Retail market
Market Department
Italian Regulatory Authority for Electricity and Gas
Milan, March 4, 2010
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Agenda
 Introduction
 Electricity
 Natural
retail market
gas retail market
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Introduction
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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…)
They do not depend
on customer’s choice
of being served by
a specific retailer in the
liberalised market
Taxes
• are set by the State and provinces
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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?
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Electricity retail market
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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
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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
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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)
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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
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Setting out PP (1)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
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)
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Setting out PP (2)
Mismatch between estimates and reality requires adjustments
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
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
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
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Setting out PP (3)
 Depending on the type of installed meter, final prices can be timeof-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:
Peak hours
Mon/Fri from 8 a.m. to 7 p.m.
Mid-level
hours
Mon/Fri from 7 a.m. to 8 a.m. and from 7 p.m. to 11 p.m.
Off-peak
hours
Mon/Sat from 0 a.m. to 7 a.m. and from 11 p.m. to 12 p.m.
Saturday from 7 a.m. to 11 p.m.
Sunday and holidays: from 0 p.m. to 12 p.m.
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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
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Natural gas retail market
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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)
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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
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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
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Customers' protection (4)
% customers at reference economic conditions (year 2007)*
0,03% Thermoelectric uses
3,7% Industrial companies
42,9% Commercial and services companies
92% 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
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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)
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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
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