Market Department Italian Regulatory Authority for Electricity and Gas Milan, March 4, 2010

1. Market DepartmentItalian Regulatory Authority for Electricity and GasMilan, March 4, 2010 Retail market

2. Agenda • Introduction • Electricity retail market • Natural gas retail market

3. Introduction

4. They do not depend on customer’s choice of being served by a specific retailer in the liberalised market What do customers pay? (1) The price paid by customers is the sum of several elements: • 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 • Tariffs for transmission, distribution and metering: • cover the costs for the services • are set by the regulator • concern monopolistic activities • General charges • are set by regulator according to specific law-provisions • cover general costs (research, incentives for renewables…) • Taxes • are set by the State and provinces

5. What do customers pay? (2) • Procurement and retailing price: • covers procurement costs in wholesale markets • includes costs and returns for retailing activity • concerns completely liberalized activities • 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?

6. Electricity retail market

7. Customers' protection (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: fewer than 50 occupied persons and a turnover or balance sheet not exceeding € 10million and connected to the grid at low voltage

8. Customers' protection (2) Wholesale markets Single buyer (SB) Public company owned by the State 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. Distribution company/related supplier* The price charged to customers includes PP and RP, where PP covers procurement costs and RP covers retailing costs Customer * 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

9. Customers' protection (3) % customers at reference economic conditions (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 economic conditions (october 2008) • Domestic sector: 27.100.000 (95,7% of the total) • Small business: 5.330.000 (72% of the total)

10. 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

11. At the end of December Y-1 the regulator: • estimates the monthly cost incurred by SB for each month of the next Y and the monthly Psb • sets out PP as the weighted average of Psb for the quarter Jan/Mar. Customers’ consumption is used as a weight. •  customers’ consumption is determined on the basis of the estimated “standard consumption” of each class of customers (residential, public lighting, business) Dec Mar Apr May Jun Jul Aug Sep Oct Nov Feb Jan Setting out PP (1)

12. At the end of March Y, the regulator: • takes into account ex-post values of past months Psb • estimates the monthly cost incurred by SB for each remaining month of the Y and the monthly Psb • sets out PP as the sum of: • weighted average of Psb for the quarter Apr/Jun + corrections for the mismatches between estimated and effective values Dec Mar Apr May Jun Jul Aug Sep Oct Nov Feb Jan Setting out PP (2) Mismatch between estimates and reality requires adjustments The same is done at the end of June for the quarter Jul/Sep and at the end of September for the quarter Oct/Dec At the end of December, the remaining money needed to cover estimation mismatch is collected through specific equalization charges not included in the PP

13. Setting out PP (3) • Depending on the type of installedmeter, 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 value of electricity in the wholesale market and to promote energy efficient behaviour and responsible consumption HOURLY BANDS:

14. Retailing price (RP) • RP covers retailing costs: • billing • customer care • credit 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 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

15. Natural gas retail market

16. Customers' protection (1) • 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 supplier • who have not yet switched to the free market • that are small residential (small = annual consumption < 200.000 m3)

17. Customers' protection (2) • Small residential customers: • if a small residential customer doesn’t switch to the liberalised market, he’s charged a price PP set by the regulator • any 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

18. Customers' protection (3) Wholesale markets Each retail supplier buys natural gas in wholesale markets for all its customers Retail supplier (*) The price charged to customers includes PP and RP, where PP covers procurement costs and RP covers retailing costs Customer * According to Directive 2003/55/EC, supply is independent from any other activity related to distribution

19. Customers' protection (4) % customers at reference economic conditions (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

20. Setting 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)

21. Retailing price (RP) • RP covers retailing costs: • billing • customer care • credit 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