The Legislative Decree No. 164/2000 (also known as “Letta Decree”) qualifies the natural-gas
distribution activity as a public service. This qualification derives from the aim
of natural-gas distribution to meet the needs of the community, by ensuring the
equal access to the gas grid (so-called “third
party access”), the continuity and the quality of the service.

After stating the public service nature of the distribution
activity, Article 14 of the aforementioned Decree regulates the procedure for
awarding it through mandatory public tenders launched by Local Entities. Within
a gas distribution market qualified as a natural monopoly, the choice for
tender procedures is directed at ensuring competition between different
companies (in order to earn benefits in terms of efficiency, quality of the
service and more reasonable prices for the end-consumers).

The Letta Decree entrusts Local Entities with the
power to award distribution services to a single operator in each minimum
geographical area (“ATEM”).

According to the Legislative Decree No. 159/07
converted into the Law No. 222/07, the Ministry for Economic Development (“MISE”) approved a Decree on 19 January 2011 identifying 177 ATEMs to carry out the natural gas
distribution service. In the same year, by Decree of 12 November No. 226, the MISE
established the tender criteria and the evaluation methods for awarding the gas
distribution service (so-called "Public
Tender Regulation" or “PTR”).

In particular, the Public Tender Regulation has
provided for the Local Entities in each ATEMs
to transfer the role of Contracting Authority to one of them recognised as Provincial
Capitals. Furthermore, the PTR has provided for the Contracting Authorities in
charge:

(a) to prepare and publish the tender notices and the tender
rules, as well as to manage the performance and the award of tenders;

(b) to abide by the Standard Tender Notice and the Standard
Tender Rules (“Standard Models”), attached
to the PTR, in carrying out the tenders;

(c) to send the tender notices and the tender rules to the
Italian Regulatory Authority for Electricity Gas and Water (“AEEGSI”), along with any supporting
notes justifying the potential deviations from the Standard Models. The latter Authority may submit comments within thirty days;

The
Region has the power to replace (i) the Local Entities in each ATEMs managing the tender, in the event
that they have not identified the Contracting Authority, (ii) the Contracting
Authority if it has not published the tender notice within the specified time
limits.

In addition, the PTR contained a timetable establishing
when the tenders must take place. According to said schedule, the tenders for the
award of the service in the 177

ATEMs should have taken place over a period of three years,
starting from 2012 (1).

However, the abovementioned provisions have been
disregarded. Even though the regulatory framework in question foresaw a broad deadline -repeatedly extended (2) - to hold
tenders, Contracting Authorities did not comply with such obligation. Furthermore,
it appears that a limited number of Contracting Authorities has respected the
aforementioned deadline in light of the threat of the economic sanction
established by law in this specific case.

The recent Law No. 21/2016 established a further
extension, additional to those already in force. Furthermore, it acts
retroactively vis-à-vis the ATEMs for which deadlines have already
expired.

The same law also modified the substitution powers in
the event of breaches by Local Entities or Contracting Authorities:

(i) it eliminated the State power to be exercised in case of inaction by
the Regions, as well as the economic sanctions for Local Entities in case they
do not comply with the deadlines for the choice of the Contracting Authority;

(ii) it established that, after the expiry of the deadlines for awarding
tenders, the Region in charge will grant Contracting Authorities a further six-month
term to comply, after which the tendering process starts through the
appointment of an Acting Commissioner (in case the Region does not proceed with
the nomination of an Acting Commissioner within two months, the MISE will start
the tendering procedure appointing the commissioner on its own).

As recently reported to the Government and Parliament
by AEEGSI (3) and by the Italian Competition Authority (“AGCM”) (4), the new deadline extension as well as the weakening of the
provisions aimed at fostering compliance with the tendering deadlines, hinder the fulfilment of the objectives identified since 2000
by Letta Decree (i.e increased
competition, development of efficiency and high quality, reduction of service
costs).

In this context, AEEGSI and AGCM have negatively assessed the provisions contained into the Law No.
21/2016. Said Authorities have therefore proposed some regulatory actions,
including:

(i) the reintroduction of a sanction mechanism in case of failure to meet
deadlines. After all, it is deemed to be the only factor capable of exerting an
effective pressure on Local Entities and Contracting Authorities;

(ii) the elimination of unjustified barriers to participate in the tender
procedures, such as the unjustified restriction of the possibility to
participate in temporary associations of companies (“ATI”) established by the PTR;

(iii) the exceedance of the provision established by the Letta Decree, according
to which the outgoing operator is entitled to receive an equal economic
recognition for the redemption value of the existing plant (“VIR”) on the basis of its net assets
value (“RAB”) not calculated using
the adjustment methodology tariff in force but according to the one provided by
Ministerial Decree of 22 May 2014;

(iv) the simplification of the analysis procedure of tender notices carried
out by AEEGSI, allowing the Authority to take measures enabling them to fast
track tender notices complying with the Standard
Models, by limiting the analysis to the adequacy of the costs-benefits and to
the minimum conditions for development.

Meanwhile, the abovementioned provisions adopted by
Law No. 21/2016 have displayed their effects, that is to say, in some cases tender
notices have been postponed, in other cases they have been withdrawn or challenged.

For example, the Municipality of Varese (Contracting
Authority for the ATEM Varese 2-Centro)
put off the deadline for the submission of tenders to 30 September 2017.

The City of Turin, acting as the Contracting Authority
for the ATEM 2, announced the
extension to 28 June 2017 of the deadline for submission of offers for the participation
in the tender. Likewise, for the ATEM
Udine 2 the new deadline was set on 30 November 2017, whereas for the ATEM Monza Brianza 1 at the end of July
2017.

There are also complex cases such as the one of the ATEM Venice 1, for which the tender is at
the moment suspended, as a consequence of the lawsuit filed by the incumbent
Italgas. Not to mention that in other cities such as Rome and Bologna the notices
have not yet been drafted. The only exception seems to be Milan, where the
tender between 2i Rete Gas and the incumbent A2A is currently taking place.

In conclusion, the liberalisation process of the natural
gas distribution service started more than fifteen years ago, yet it still
appears full of difficulties. The main reason seems to be a regulatory
framework which permits Local Entities to avoid public tender rules, at the
expense of the fundamental liberalisation target, i.e. competition in the gas market.

End
notes:

(1) The timetable of PTR had already established very
distant deadlines, so that the tendering program would have to take place
between November 2013 and February 2017.

(2) See the Law Decrees Nos. 69/2013, 145/2013,
91/2014 and 192/2014.

(3) See the AEEGSI
Declaration No. 86/2016/I/gas of 8 March 2016.

(4) See the AGCM
AS1262 Declaration of 11 March 2016.