RAB as at 31 December 2009 for transportation, dispatch and metering amounts to € 13.1 billion.

26

27

Snam Rete Gas Annual Report 2010 / Liquefied Natural Gas (LNG) regasification

Liquefied Natural Gas (LNG) regasification

28


The LNG regasifi cation serviceNatural gas is also injected into the national transportation network from the LNG terminal at Panigaglia (La Spezia), which is owned by GNL Italia. Here, it can regasify 17,500 cubic meters of LNG per day, thus when operating at maximum capacity, the terminal can inject over 3.5 billion cubic meters of natural gas into the transportation network annually. The regasifi cation service includes unloading the LNG from the vessel, operating storage, i.e., the storage time

required for vaporising the LNG, regasifying it and injecting it into the national network at the Panigaglia entry point. The regasifi ca-tion service can be either continual for the entire thermal year or work on a spot basis. Ancillary services are also available, such as correcting the heating power of the natural gas to comply with qual-ity requirements for its injection into the transportation network (correction of the Wobbe index).

Key performance indicators (€ million) 2008 2009 2010 Change Change %

Core business revenue (*) (**) 37 36 35 (1) (2.8)

- of which LNG regasifi cation revenue 20 21 24 3 14.3

Operating costs (**) 30 27 24 (3) (11.1)

EBIT 5 5 7 2 40.0

Investments 6 7 3 (4) (57.1)

Volumes of LNG regasifi ed (billions of cubic metres) 1.52 1.32 1.98 0.66 50.0

Tanker loads (number) 42 38 54 16 42.1

Employees in service at December 31 (number) 93 87 70 (17) (19.5)

(*) Core business revenue includes the recharging to customers of costs relating to the natural gas transportation service provided by Snam Rete Gas S.p.A. For purposes of the consolidated fi nancial statements, these revenues, together with transportation costs, are charged to GNL Italia S.p.A. to show the scale of the operation.

(**) Before consolidation adjustments.

Financial resultsLNG Regasifi cation revenue amounted to €24 million in 2010, a year-on-year increase of €3 million, or 14.3%. This rise was due mainly to higher volumes of LNG regasifi ed (+0.66 billion cubic metres; +50%).

EBIT totalled €7 million, an increase of €2 million, or 40%, com-pared with 2009. The rise was mainly due to higher revenue from the LNG regasifi cation service.

Operating review

Quantities of regasifi ed LNG per user (billions of m³) 2008 2009 2010 Change Change %

Enel Trade 1.23 1.01 1.28 0.27 26.7

Eni 0.29 0.10 0.22 0.12

Other 0.21 0.48 0.27

1.52 1.32 1.98 0.66 50.0

29


Resolution ARG/gas 54/10 - “Modifi cation of Article 11 of Resolution no.167/05 issued by the Authority for Electricity and Gas on 1 Au-gust 2005 containing provisions in the event of failure to use the regasifi cation capacity.” With Resolution ARG/gas 54/10, published on 15 April 2010, the Authority for Electricity and Gas introduced a tolerance of 10% on the complete use of the capacity provided in order to determine any release of capacity commensurate with the fl exibility of supply contracts, to achieve greater fl exibility in accessing the regasifi ca-tion service. Pursuant to the aforementioned provision, GNL Italia proposed to amend its own regasifi cation code.

Resolution ARG/gas 90/10 - “Deployment of the process for the es-tablishment of provisions referring to the payment of costs for the restoration of liquefi ed natural gas regasifi cation terminals.” With this provision published on 21 June 2010, the Authority for Electricity and Gas began a procedure for the establishment of pro-visions aimed at recognising the restoration costs for GNL sites in tariffs.

Resolution ARG/gas 108/10 - “Approval of the tariff proposals for the regasifi cation service for thermal year 2010-2011 for GNL Italia S.p.A. and Terminale GNL Adriatico S.r.l., in implementation of Reso-lution ARG/gas 92/08 issued by the Authority for Electricity and Gas on 7 July 2008.” With this provision, wh ich was published on 19 July 2010, the Au-thority for Electricity and Gas approved the tariffs for the regasifi -cation service provided by GNL Italia for thermal year 2010-2011, pursuant to Resolution ARG/gas 92/08. The tariffs were set on the basis of the base revenues of €25.6 million. The actual revenues for thermal year 2010-2011 must take into account the regasifi ed volumes. The net capital invested as at 31 December 2009 (RAB) is equal to €109.7 million.

In 2010, the Panigaglia LNG terminal in the province of La Spezia regasifi ed 1.98 billion cubic metres of natural gas (compared with 1.32 billion cubic metres in 2009), unloading 54 methane tankers of various types, including three spot loads (compared with 38 tankers in 2009, including fi ve spot loads).

InvestmentsInvest ments in 2010 amounted to €3 million, a decrease of €4 million compared with the previous year.

Adaptation and modernisation of Panigaglia plant The Environmental Impact Assessment (EIA) of the plans to expand and modernise the GNL Italia regasifi cation terminal at Panigaglia was completed successfully on September 9. The decree was signed by the Italian environment and culture ministries.

Regulation

Resolution ARG/gas 92/08 - “Criteria for the determination of the tariffs for the regasifi cation service and amendments to Resolu-tions no. 166/05 and no. 11/07”.With Resolution ARG/gas 92/08, published on 9 July 2008, the Au-thority for Electricity and Energy defi ned the tariff criteria for the regasifi cation service applicable for the third regulatory period (1 October 2008-30 September 2012).The mechanisms already in effect in the second regulatory period were confi rmed for determining the base revenues, including the real return on net invested capital of 7.6% before taxes. In regard to the tariff structure, the breakdown of revenues into a regasifi ca-tion capacity component and a regasifi ed volumes component was maintained, at a ratio of 90/10 (80/20 in the second regulatory period). The tariffs are updated using the price cap methodology applied only to the component relating to operating costs, with a productiv-ity recovery coeffi cient of 0.5%.The revenue component relating to the return and amortisation and depreciation is updated on the basis of an annual recalculation of invested capital and additional revenues from the incentives for in-vestments realized in prior regulatory periods. Incentives for new investments involve the payment of a return in-creased by three percentage points compared to that paid for capi-tal at the end of 2007, for a duration of 16 years. Both the increase in the rate of return and the duration are differentiated depending on the type of investment.

Resolution ARG/gas 102/09 - “Approval of the tariff proposals for the regasifi cation service for thermal year 2009-2010 for GNL Italia S.p.A. and Terminale GNL Adriatico S.r.l., in implementation of Reso-lution ARG/gas 92/08 issued by the Authority for Electricity and Gas on 7 July 2008.” With this provision, which was published on 29 July 2009, the Au-thority for Electricity and Gas approved the tariffs for the regasifi -cation service provided by GNL Italia for thermal year 2009-2010, pursuant to Resolution ARG/gas 92/08. The tariffs were set on the basis of the base revenues of €25 million. The net capital invested as at 31 December 2008 (RAB) was equal to €105.9 million.

0.5

2.0

1.0

2.5

1.5

loads (number)

2010

regasified volume (billions of m³)

2008 2009

60

40

20

0 0

Volumes of regasified LNG and number of tanker loads

30

31

Snam Rete Gas Annual Report 2010 / Natural gas storage

Natural gas storage

32


Natural gas storage servic e

The natural gas storage business in Italy is done under a conces-sion regime and it serves to offset the various demands of gas consumption and supply. In fact, procurement has had a basically constant profi le throughout the year, while gas demand has been

characterised by high seasonal variability with winter demand sig-nifi cantly higher than summer. Essentially, there are two distinct phases in storage: (i) injection phase, generally concentrated be-tween April and October, consisting of injecting into storage the natural gas deriving from the national transport network; (ii) the extraction phase, usually concentrated between November and March of the following year, when the natural gas is extracted from the deposit, treated, and redelivered to users by the transport network. The storage business is carried out by making use of an integrated whole of infrastructures comprised of deposits, gas treatment plants, compression stations, and the operational dis-patching system.

Stogit, the Group company which handles natural gas storage business, is now the largest Italian operator and one of the lead-ing European operators in the sector, using eight storage opera-tions fi elds located in Lombardy (four), Emilia Romagna (three) and Abruzzo (one). By adhering to technical effi ciency and econ-omy criteria, the Company makes its storage capacity available using an integrated system that is able to provide the required modulation services in a manner compatible with the available storage capacities.

IntroductionAs indicated previously, the results for 2009 include the economic effects of consolidating Stogit in the second half of 2009, as the-se were included in the group’s consolidated fi nancial statements from 30 June of that year, the date when the acquisition of Stogit from Eni was completed. In order to fully assess operating perfor-mance, the results of the natural gas storage business segment are analysed in comparison to those for the whole of 2009.

Key performance indicators (€ million) 2009 2010 Change Change %

Core business revenue (*) 344 355 11 3.2

- of which, natural gas storage revenue 341 349 8 2.3

Operating costs (*) 64 63 (1) (1.6)

EBIT 214 218 4 1.9

Investments 282 252 (30) (10.6)

Net invested capital at 31 December 2,093 2,258 165 7.9

Concessions (number) 10 10

- of which operational 8 8

Natural gas moved through the storage system (billions of cubic metres) 16.52 15.59 (0.93) (5.6)

- of which injected 7.81 8.00 0.19 2.4

- of which withdrawn 8.71 7.59 (1.12) (12.9)

Available storage capacity (billions of cubic metres) (**) 8.9 9.2 0.3 3.4

Employees in service at 31 December (number) 301 279 (22) (7.3)

(*) Before consolidation adjustments.(**) Working gas capacity for modulation, mining and balancing services. The value shown represents the maximum available capacity and may not correspond to the maximum replenishment carried

out.

Stogit – Storage concessions at 31 December 2010

33


Operating review (€ million) 2009 2010 Change Change %

Development of new fi elds 221 144 (77) (34.8)

Investments with an incentive of 4% over 16 years 221 144 (77) (34.8)

Capacity upgrades 36 74 38

Investments with an incentive of 4% over 8 years 36 74 38

Maintenance and other 25 34 9 36.0

282 252 (30) (10.6)

InvestmentsInvestments totalled €252 million in 2010, down by €30 million, or 10.6%, year-on-year. This reduction was due largely to the de-velopment activities in progress in the Fiume Treste storage fi elds drawing to an end.Pursuant to Resolution no. 50/06 of the Electricity and Gas Au-

thority, relating to the second regulatory period (1 April 2006 – 31 March 201011), incentivising investments means applying a rate of return that is four percentage points higher than the base rate, over eight years for upgrades of existing capacity and over 16 years for the development of new fi elds. Pursuant to Resolution ARG/gas 119/10 of the Electricity and Gas Authority, this incentive system will also apply to the third regulatory period (1 January 2011 – 31 December 2014).Investments with a 4% incentive over 16 years (€144 million) re-late mainly to the development activities in progress in the Fiume Treste storage fi elds, as well as the Bordolano storage fi eld project to develop the cushion gas injection programme. Investments with a 4% incentive over eight years (€74 million) mainly concern projects to increase pressure. Around 86% of these investments are expected to benefi t from incentive-based returns. The breakdown of investments in 2010 by category will be submitted to the Authority when the tariffs are ap-proved for 2012.

Natural gas moved through the storage systemThe volumes of gas moved through the storage system in 2010 to-talled 15.59 billion cubic metres, down 0.93 billion cubic metres, or 5.6%, compared with 2009. This decrease was due mainly to the exceptional fall in supplies in January 2009 caused by the Russia-Ukraine crisis of 6-20 January, during which 2.2 billion standard cu-bic metres were supplied, which was partially offset by increased reconstitution of the capacity for shippers.

(11) The Electricity and Gas Authority’s resolution ARG/gas 21/10, published on 24 February 2010, extended for the period 1 April 2010 - 31 December 2010 the validity of nat ural gas storage tariffs approved for the thermal year 1 April 2009 - 31 March 2010 with Resolution ARG/gas 38/09

Financial resultsNatural gas storage revenues totalled €349 million, up by €8 mil-lion, or 2.3%, compared with 2009. This increase was due to tariff changes relating to the return on investments made in the second regulatory period (+€6 million) and to higher variable payments for movement of natural gas (+€2 million). Storage revenues refer to modulation storage (€282 million; +3.3%) and strategic storage (€67 million; 1.5%).

EBIT totalled €218 million in 2010, up by €4 million, or 1.9%, com-pared with 2009. This was due to the increase in storage revenues (+€8 million) and higher income from the sale of natural gas no longer necessary for plant operation (+€2 million, net of the costs of gas sold). These factors were partially offset by greater amorti-sation and depreciation (-€6 million), mainly as a result of revised estimates for abandonment costs.

(%)

Development of new fields

Upgrading of capacity Maintenance and other

2009 2010

78

57

13

29

9 14

Share of investments by incentive (% of total investments)

34


Total storage capacity as at 31 December 2010 was 14.2 billion cu-bic metres, a year-on-year increase of 0.3 billion cubic metres, due mainly to development investments made at the Settala conces-sion plants.

Regulation Resolution ARG/gas 50/06 – “Calculation criteria for storage tariffs and modifi cations and supplements for Resolution 119/05 of the Electricity and Gas Authority of 21 June 2005 and for Resolution 166/05 of the Electricity and Gas Authority of 29 July 2005” and Resolution ARG/gas 38/09 – “Approval of company payments and calculation of single payments for storage relating to thermal year 2009-2010, implementing Resolution 50/06 of the Electricity and Gas Authority of 3 March 2006”. With Resolution 50/06 of March 2006, the Electricity and Gas Au-thority established the calculation criteria for the storage tariffs for the second regulatory period, expiring 31 March 2010, providing for a mixed mechanism of revenue allowed (in terms of capacity) and a price cap (on gas moved – commodity), also establishing a single tariff on a national level. With Resolution 38/09, published on 30 March 2009, the Author-ity approved the storage tariffs for thermal year 2009-2010, estab-lished on the basis of the RAB at 31 December 2008 equivalent to €2.8 billion.

Resolution ARG/gas 165/09 - “Urgent operations for adapting the balancing regimen and regulation of natural gas storage services under Legislative Decree No. 78 of 1 July 2009”. With this resolution, published on 3 November 2009, the Electrici-ty and Gas Authority, applying Legislative Decree No. 78/09 which provided measures for reducing the cost of energy for businesses by providing for, among other things attributed to the Regulator, the promotion of storage and point services for end industrial and thermoelectric customers, has defi ned criteria to permit storage companies to offer additional fl exible services to users of the transport system on a monthly basis, enabling the company to withhold a share of the revenue deriving from eventual alloca-tions of the services offered. For this purpose Stogit has prepared a proposal for updating its Storage Code, approved by Resolution ARG/gas 178/09, which defi nes the offering of the so-called Users Balancing Service.

Resolution ARG/gas 21/10 - “Extension of validity of natural gas storage tariffs”.With this resolution, published on 24 February 2010, the Electric-ity and Gas Authority extended, for the period 1 April 2010 – 31 December 2010, the validity of the tariff proposals for natural gas storage service approved by Resolution ARG/gas 38/09, extending for that period the revenue guarantee criteria referred to in Article 10 of Resolution 50/06 as well as the equalisation regime referred to in Article 9 of that resolution.

Resolution ARG/gas 119/10 - “Consolidated act on the regulation of the quality and tariffs for natural gas storage services for the 2011-2014 period (TUSG): approval of part II, “Regulation of natu-ral gas storage service tariffs for the regulatory period 2011-2014 (RTSG)”, measures on the transitory payment for the gas transpor-tation metering service for 2011”.

With this resolution, published on 5 August 2010, the Electricity and Gas Authority established the calculation criteria for the stor-age tariffs for the third regulatory period, expiring 31 December 2014, providing for a mixed mechanism of revenue allowed (in terms of capacity) and a price cap (on gas moved – commodity), also establishing a single tariff on a national level.

Resolution no. ARG/gas 202/10 “Approval of the company pay-ments and calculation of single payments for storage service and calculation of the transitory payment for the gas transport measurement metering service for 2011, implementing Resolu-tion ARG/gas 119/10 of the Electricity and Gas Authority of 3 Au-gust 2010”.With this resolution, published on 24 November 2010, the Electric-ity and Gas Authority approved the storage tariffs and the transi-tory metering payments for 2011, established on the basis of a RAB at 31 December 2009 equivalent to €3.0 billion.

Legislative Decree no. 130/10 – New storage capacity programme

Legislative Decree no. 130, “Legislative Decree bearing measures for greater competition in the natural gas market and the transfer of resulting benefi ts to end customers, pursuant to Article 30, para-graphs 6 and 7, of Law no. 99 of 23 July 2009”, came into force on 19 August 2010.Among other things, the Decree obliges entities which inject natu-ral gas into the national network to disclose their wholesale market share on an annual basis. The maximum market share has been set at 40% of the total volume of gas injected, although this can be increased to 55% if an entity commits to building new natural gas storage infrastructures (or upgrading existing ones) in order to free up 4 billion cubic metres of new storage capacity over a fi ve-year period. This commitment can be made by stipulating appropriate agreements with storage subsidiaries.

15.59

7.59 7.81

16.52

8.718.00

0

2

4

6

8

10

12

14

16

18

Total

2009

Withdrawal Injection

2010

Natural gas moved in/out of the storage system (billions of m³)

35


Consequently, the ultimate parent, Eni, informed Stogit of its inten-tion to build new storage capacity by asking its storage subsidiary to prepare and submit a draft proposal. Stogit carried out this re-quest and the ultimate parent, Eni, then submitted Stogit’s proposal to the Ministry of Economic Development with a view to increasing the aforementioned maximum market share.The proposal was approved by the ministry, upon consultation with

the Electricity and Gas Authority, by a decree of 31 January 2011. Consequently, it is binding for Stogit, in terms of effi ciency and time-frame, and must be completed within fi ve years of 1 September 2010. More specifi cally, Stogit must ensure punctual completion of the proposal’s infrastructure capacities. This activity will be carried out in compliance with the obligations of functional separation estab-lished by Resolution no. 11/07 of the Electricity and Gas Authority.

36

37

Snam Rete Gas Annual Report 2010 / Natural gas distribution

Natural gas distribution

38


Key performance indicators (€ million) 2009 2010 Change Change %

Core business revenue (*) 802 1,233 431 53.7

- of which, natural gas distribution revenue 776 1,197 421 54.3

Core business revenue net of IFRIC 12 802 884 82 10.2

- of which, natural gas distribution revenue 776 848 72 9.3

Operating costs (*) 291 640 349

Operating costs net of IFRIC 12 291 291

EBIT 398 455 57 14.3

Investments 334 386 52 15.6

Net invested capital at 31 December 3,419 3,519 100 2.9

Gas distribution (millions of cubic metres) 7,537 7,953 416 5.5

Distribution network (kilometres) 49,973 50,307 334 0.7

Active meters (millions) 5.771 5.848 0.077 1.3

Employees in service at 31 December (number) 3,545 3,119 (426) (12.0)

(*) From 1 January 2010, items include the effects of applying international accounting standard IFRIC 12, “Service Concession Arrangements”. Applying this interpretation had no effect on the group’s and the segment’s results, except for the equal recognition of revenue and costs relating to building and upgrading distribution infrastructures (€349 million). More information on this interpreta-tion and how it applies to the Snam Rete Gas group can be found in the “Basis of presentation and consolidation principles” chapter of the Notes to the consolidated fi nancial statements, to which reference is made.

Natural gas distribution serviceThe natural gas distribution business operates on a concession regime, between Italgas and Companies which are its subsidiar-ies, through the conferral of this service by local public entities; it consists of the service of gas distribution through local pipe-line networks from delivery points at the metering and reduction stations (city gates) to the gas distribution network redelivery points at the end customers (families, businesses, etc.). Gas distribution service is carried out for sales companies author-ised to market to end customers by the transportation of the gas through city networks. Italgas undertakes natural gas distribution activities by making use of an integrated system of infrastruc-tures comprised of stations for withdrawing gas from the trans-port network, pressure reduction plants, local transportation and distribution network, user derivation plants and redelivery points comprised of technical equipment featuring meters at the end customers (families, commercial and tertiary businesses, and small industrial businesses).Italgas is the leading Italian operator in the natural gas distribution business in Italy with 1,448 municipal concessions and more than 50,300 kilometres of medium- and low-pressure transportation network.

IntroductionAs indicated previously, the results for 2009 include the effects of consolidating Italgas in the second half of 2009, as these were included in the group’s consolidated fi nancial statements from 30 June of that year, the date when the acquisition of Italgas from Eni was completed. In order to fully assess operating performance, the

results of the distribution business segment are analysed in com-parison to those for the whole of 200

Italgas and Napoletana Gas – Municipal territories under concession at 31 December 2010

Financial resultsNatural gas distribution revenues totalled €1,197 million, an increase of €421 million (+54.3%) compared with 2009. Exclud-ing the effects of applying IFRIC 12, distribution revenues totalled

€848 million, up by €72 million (+9.3%) year-on-year. This in-crease was attributable mainly to the effects of applying the ‘grad-uality’ mechanism introduced by Resolution no. 79/09 of 1 June

39


2009 of the Electricity and Gas Authority12, increased revenues due to the return on investments in the distribution network and meter-reading services, which were transferred to distribution companies on 1 July 2009. EBIT generated in 2010 totalled €455 million, up by €57 million, or 14.3%, year-on-year. This increase was due mainly to higher rev-

enues from natural gas distribution (+€72 million, net of IFRIC 12) and more income from technical services performed at redelivery points (+€9 million). These factors were partially offset by higher amortisation, depreciation and impairment losses (-€22 million) owing to increased amortisation and depreciation (-€12 million) and the impairment losses on certain assets (-€10 million).

Operating review

Investments (€ million) 2009 2010 Change Change %

Maintenance 194 209 15 7.7

Extension and upgrade 92 113 21 22.8

New networks 17 27 10 58.8

Other investments 31 37 6 19.4

334 386 52 15.6

Investments in 2010 amounted to €386 million, an increase of €52 million, or 15.6%, compared with 2009. Maintenance investments (€209 million) mainly involved renovat-ing sections of pipes, by replacing cast-iron pipes, and continuing the meter-replacement programme.Extension and upgrade investments (€113 million) involved ex-tending existing networks in response to commitments arising from concession contracts.Investments in new networks (€27 million) essentially related to infrastructure under construction in southern Italy.Other investments (€37 million) mainly concerned real-estate and

IT investments. In addition to the technical investments described above, in 2010 the group acquired the CNEA business unit for €9 million, essen-tially consisting of gas distribution infrastructure in seven munici-palities in the Lazio region.

Gas distribution During 2010, 7,953 million cubic metres of gas were distributed, an increase of 416 million cubic metres, or 5.5%, on 2009, mainly due to the different climatic conditions and the development of the network.

(12) With this resolution, which amended the tariff criteria in effect under prior Resolution no. 159/08, the Authority introduced a gradual increase in the amortised tariff component for the new regulatory period, which is in addition to that already provided for returns on invested capital.

(%)

Maintenance

Network extension and upgrade

New networks

Other investments

2009 2010

58 54

2829

5 7

9 10

Share by investment type (% of total investments)

4,000

5,000

8,000

6,000

9,000

7,000

3,000

20102009

Active meters and volumes of natural gas distributed

active meters (thousands)

volume distributed (millions of m³)

5,771

7,9537,537

5,848

40


of each company, and the costs recognised for such company, using the reference tariff.

Resolution ARG/gas 114/10 - “Approval of the gas distribution and metering services tariffs for 2009”.With this resolution, published on 30 July 2010, the Authority ap-proved the reference tariff for 2009. At that time the reference tariffs for the sites managed by Italgas were also approved, and Resolution ARG/gas 197/09 provided for a fact-fi nding supplement on the public contributions received; the Authority found that there were suffi cient explanations provided by the Company to justify the discrepancy between the data reported in the questionnaires given to the Authority and the data reported in the list provided by the Ministry of the Economy.

Resolution ARG/gas 115/10 - “Approval of the gas distribution and metering services tariffs for 2010”.With this resolution, published on 30 July 2010, the Authority reap-proved the reference tariffs for 2010.Resolution ARG/gas 195/10 - “Recalculation, due to material errors, of the gas distribution and metering services tariffs for 2009”.With this resolution, published on 9 November 2010, the Authority recalculated the reference tariffs for 2009, correcting several mate-rial errors contained in the preceding Resolution ARG/gas 114/10.The new procedure for calculating the tariffs required sending an enormous amount of data and creating a complex system of algo-rithms in order to take into account the various types represented in the national scope of gas distribution.Subsequent refi nements of the data by the distribution companies and the repeated checking of those data by the Authority made it necessary to issue a new measure in response to material errors found in transmitting information or interpretation errors involving questionnaires sent and the information itself.

Resolution ARG/gas 235/10 – “Updating of mandatory tariffs for 2011 for the providing of natural gas distribution and metering services and tariff options for gas distribution and metering serv-ice other than natural gas by channelled networks. Start-up of the procedure for re-exercising the power of tariff regulation pursuant to the orders of the Regional Administrative Court of Lombardy, Sect. III, 11 October 2010, Nos. 6912, 6914, 6915 and 6916. Provi-sions on tariff options for gas distribution and metering service other than natural gas by channelled networks for 2010”.With this resolution, published on 16 December 2010, the Au-thority approved the mandatory tariffs for 2011 and initiated a procedure to adopt modifications to the regulation in force on the subject of calculating tariffs for providing natural gas distribution and metering services and other gases in order to comply with the orders of the Regional Administrative Court of Lombardy which partially grant the appeals brought by several operators against the Consolidated Act for the regulation of gas distribution and metering tariffs for the 2009-2012 period, ap-proved by Resolution ARG/gas 159/08 and subsequent amend-ments and modifications.The elimination of several tariff regulation concepts voided by the Regional Administrative Court of Lombardy and the resulting im-plementation orders has made it necessary for the Authority to re-exercise the power of tariff regulation, after consultation with the

At 31 December 2010, the group had concessions for gas distribu-tion services in 1,448 municipalities (compared with 1,441 at 31 December 2009). It had 5.848 million active meters at gas delivery points to end customers (households, businesses, etc.), compared with 5.771 million at 31 December 2009.

Distribution networkThe group’s gas distribution network at 31 December 2010 covered 50,307 km, an increase of 334 km, or 0.7%, compared with 31 De-cember 2009. The increase is due to the balance of increases and decreases in the network. The increases are primarily due to:· Acquisition of the business unit CNEA Gestioni S.r.l, holder of the

gas concessions in 7 municipalities in the provinces of Frosi-none and Latina;

· The awarding of a new tendered concession;· Construction of new networks, particularly in Calabria;· Extensions of networks to meet commitments deriving from

concession contracts.

Regulation

Resolution ARG/gas 159/08 - “Consolidated act on the regulation of the quality and tariffs for natural gas metering and distribution services for the 2009-2012 period regulatory period (TUDG): ap-proval of part II, “Tariff regulation for natural gas distribution and metering services for the 2009-2012 regulatory period (RTDG).Temporary measures for 2009”. With this resolution, published on 17 November 2008 (and subse-quent amendments), the Authority defi ned the tariff criteria for the distribution and metering services for the third regulatory period, from 1 January 2009 to 31 December 2012. In summary, the reso-lution provides for:· Recognition of the capital invested for the site by the adjusted

historical cost method and of the capital invested with respect to centralised operations (non-industrial buildings and other fi xed assets) by the parametric method;

· Recognition of the operating costs of distribution operations on a parametric basis and differentiated depending on company size and density of the customers connected to the network;

· Recognition of the operating costs of metering and sales opera-tions using equal parametric components for all businesses;

· Assessment, at standard cost, starting in 2010, of all invest-ments on the basis of a price list defi ned by the Authority (Mod-ern Equivalent Asset Value (MEAV) method, based on the con-cept of new replacement cost);

· Calculation by the Authority of the reference tariffs for each busi-ness, corresponding to the costs recognised for remunerating net invested capital, amortisation and depreciation, and operat-ing costs;

· Subdivision of the national territory into six tariff areas and cal-culation by the Authority of the respective mandatory tariffs that distributors must apply to users of their own networks;

· Introduction of an equalisation mechanism, managed by the Authority through the Cassa Conguaglio Settore Elettrico (Elec-tricity Equalisation fund), to guarantee equivalence between the revenue obtained by each company by application of the man-datory tariff, which, naturally, does not refl ect the specifi c costs

41


entities involved, to fi ll the void left by this nullifi cation, taking that established by the administrative court into consideration.In order to comply with the Lombardy Regional Administrative Court orders, the Authority therefore started a procedure to assess the required modifi cations to the tariff regulation in force and, in the interim while the procedure is carried out, it has suspended cal-culation of the reference tariffs for 2011. In addition, fi nal approval of the reference tariffs for 2009 and 2010 has been postponed pending a further measure to be adopted at the appropriate time for calculating the remaining equalisation amounts for 2010 (or for the second half of 2011).Finally, the resolution provides for a one year postponement, start-ing in 2012, of the introduction of the MEAV method for assessing the standard costs of investments for tariff purposes, pending defi -nition of the pertinent price list by the Authority.

National legislative provisions

Provisions on competition and quality of basic services in the natu-ral gas distribution sectorOn 16 December 2010, the Joint Conference approved the two draft decrees of the Ministry of Economic Development relating to: (i) min-imum geographical areas for holding calls for tenders for awarding gas distribution concessions (“Ministerial Decree on Areas”) and (ii) tender and proposal-assessment criteria for awarding concessions for gas distribution (“Ministerial Decree on Tender Criteria”).The draft Ministerial Decree on Minimum Geographical Areas pro-vides for: (a) a minimum of 177 geographical areas for holding calls for tenders and awarding concessions for gas distribution; (b) local authorities from each minimum geographical area to award con-cessions for gas distribution via a single call for tenders; the call for tenders may be extended to two or more adjoining areas subject to agreement by the local authorities of the areas in question; (c) concessions relating to all plants in the same minimum geographi-cal area, including new distribution plants, to expire 12 years after

the date the concession was awarded to the successful tenderer for the fi rst plant in the area.From the date the Ministerial Decree on Areas enters into force, concessions for gas distribution for which a call for tenders has not been published or the deadline for submitting tenders has not passed will be awarded exclusively with reference to the aforemen-tioned minimum geographical areas. However, the outgoing opera-tor will be obligated to continue providing the service until the date the new concession begins.Pursuant to the draft Ministerial Decree on Tender Criteria, the con-tracting entity will prepare the call for tenders and tender regula-tions, in compliance with the outlines of and information contained in the standard call for tenders and tender regulations. The contract-ing entity will prepare the area guidelines with minimum develop-ment conditions. The minimum development conditions and the measures set out in the area guidelines must allow the operator to maintain fi nancial stability and must be justifi ed by an analysis of costs and benefi ts to consumers. The concession will be awarded to the most economically advantageous tender, based on the fol-lowing criteria: (a) fi nancial terms and conditions; (b) safety and quality criteria; and (c) plant development plans.The draft also sets out, among other things, the criteria for determin-ing the amount to be repaid to outgoing contract- and concession-holders, and stipulates that the industrial value of the part of the plant owned by the outgoing operator be equal to its new-for-old value, less the cost of physical deterioration, including fi xed assets under construction, as shown in the accounting records: the amount to be repaid to the outgoing operator can therefore be obtained by deducting advances and subsidies granted by local authorities and other public fi nancial backers from the industrial value, and adding any premiums paid to the local concessionary bodies. In the event of a dispute, the call for tenders will allocate to the plant or section of a plant in question the greater of the following values: (a) the estimate of the local concessionary body; (b) the value of the site’s net fi xed assets, according to the tariff system.

SRG Relazione sulla gestione 2010 - UK.indd 41SRG Relazione sulla gestione 2010 - UK.indd 41 30/03/11 17:4230/03/11 17:42

Documents

Main factors of the pricing framework