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.
