OREANDA-NEWS. Fitch Ratings says in a new report that the second regulatory period 2016-2019 for the Italian water sector shows methodological continuity with the first period, which contributes to building a track record for the sector.

Fitch assumed a stable regulatory environment in its rating cases for Acea SpA (BBB+/Stable), Iren SpA (BBB-/Stable) and Acquedotto Pugliese SpA (AQP, BBB/Stable), and thus views the tariff determination as rating-neutral for these companies.

Updated water tariffs continue to allow for the recovery of operating and capital costs, including some positive adjustments for sizeable investment plans. The real pre-tax allowed return on capital has been reduced by around 70bp from 6.06% in the previous period, mainly reflecting lower interest rates. Allowed opex include costs related to unpaid receivables and are annually updated to reflect inflation, while companies can retain the benefits stemming from cost reduction against the reference cost base of 2014.

The regulator (AEEGSI, Autorita per l'Energia Elettrica, il Gas ed il Servizio Idrico) has also clarified the procedures for expiring concessions, requiring recently constituted local authorities EGAs (Ente di Governo d'Ambito) to re-tender the concessions at least 18 months before their expiry and defining the methodology to calculate the terminal value. We believe this positive development could be hindered by delays to the full implementation of the sector's governance.

AEEGSI has also set out provisions for the sector's consolidation, while the government has introduced the target of 'one-Ambito Territoriale Ottimale (ATO) one-company', which has not yet been reached (ATOs are pools of municipalities, each ruled by an EGA). The water infrastructure in Italy is inadequate, with antiquated plants and high leakage. This is a result of the regulatory uncertainty before AEEGSI took over regulation in 2011, the average small scale and limited technical abilities of water companies and delays to implementing sector governance.

Residual legal risks for the sector mainly stem from opposition made by some lobby groups regarding allowed financial costs and a law proposal under discussion which could lead to, among others, the assignment of water regulation to the relevant ministry. However, these risks are not expected to materialise in our central scenario.

The report, 'Italian Water Sector: Emerging Track Record', is available on www.fitchratings.com.