Terna’s core business: the remuneration of our regulated activities

This section includes detailed information on the remuneration of our regulated activities, transmission and dispatching: Terna’s core business.

Terna’s core business is mainly linked to Regulated activities. Terna receives its remuneration on the basis of a tariff system established by the Authority for Electricity and Gas for the two important regulated activities that the company carries out in Italy: electricity transmission and dispatching, both implementing the concession by the Ministry for Economic Development. The first activity is remunerated as established by the Authority with Resolution no. 199/11, the second with Resolution no. 204/11. Terna overall accounts for less than 3% on the electricity bills paid by end users.

Recognized cost categories are three:

• Operating expenses;

• Return on the net invested capital for regulatory purposes (commonly defined as RAB, Regulated Asset Base); 

• Compensation for depreciation.

   

Due to the large investments included in Terna’s industrial plan and to efforts to reduce costs, a gradual increase over time is expected of the incidence of RAB remuneration and a limited increase of the incidence of compensation for depreciation, compared to a significant reduction in the incidence of operating expenses.

The graph illustrates a projection to 2015 of the various shares of recognized cost categories:
 

For more information on recognized cost categories:

1. Operating expenses

Existing regulations provide for the application of a price-cap system that includes establishing a level of recognized operating expenses that varies each year based on the inflation, the volume of activities and an annual reduction percentage parameter known as the x-factor.

If the actual operating expenses of a given year are lower that the recognized ones, Terna may fully withhold the difference, provided that at the end of each regulatory period (presently lasting four years) the difference is divided between Terna and the national electricity system (so-called profit-sharing system).

This system is widespread at the international level and provides a strong incentive for Terna to maximize its expenditure efficiency. In the short term, it allows the company to make profits with an efficiency that is higher than what expected, and allows the whole system to fully make use of the advantages deriving from this efficiency in the medium term.
 

2. Net invested capital for regulatory purposes

The National Transmission Grid development requires huge investments; from Terna’s listing to the present, the annual average investments increased by nearly five times, as illustrated in the following graph:

The present regulations establish that Terna must provide the capital needed for investments, through the finding of risk capital on the market (collected by its shareholders) and of debt capital (collected by banks and other financial institutes). To access these capitals, Terna must remunerate them according to market criteria, and in order to do so, the system must remunerate Terna according to the same criteria.

For each investment made by Terna for activities under concession, the present regulations establish that for each year of the life of the assets for which the investment was made, recognized expenses are linked to it equal to:
 

• The value of the investment, gradually re-evaluated taking into account inflation, divided by the number of years of the asset life, to cover the costs of amortization and depreciation;

• The net invested capital (equal to the difference between the initial investment and the accrued amortization and depreciation, both re-evaluated taking into account inflation) multiplied by the WACC (Weighted Average Cost of Capital calculated considering the relative weight of the return expected by creditors, shareholders and others who provided Terna’s capital). 
   

The total of investments over time determines the RAB value and indirectly that of totally recognized amortization and depreciation.

For incentivizing development investments compared to restructuring ones, current regulations envisage for the first – for a period of time equal to 12 years from the date of entrance into operation- an increase of 1.52% or of 32% of the WACC used for calculating the recognized remuneration cost of the RAB.
 

In line with such priority indications, Terna developed and planned a growing part of its investments for categories that are subject to incentives, generating at the same time important benefits for the system and a positive effect on its profit and loss account.
 

The graph illustrates a projection of investments in the plan period: