Why We See Italy's Water Regulatory Framework As Supportive. Report, S&P Global Ratings

19 mag 2018
In its report published today, "Why We See Italy's Water Regulatory Framework As Supportive," S&P Global Ratings explains it's that Italy benefits from a stable and predictable regulatory framework for integrated water services.

In its report published today, "Why We See Italy's Water Regulatory Framework As Supportive," S&P Global Ratings  explains it's that Italy benefits from a stable and predictable regulatory framework for integrated water services.   We consider that the regulatory framework for water in Italy exhibits most  characteristics consistent with a strong regulatory advantage. However,  structural downsides reduce its effectiveness, in particular with regard to  the sector's high level of fragmentation and the risk of political interference at a local level. In our view, since the appointment of Autorità per l'Energia, le Reti e  l'Ambiente (ARERA) in 2011 as the regulatory authority for water services, the  regulatory framework's consistency and independence has improved.  

The regulation allows operators to recover their capital and operational costs  in a comprehensive, stable manner, with a mid-term review that ensures the  adequacy of the parameters, and water operators under ARERA's purview are  protected against inflation, volume, price, and counterparty risk. Moreover,  asymmetric regulation of tariffs incentivizes operating efficiency, capital  investments, growth, and consolidation in the very fragmented Italian water  sector.

We believe regulation points in the right direction, aiming to directly address key issues of the water sector. However, to what extent the regulatory  framework will be effective and further adopted is still unclear. Tariff increases will have to be supported by improved water service and quality in  order to be politically and socially acceptable. The regulatory framework has not yet been adopted by all the water operators. In the northern regions, the  majority of the population receives water services from a provider under ARERA's purview, with an ARERA-approved regulatory scheme adopted by  operators. But in the southern regions, more than 75% of consumers receive water services from operators who have not adopted ARERA's tariff-setting  mechanism and do not pay the regulated tariffs.

MAJOR CONSIDERATIONS

Strengths:

• ARERA is independent;  

• The regulation allows operators to recover their capital and operational  costs in a comprehensive and stable manner, with a mid-term review that ensures the adequacy of the parameters;  

• Water operators are protected against inflation, volume risk, price risk,  and counter party risk; and

• An asymmetric regulation of tariffs emphasizes the needs for operating  efficiency, capital investment growth, and consolidation in the  fragmented Italian water sector.  

 Weaknesses:

• The sector is too fragmented, with more than 2,200 operators, which calls  into question the efficiency of regulatory oversight;

• ARERA has been regulating water only since 2011. We are only in the  second official regulatory period (2016-2019) and it displays  characteristics of being a fairly young framework in terms of  predictability; and  

• The political instability surrounding the water management in Italy could  translate into some governance issues, especially for in-house utilities,  that is, those fully owned by municipalities. 

Only a rating committee may determine a rating action and this report does not  constitute a rating action.