Autorità per l’energia elettrica e il gas, Direzione Mercati 1 Market Department Italian Regulatory Authority for Electricity and Gas Milan, March 4, 2010

Autorità per l’energia elettrica e il gas, Direzione Mercati 1

Market Department

Italian Regulatory Authority for Electricity and Gas

Milan, March 4, 2010

Retail marketRetail market


AgendaAgenda

IntroductionIntroduction

Electricity retail market Electricity retail market

Natural gas retail marketNatural gas retail market


IntroductionIntroduction


What do customers pay? (1)What do customers pay? (1)

Tariffs for transmission, distribution and metering:

• cover the costs for the services• are set by the regulator

• concern monopolistic activities

Procurement and retailing price:• covers procurement costs in wholesale markets

(including dispatching balancing and losses)• includes costs and returns for retailing activity

• concerns completely liberalised activities

General charges• are set by regulator according to specific law-

provisions• cover general costs (research, incentives for

renewables…)

The price paid by customers is the sum of several elements:The price paid by customers is the sum of several elements:

Taxes• are set by the State and provinces

They do not depend They do not depend

on customer’s choiceon customer’s choice

of being served by of being served by

a specific retailer in thea specific retailer in the

liberalised marketliberalised market


What do customers pay? (2)What do customers pay? (2)

It depends on:1) the type of customer:

• electricity: residential/non-residential?• electricity: if non-residential, small/large?• natural gas: residential, small/large?

2) the choice made by the customer: • liberalised market?

Procurement and retailing price:• covers procurement costs in wholesale markets• includes costs and returns for retailing activity

• concerns completely liberalized activities


Electricity retail marketElectricity retail market


CCustomers' protectionustomers' protection (1) (1) right to be supplied with electricity of a specified quality at

reasonable, easily and clearly comparable and transparent prices [DIRECTIVE 2003/54/EC, article 3]

it is intended to ensure protection for those customers with limited bargaining power

it is provided to customers (residential or small customer) who don’t choose a retailer

SMALL CUSTOMERS:SMALL CUSTOMERS:

fewer than 50 occupied persons and a turnover or balance sheet not fewer than 50 occupied persons and a turnover or balance sheet not exceeding € 10million exceeding € 10million

and connected to the grid at low voltageand connected to the grid at low voltage


CCustomers' protection ustomers' protection (2)(2)Wholesale marketsWholesale markets

CustomerCustomer

Single buyer (SB)Single buyer (SB)

Public company owned by the StatePublic company owned by the State

Distribution company/related supplier*Distribution company/related supplier*

SB procures electricity for DC/RS.

DC/RS pay a price (Psb), that covers

all the SB procurement costs (the SB doesn’t

make profit)

SB has a portfolio of contracts (bilateral, CFDs…)

SB also buys electricity on the day ahead

mkt and pays the TSO for dispatching services.

The price charged to customers includes

PP and RP, where PP covers procurement

costs and RP covers retailing costs

* According to Directive 2003/54/EC distribution system operator (if serving more than 100.000 connected

customers) shall be independent from other activities not related to distribution


CCustomers' protection ustomers' protection (3)(3)

% customers at reference economic conditions % customers at reference economic conditions (year 2007)*(year 2007)*

81,6% industrial and commercial companies

99,7% domestic sector(*) since the 1st July 2007 all customers, including residential, can access

the free market

Number of customers at reference Number of customers at reference economic conditions economic conditions (october 2008)(october 2008)

Domestic sector: 27.100.000 (95,7% of the total)

Small business: 5.330.000 (72% of the total)


Procurement price (PP)Procurement price (PP)

PP is set out by the regulator and it is adjusted every 3 months

The purpose of the regulator is to set out a price which reflects “market conditions” such that no obstacles to the customers’ choice are created


Setting out PP (1)Setting out PP (1)

JanJan MarMar MayMay FebFeb AprApr JunJun JulJul AugAug SepSep OctOct NovNov DecDec

At the end of December Y-1 the regulator: At the end of December Y-1 the regulator: • estimates the monthly cost incurred by SB for each month estimates the monthly cost incurred by SB for each month

of the next Y and the monthly Psbof the next Y and the monthly Psb• sets out PP as the weighted average of Psb for the quarter sets out PP as the weighted average of Psb for the quarter

Jan/Mar. Customers’ consumption is used as a weight.Jan/Mar. Customers’ consumption is used as a weight.

customers’ consumption is determined on the basis of customers’ consumption is determined on the basis of the estimated “standard consumption” of each class of the estimated “standard consumption” of each class of customers (residential, public lighting, business) customers (residential, public lighting, business)


Setting out PP (2)Setting out PP (2)

JanJan MarMar MayMay FebFeb AprApr JunJun JulJul AugAug SepSep OctOct NovNov DecDec

Mismatch between estimates and reality requires adjustments

The same is done at the end of June for the quarter Jul/Sep and at the The same is done at the end of June for the quarter Jul/Sep and at the end of September for the quarter Oct/Decend of September for the quarter Oct/Dec

At the end of December, the remaining money needed to cover At the end of December, the remaining money needed to cover estimation mismatch is collected through specific equalization charges estimation mismatch is collected through specific equalization charges not included in the PPnot included in the PP

At the end of March Y, the regulator: At the end of March Y, the regulator: • takes into account ex-post values of past months Psbtakes into account ex-post values of past months Psb• estimates the monthly cost incurred by SB for each remaining month of estimates the monthly cost incurred by SB for each remaining month of the Y and the monthly Psbthe Y and the monthly Psb• sets out PP as the sum of: sets out PP as the sum of:

weighted average of Psb for the quarter Apr/Jun + corrections weighted average of Psb for the quarter Apr/Jun + corrections for the mismatches between estimated and effective valuesfor the mismatches between estimated and effective values


Setting out PP (3) Setting out PP (3)

Depending on the type of installed meter, final prices can be time-of-use or non time-of-use type

Time-of-use prices: prices differentiated according to hourly bands

This is done in order to transfer the economical signal of the different This is done in order to transfer the economical signal of the different value of electricity in the wholesale market and to promote energy value of electricity in the wholesale market and to promote energy efficient behaviour and responsible consumptionefficient behaviour and responsible consumption

HOURLY BANDS: HOURLY BANDS:

Peak hoursPeak hours Mon/Fri from 8 a.m. to 7 p.m.Mon/Fri from 8 a.m. to 7 p.m.

Mid-level Mid-level hourshours

Mon/Fri from 7 a.m. to 8 a.m. and from 7 p.m. to 11 Mon/Fri from 7 a.m. to 8 a.m. and from 7 p.m. to 11 p.m.p.m.

Saturday from 7 a.m. to 11 p.m.Saturday from 7 a.m. to 11 p.m.

Off-peak Off-peak hourshours

Mon/Sat from 0 a.m. to 7 a.m. and from 11 p.m. to Mon/Sat from 0 a.m. to 7 a.m. and from 11 p.m. to 12 p.m.12 p.m.

Sunday and holidays: from 0 p.m. to 12 p.m.Sunday and holidays: from 0 p.m. to 12 p.m.


Retailing price (RP)Retailing price (RP)

RP covers retailing costs: billingbilling customer care customer care credit riskcredit risk

Until 2007: RP covered the costs incurred by incumbent distribution companies its level used to take into account scope economies between distribution and supply

Since 2008: RP reflects the cost of “new entrantsnew entrants” (including costs for customers acquisition) RP has been set on the basis of an analysis of the balance sheets of

incumbent distribution companies and retailers operating in the liberalised market


Natural gas retail marketNatural gas retail market



Member States may impose on undertakings operating in the gas sector […] public service obligation which may relate to […] quality and price of supply [DIRECTIVE 2003/55/EC, article 3.2]

It is intended to ensure protection for those customers:who temporarily don’t have a supplierwho have not yet switched to the free market that are small residential (small = annual consumption < 200.000

m3)



Small residential customers: if a small residential customer doesn’t switch to the liberalised

market, he’s charged a price PP set by the regulatorany supplier in the liberalised market must offer, together with its

price, the price PP set by the regulator

Customers who have not yet switched to the liberalised market (different from small residential customers): they keep paying the price set by the regulator until they switch to

the market



Wholesale marketsWholesale markets

CustomerCustomer

Retail supplier (*)Retail supplier (*)

Each retail supplier buys natural gas in

wholesale markets for all its customers

The price charged to customers includes

PP and RP, where PP covers procurement

costs and RP covers retailing costs

* According to Directive 2003/55/EC, supply is independent from any other activity related to distribution



% customers at reference economic conditions % customers at reference economic conditions (year 2007)*(year 2007)*

0,03% Thermoelectric uses

3,7% Industrial companies

42,9% Commercial and services companies92% Domestic sector

(*) opening of the demand side market:

june 2000 for bigger costumers (basically those having an annual consumption of 200.000 cubic metres or more)

january 2003 for everybody


Setting out PPSetting out PP

Every 3 months (end of March, end of June, end of September and end of December) the regulator set out PPt

PPt=PPt-1+ΔPP

Where ΔPP=PP0x(It-It-1)

and It is an index calculated on the basis of international oil prices pubblished monthly in “Platt’s Oilgram Price Report”

It = a×GASOLIOt/GASOLIO0+b×BTZt/BTZ0+c×BRENTt /BRENT0

(GASOLIO0, BTZ0, BRENT0 and PP0 are basis values and a=0,41 b=0,46 c=0,13)


Retailing price (RP)Retailing price (RP)

RP covers retailing costs: billingbilling customer care customer care credit riskcredit risk

RP covers the costs incurred by retail supplier companies

RP has been set on the basis of an analysis of the balance sheets of retailers operating in the liberalised market serving small customers

Documents

Autorità per l’energia elettrica e il gas, Direzione Mercati 1 Market Department Italian Regulatory Authority for Electricity and Gas Milan, March 4, 2010