Operating and environmental risks

The management of the Integrated Water Service – the entire cycle of drinking water and wastewater from the capture of the natural resource to its return to the environment – requires the respective Group companies comply with specific conventions and manage water infrastructure that is spread throughout the region for the supply and distribution of drinking water and sewerage networks and plants, ensuring the continuity and quality of the service provided.

Some of the uncertainty that the Group must deal with includes possible impacts deriving from unpredictable natural phenomena (e.g. earthquakes, floods and landslides) and/or from cyclical or permanent climatic variations. These risks are addressed through the implementation of structured tools for the governance of water dynamics (e.g. Water Safety Plan) as well as specific projects to increase the resilience of the infrastructure in the various regions. Finally, it should be noted that the residual portion of risks from natural events is covered by the Group's insurance programme.

The Water Segment Companies offering Integrated Water Services implement programmes, procedures and controls in order to ensure adequate HSE compliance monitoring by virtue of the very characteristics of the business managed (potential breach of drinking water limits due to source pollution, potential breach of treated wastewater discharge limits in receiving bodies, occupational health and safety, characterisation and compliance of outgoing waste, etc.).

Acea Ato 2 – critical situations concerning irregular discharges

The Operating Agreement signed officially ratified the obligation to transfer the integrated water services of Municipalities in Ato 2 (except for protected services and, subsequently, on the basis of art. 148, paragraph 5 of Italian Legislative Decree no. 152 of 3 April 2006, also Municipalities with up to 1,000 residents, which have the right to not subscribe to the I.W.S.) in accordance with the law. In reality the times and procedures for the implementation of said transfer were not observed both due to the unwillingness of some Municipal Authorities to transfer the Service, and as it was impossible for the Operator, in particular from 2007, to take over the management of water, sewerage and wastewater treatment plants that did not comply with the provisions of the laws in force to avoid exposing both the Operator and its executives to the consequent criminal charges applied by the magistracy.

The most critical situations in fact are discharges that are still not treated and/or existing waste treatment plants that must be re-qualified and/or upgraded to meet the new emissions limits set by the Supervisory and Control Authorities as a result of a different evaluation of the hydrological structure of receiving water courses, or even the nature of the receiving system (soil instead of water) as some wastewater treatment plants discharged onto soil as the water course was dry when inspected. The uncertainty of this situation is due to the fact that the Lazio Region has not yet determined the classification of the regional surface hydrographic network.

The situation of a real environmental emergency also required interventions of an institutional nature. In fact, in 2008 the Regional Authority signed a "Memorandum of understanding for the implementation of extraordinary reclamation of river, lake and sea resources to solve the discharge emergency in Ato 2 – Central Lazio – Rome" to allocate specific funds for the implementation of some plans of action to deal with the emergency.

Today, thanks to a noteworthy technical development and economic commitment, 184 of the 246 discharges surveyed have been collected for water treatment. There are still 62 discharges active, of which 35 of Acea Ato 2 and 26 of the Municipal Administrations. Of the latter, 15 discharges were restored with interventions that were subsequently requested of the Manager.

During the first few months of 2018, in the light of ARERA Resolution 918/17, the update of the 2018-2019 Works Programme has been drafted with indications until the end of the concession (2032). This Programme is part of the documentation underlying the tariff application, adopted by Resolution no. 3-18 of 15 October 2018 by the Conference of Mayors and approved by Resolution no. 572/2018/R/idr of 13 November 2018, by ARERA.

In the first years, from 2003 on, investments financed by the tariff were made for annual amounts in growth (from € 30 to € 70 million), which in the Integrated Water Service implementation phase discounted the lack of knowledge of the plants being acquired from the Municipalities and the need to draw up a plan aimed at solving the most critical problems, especially in the hygienic-sanitary sector. The time frames resulting from this design and the authorisations necessary for the construction of the works have delayed the performance of investments in the region.

In the following years the investments made went from € 141 million in 2014 to € 189 million in 2015, to € 225 million in 2016 and € 232 million in 2017 and about 279 in 2018, all values net of write-downs and disposals, almost doubling the value per inhabitant served by around € 36/inhabitant to about € 60/inhabitant, and in fact recovering the gap of previous years by making greater investments than those planned in the previous Plans.

As a result of a process of technological renewal and the implementation of the design activities developed in previous years, it has been possible to increase the production of investments for the construction of new large works. With regard to the difficulties related to the authorisation phase of the projects and the declaration of public utility by the Municipalities and in particular the Municipality of Rome and the consequent infrastructure procedures aimed at acquiring the areas necessary for the works, an effort was made with the Conference of Mayors resolution no. 2-17 of 20 December 2017 with which the power to approve the projects and concurrent declaration of a single opinion on the works in the works programme and to organise the Service Conferences necessary was delegated to the Operational Technical Secretariat.

Acea Ato 2 – critical elements of the drinking water system

From 2002 to date, the flow supplied by the aqueducts of Scheme 66 that supplies Roma Capitale to the Municipalities of the metropolitan area of Roma Capitale has increased from less than 300 to about 2,600 l/s. This increase in distribution was necessary to overcome emergencies, especially qualitative ones, and drastically reduced the reserves available to Roma Capitale and the Municipalities themselves.

Two critical elements emerged and continue to emerge following the acquisition of the Integrated Water Service:

• quality of the water flowing out of the source;
• water shortage mainly in the South of Rome.

With respect most importantly to the first critical issue, the quali-quantitative crisis caused by the presence in the territory of water sources that do not comply with the chemical parameters such as those for arsenic and fluorine, which are naturally found in underground water sources of volcanic origin, with the consequent critical situation in terms of the quantity and quality of the water supplied (Municipalities in the district of Castelli Romani and in general those in the volcanic areas of the Ato with over 170,000 inhabitants in fourteen Municipalities), resulted in the Company having to draw up restoration plans to put into action to meet the parameters of Italian Legislative Decree no. 31/2001 as implemented in subsequent investment plans of the Area Plan.

To this end, interventions were planned and implemented:

• replacement of the local qualitatively critical sources with sources characterised by better qualitative properties;
• mixing water sources free of undesired elements;
• construction of drinking water plants using reverse osmosis filtration technology.

As for the second critical element, in other words the water shortage mainly affecting the Colli Albani area, which is supplied by the Simbrivio aqueduct, the Doganella aqueduct and over 140 local wells, over the years various interventions have attempted to mitigate this critical situation, such as taking a branch off the Pertuso spring, putting new plants into service, the Arcinazzo tank and the Ceraso "booster" plant, the new VIII lift siphon in the Municipality of Frascati.

These interventions have made it possible to increase the mixing capacity of low-quality sources and to guarantee a savings in the resources coming from the Doganella aqueduct, which due to its structure is limited in scope.

With regard to the water shortages in the area north of the province of Rome, during the year 2019 the Mignone aqueduct was acquired under management with the purification plant that derives from the Mignone River. This plant underwent major restructuring in 2019 that will continue in 2020, which will ensure both an increase in the flow rate and an improvement in the quality of the water.

Concurrently, work is under way to connect the municipal networks of Allumiere and Tolfa in order to increase their capacity during the summer.

It should also be noted that during 2019 important reclamation work was carried out on the water network, involving a total of approximately 90 km.

Lastly, it should be noted that in 2019 the only new addition to the company's portfolio was the water service of Percile.

Commercial and Trading Segment

With regard to the Commercial and Trading Segment, the main operational risks associated with Acea Energia's activities in the deregulated electric power and natural gas markets are the risk of a possible progressive concentration of operators in these markets, with an impact on the Company's customer base growth plans and its positioning.

There is also a risk connected with the extension of the Protected Service and the definition of the procedures for its closure, which could affect company strategies.

In order to ensure the success of the development initiatives envisaged in the Business Plan, the Segment companies have launched change management projects, mitigating the risks associated with the non-involvement of all personnel (staff and line personnel, managers and others).

Acea Energia also has typical business risks deriving from an efficient and effective management of billing and credit recovery processes, where it is affected by the sub-optimal performance of electricity and gas distributors.

Information about commodity price risk and the control tools adopted is provided in the "Financial Market Risk" section of this Report.

Energy Infrastructure Segment

Potential sources of risk referable to the Companies of the Energy Infrastructure Segment derive from the implementation of the development plans of the 2019-2022 Business Plan (fibre optics project, 2G smart metering project, resilience plan of the distribution network, growth in the photovoltaic sector through M&A and the construction of plants), and the monitoring of information security and systems.

With regard to plant safety, the Companies operate by implementing protocols, procedures and controls in accordance with the provisions of current regulations and in full collaboration with the relevant Authorities and Institutions.

With regard to the continuity of service, in addition to the aforementioned development plans, areti has implemented specific initiatives relating to the public lighting service provided in the Municipality of Rome, such as plans to modernise and reclaim the network.

As far as cyber security is concerned, areti is implementing all the necessary actions to align its cyber security posture with the main national and international industry standards. Technological and organisational measures are being implemented with the aim of:

1. managing the threats to the organisation's network infrastructure and information systems in order to ensure a level of security appropriate to the existing risk;
2. preventing accidents and minimising their impact on the security of the network and information systems used to provide services, so as to ensure their continuity.

In general, the main risks falling within this Industrial Segment (which includes, in addition to areti, Acea Produzione, Ecogena, ALL and the new photovoltaic company) can be classified as follows:

• risks relating to the effectiveness of the investments for the replacement/renewal of grids, in terms of expected effects on the improvement of service continuity indicators;
• risks relating to the quality, reliability and duration of works;
• risks relating to the ability to meet the terms for obtaining prescribed authorisations, regarding both the construction and start-up of plants (pursuant to Regional Law 42/90 and related regulations) and performing work (authorisations of Municipalities and other similar authorisations), according to the need to develop and enhance the plants;
• risks related to production failure.

The risk relating to the effectiveness of investments basically stems from the increasingly stringent ARERA service continuity regulations. To deal with this risk, areti has strengthened the tools for analysing network performance in order to make increasingly better use of capital expenditure (e.g. ORBT project) and applied new technologies (automation of medium voltage network, smart grids, etc.).

As far as the risk linked to work quality is concerned, areti implemented operational, technical and quality control systems, including the creation of the Worksite Inspection Unit, which forms part of the Quality and Safety department. The results of the inspections, which are processed electronically and statistically analysed, give rise to rankings (reputational indicators) and a "vendor rating" system, developed in collaboration with the University of Tor Vergata (Rome). This system ranks contractors according to their reputation, scored on the basis of their ability to meet the quality and safety standards for worksites.

The good level in the reputation indicator was confirmed for companies that worked for areti.

The risk relating to the ability to meet deadlines arises from the number of entities that have to be addressed in the authorisation procedures and from the considerable uncertainty linked to the response times of these entities; the risk lies in the possibility of refusals and/or in the technical conditions set by the above entities (such as the construction of underground rather than above-ground plants, with a subsequent increase in plant and operating costs). It should also be noted that lengthy proceedings result in higher operating costs, are difficult to deal with for operating structures (drafting and presentation of in-depth project examinations, environmental studies, etc.) and require participation in service conferences with technical meetings at the competent offices. However, the substantial risk is still essentially linked to the failure to obtain authorisations, with the result being the inability to upgrade plants and the subsequent greater risk linked to the technical performances of the service (at present there are delays in upgrading the HV network in the coastal area and the Terna procedure to construct a new Castel di Leva primary substation). Note that a particularly critical point is the long response times of a number of the administrations contacted.

With regard to the risk of non-production of the plants, Acea Produzione has taken steps from the beginning of the activities to sign with primary insurance companies policies to limit any damage caused by the lack of production.

Finally, areti has adequately mitigated the risk to "typical" business areas like the integrity of its assets, adequate health and safety at work and its exposure to counterparties such as key suppliers and significant debtors and end customers for the technical services rendered.

Environment Segment

The waste treatment plants are highly complex from a technical point of view, requiring the companies to employ qualified personnel and adopt organisational structures with a high level of know-how. They and their activities are parametrised to specific characteristics of the waste. The failure of incoming material to meet the necessary specifications could lead to concrete operational problems, sufficient to compromise the operational continuity of the plants and give rise to risks of a legal nature. For this reason, specific procedures have been adopted for monitoring and controlling incoming materials via spot checks and the analysis of samples pursuant to legislation in force.

The risk of waste produced not being delivered downstream in the value chain is particularly significant and has an impact on business continuity. Acea Ambiente uses tendering procedures to stimulate the opening of the market. Furthermore, the Segment Companies implement programmes, procedures and controls to ensure adequate HSE compliance monitoring by virtue of the very characteristics of the business managed (CO2 emissions, exceeding exhaust emission limits, health and safety at work, non-compliance of incoming waste, etc.).

The Terni and San Vittore del Lazio plants were involved in optimisation and revamping projects that typically present risks related to the construction of complex industrial infrastructure (construction and performance defects).

The Orvieto plant recently completed an important redevelopment of the recovery processes for composting and is currently undergoing a project to expand it, while the Latina plants (recently built), Monterotondo Marittimo and Sabaudia are affected by important interventions of expansion and redevelopment.

With regard to the management phase, the possible discontinuity of the waste-to-energy activities carried out in the Terni and San Vittore del Lazio plants and the waste treatment activities carried out by the other plants, if connected to the production of electricity under CIP 6/92 and the performance of services of public importance, could lead to significant negative effects.

This, both from an economic point of view and with respect to responsibility towards public and private suppliers. In this context, therefore, where not planned, a plant shutdown creates a concrete risk of failure to achieve the objectives of the industrial activity.

The waste-to-energy plants, as well as waste treatment plants to a lesser extent, are characterised by a high level of technical complexity, which requires the management of qualified resources and organisational structures with a high level of know-how. Therefore, there are specific risks with regard to the continuity of technical performance of the plants, as well as connected to the possible exodus of professional skills (not easily available on the market) having specific managerial skills in this area.

These risks have been mitigated by implementing specific maintenance and management programmes and protocols, drawn up partly on the basis of the experience acquired in plant management.

Moreover, the plants and the related activities are designed to handle certain types of waste. The failure of incoming material to meet the necessary specifications could lead to concrete operational problems, sufficient to compromise the operational continuity of the plants and give rise to risks of a legal nature.

For this reason, specific procedures have been adopted for monitoring and controlling incoming materials via spot checks and the analysis of samples pursuant to legislation in force.