Distribution Tariffs: What they are and how they are calculated (Italian case)

A natural monopoly, in the more compelling sense of the term, means that the optimum number of firms in the market is equal to one.

By definition, the natural monopoly implies that the costs incurred by a company in distributing the entire quantity demanded of a good or service are lower than those that would support more companies simultaneously on the market. Under these conditions, the presence of a single, or few, operators is more efficient than a plurality of companies.

The field of power distribution in Italy, has been recognized by the Authority for Electricity and Gas as a unique example of “natural monopoly.” To make it so it is mainly the technical characteristics and the importance of fixed costs, typical of this industry. Therefore, this business has always been subject to a strong regulation that aimed to encourage virtuous behavior for the collectivity and to prevent cross-subsidies from other industry segments.

For this reason, and because of the national interest involved, the electrical distribution was only partially touched by the liberalization process that affected the Italian electricity industry at the end of the nineties. Nowadays, power distribution in Italy is carried out by some operators who have obtained state permits, issued on March 31st, 2001, and expiring December 31st, 2030.

According to the legislation distribution companies, cannot sell energy. The laws approved after the liberalization of the market, imposed to distributors with more than 100,000 end customers, the separation, both at the corporate and at a functional level, of sales and distribution activities. In practice, what actually happened was the constitution by large production companies of separate societies for distribution: (Like Enel Energia and Enel Distribuzione, or A2a Energia and A2a Reti Elettriche).

Apart from that, the most remarkable thing is that distributors must provide the same service to end users regardless of who is the provider of the customer, ensuring an equal treatment to all operators.

Revenues of distribution companies undergo a strong regulation: The Government defines the maximum revenue admitted, that have to cover the costs arising from the service, the remuneration of operating costs and the return on investment, through a system of fees and equalization.

Article. 2 paragraph 17 of Law 481/95 establishes the maximum unit prices for distribution services, net of taxes. The ultimate aim of these prices, according to the Authority would be to:

• Ensuring the quality of the service for a given period according to established standards
• Cover any costs resulting from unforeseeable and exceptional events or changes in the law
• Cover the costs of interventions to control and manage demand through the efficient use of resources.

The Authority is also responsible for updating the above tariffs, taking into account the impact of inflation in the market, and the total costs incurred by distribution companies.

The tariff components are therefore based on the average costs provided by the various operators, with particular emphasis on operating costs, depreciation and return on invested capital.

Operating expenses respond to the price cap methodology, also known as incentive regulation. This type of mechanism is used with the aim of reducing costs, through the regulation of prices. It established a maximum price that can be demanded by distributors to the end users. This value is updated according to a recovery efficiency index (called X-factor) and the consumer price index calculated by ISTAT.

About return on equity, the Authority stated that the premium to be paid to investors must ensure the systematic risk, ie the risk that cannot be avoided by operators.

According to what above mentioned, it is clear that any company operating in the distribution industry could simply under-invest, and count on the remuneration linked to investments implemented at a national level. The average industry costs are largely attributable to the investment policies of Enel Distribuzione, owner of a large percentage of the national network, and considered the main reference in terms of standard costs.

The logic adopted by AEEG to determine the distribution sector prices is therefore that of a correspondence of prices and costs, paying charges to operators that have actually faced them. These tariffs differ by type of consumers, classified as follow:

1. a) Domestic low voltage uses
2. b) Public lighting low voltage uses
3. c) Low voltage uses different from previous ones
4. d) Public lighting average voltage uses
5. e) Medium voltage uses different from point d)
6. f) High and very high voltage uses
7. g) Very high voltage uses with rated voltage between phases greater than 220KV

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Distribution costs cover a significant portion of the electricity bill, specifically, about a 10-11%. The AEEG subdivision often includes them under the heading of network services, along with dispatching costs.

This is because the distribution activity refers to the operation and maintenance of electrical networks at a local level. Distributors are, in fact, the owners of the local electricity grids and meters. They are the ones who make the hook-ups, (for example when there is new urbanization), or the maintenance in case of failure. In particular, the distributors are responsible for meter reading, and the management of the detected data.

Sales companies contact with distributors for different activities, such as:

• The receipt of consumption data of final customers
• The correct header of the supply owners. (Each turner request must also be communicated to the distributor.)
• The management of practices coming from customers requests, like power increases, checks or closures of meters or connections of new meters.

The distribution fees are compulsory for all final customers except for households in low voltage.

The rate has a trinomial structure divided as follows:

• Quota Fissa (in € cents per year and distribution point)
• Quota Potenza (in € cents per kW per year)
• Quota Energia (in € cents per kWh)

The main part is the Quota Energia, which is variable and linked to consumption.

These rates are established annually and updated by the Authority for Electricity and Gas. They cover costs related to infrastructure for distribution and transmission and those related to services delivery.

In addition there are the costs related to the imbalances of the equalization system of power distribution and those of integration mechanisms.

In fact, the costs incurred by distributors in the course of their activities, are influenced by factors like the characteristics of the clients and some external factors beyond the company’s control, for which in the presence of a single national rate, should be supported by the introduction of appropriate mechanisms to ensure the equalization of those costs.

Last but not least ,these tariffs include the costs, paid for continuous improvements of the electricity service.

Below we list the table with the distribution fees, for year 2016.

Maria Mura | Energy Consultant