Revenue structure and regulatory framework

In 2012, the Terna Group's revenue amounted to 1,806 million euro. Most of this (about 95%) comes from activities subject to remuneration established by the Electricity and Gas Authority (AEEG) and only 5% is related to other activities, which consist mainly in specialised services provided by the Terna Group to third party entities, such as maintenance activities for HV systems owned by third-parties, plant engineering, maintenance of the fibre optic network owned by third parties, housing of TLC equipment, as well as other consulting activities in the transmission field. 

Regulated revenue 

The Company’s regulated revenue is generated by different rate components – the most important of which is the payment for transmission – paid to Terna by different categories of companies in the electricity industry (Distributors, Single Buyer and Dispatching Users) in proportion to the specific allocation drivers established by the AEEG (quantity of energy, power available, number of injection/withdrawal points).

Annually, the AEEG determines  unit sum of the rate components, on the basis of rules defined at the beginning of every four-year regulatory period. The contributing factors are, first, Terna's recognized costs, including margins, and second, the reference quantities(forecast) of the aforementioned allocation drivers. The cost components considered to determine the transmission rates mainly belong to three categories:

  • Remuneration of the RAB. The value of the RAB (Regulated Asset Base) is revalued annually on the basis of the Istat number on the change in the gross-fixed-investment deflator and updated on the basis of Terna's net investment. This investment is for both the construction of electric infrastructure (lines and stations) to renovate or develop the grid (work included in the Grid Development Plan) and the enhancement of managerial instruments (for example, IT systems or technologies to improve the security of the electric system). The RAB is remunerated by the AEEG at a rate of return linked to the market rate, or 7.4% for investments carried out up to 2011 and 8.4% for investments carried out starting in 2012. This rate is increased - for a limited number of years - for certain categories of development investment that are considered of particular strategic importance. In 2012, remuneration of the RAB constituted about 49% of Terna's recognized costs.
  • Depreciation and amortisation. Provision is made for the annual adjustment of the depreciation and amortization recorded due to the effects of new investments, divestments, the termination of the useful life of assets, and revaluation based on the change in the deflator of gross fixed investment. The share of amortisation remuneration represented in 2012 approximately 29% of the total recognised costs.
  • Operating costs. Operating costs are  typically the costs of labour and the procurement of goods and services that do not constitute investments. The component covering these costs, which in 2012 came to about 22%, is based on annual operating costs, valid for the entire regulatory period, revalued annually on the basis of inflation and reduced annually by an efficiency factor (price cap mechanism).

Once the unit amounts of the different rate components have been established, Terna's revenue depends on the actual dynamic of the allocation driver of recognized costs and in particular of the energy transmitted and the demand for electricity: in effect, because of the volume effect, it can turn out to be higher or lower than that foreseen. The sharp business contraction that began in the second half of 2008 together with the increase in the energy input onto the distribution networks (which “locally” satisfies part of the demand and therefore reduces the energy transported on the transmission grid) made forecasting the trend in energy transported more uncertain and led the AEEG to confirm, for 2012 and 2013, the mechanism to partially neutralize the volume effect introduced with Resolution ARG/elt 188/08. This mechanism provides that the AEEG:

  • supplement Terna’s remuneration regarding the volume share exceeding an exemption of 0.5% if the final volume is smaller than the one used for the rates;
  • require Terna to return the increased earnings regarding the volume share exceeding an exemption of 0.5% if the final volume is larger than the one used for the rates.

The 199/11 resolution provided that the transmission rate would become binomial starting in 2013. In other words, based on two allocation drivers: energy transported and power available at the connection points between the transmission grid and the distribution networks. Certain implementation difficulties have led the Authority to postpone adoption of the same and to confirm the pre-existing monomial rate for 2013.

 

Pass-through items 

In addition to regulated revenues and those generated by non-regulated activities, other Terna revenue comes from covering the costs for transactions for which the rules require a zero balance: these are considered pass-through items that do not influence the net income of the Terna Group in its Income Statement.

Part of these items, for example, are amounts such as the so-called capacity payment that Terna collects from withdrawal dispatching users and pays to the producers who make the capacity available on the market, or the amounts that Terna collects from the withdrawal dispatching users and pays to the subjects that supply the right to interrupt the load.

A significant part of the pass-through items is represented by so-called uplift, a rate component which includes various system costs, including covering the net expenses incurred to procure resources on the DSM. On one of the Uplift components (the component covering the energy purchase and sale transactions carried out by Terna on the DSM in order to keep the electric system balanced) the AEEG established an incentive scheme for Terna which establishes bonuses and penalties based on the volume of resources procured (see the following paragraph) in order to contain costs for end users.

Even if it does not influence Terna's profitability, pass-through revenue - also because of its size - has important repercussions on its relationship with industry companies with regard to the commercial and administrative management of contracts and billing of receivables and payables.

In 2012, Terna's pass-through revenues - and expenses - totalled 6,327 million euro (5,026 in 2011), of which 1,529 ( about 1,261 million euro in 2011) relative to the procurement of resources on the DSM.

 

2012 Incentive schemes 

The AEEG has introduced a specific bonus and penalty scheme aimed at incentivizing service improvement, in both technical and economic terms. Implicit in the incentive mechanisms is the assumption that if the objectives are achieved, the benefit for the users of the service will be a multiple of the incentive paid to Terna. In particular, in 2012 incentive mechanisms were provided for:

  • the quality of transmission service. The AEEG has defined (Resolution 197/11) a framework of incentives and penalties, applicable for the three-year period 2012-2015, linked to the ENSR (relevant energy not provided) indicators evaluated by referring to three different sub-indicators: ENSR-TERNA, ENSR-TELAT and ENSR-ALTRI, referred to three distinct portions of the national transmission grid. Temporarily, for the 2012-2015 period, economic effects are only associated with the first two sub-indicators and the bonus/penalty is calculated by multiplying a pre-established sum by the difference between the actual value and the target value of the indicator, net of an exempted range (+/-5% of the target value of the indicator). The inclusion of the grid portion acquired in 2009 from Enel (Telat grid) within the incentive mechanism includes the application of diversified targets, converging in 2015. At present, the final calculation by AEEG of the indicator for 2012 by which the incentive is valued is not yet available;
  • reduction of the volume of resources procured on the Dispatching Services Market (DSM). The mechanism was introduced in 2007 for a four-year period. It was modified by Resolution ARG/elt 213/09 and extended through 2012. The current mechanism provides for a differentiated unitary cap for each year and does not provide for a bonus cap;
  • acceleration of investment to develop the NTG. This mechanism, originally introduced by Resolution ARG/elt 87/10 and modified by Resolutions ARG/elt 199/11 and 40/2013/R/eel provides for a 2% additional incentive for the work in progress on development projects with the most added value for the electric system (elimination of congestion between market areas, increased transport capacity with other countries), conditional on the achievement of a series of milestones agreed on with the AEEG. Starting in 2012 a penalty mechanism is also applied in the event that development works go into operation behind schedule. Furthermore, Resolution ARG/elt 199/11 provides that Terna's participation in the investment acceleration mechanism (optional without other consequences until 2011) is a necessary condition for access to the additional 2% remuneration for Category I3 investments.

The bonuses earned in 2012 for achieving the objectives established as part of the incentive schemes are included in Terna's total regulated revenue. In the case of the incentive for reducing the volume of resources procured on the MDS, compared to the result achieved in 2012 and in consideration of the three-year period of the incentive mechanism and its characteristics, Terna recorded 23 million euro in its 2012 Financial Statements (165 million total during the 2010-2012 three-year period, as adjustment of the related fair value, taking into account the risks connected to the determination of 2012 targets and performance as well as the possible corrections to the volumes booked for 2012.

 

INCENTIVE MECHANISMS ACTIVATED IN 2012
Objective Resolution AEEG Period applicable 2012 result
Quality of transmission service Resolution  197/11 2012-2015 Being defined by AEEG
Reduced volume of resources procured on the MDS Resolution  213/09 2010-2012 Bonus € 1 million
Acceleration of investment to develop the NTG Resolution  199/11 2012-2015 Bonus € 14 million

 

The cost of transmission on the final user’s bill

In accordance with current regulations, much of Terna's recognized costs are billed to end customers of the electricity service by the distribution companies. Even without an official breakdown of the cost for the end user which directly shows the impact of the costs resulting from Terna's activity, based on the figures published by AEEG it can be estimated that transmission costs have a weight of about 3% on the electric bill of an average user5. Most of these costs are Terna's recognized costs (the consideration of other minor rate components have a negligible effect), net of pass-through items.

 

(5) Relation between the costs of transmission and cost of electricity for an average domestic consumer (family with 3 kW of committed power and 2,700 kWh of annual consumption); Terna processing of AEEG data.