This excerpt taken from the ENI 20-F filed Mar 16, 2006.
Value Added from Distribution
Value Added from Distribution (VAD) includes the following distribution costs: (a) general, administrative and selling costs; (b) maintenance and operation costs for distribution equipment; (c) a margin for standard energy and capacity losses; and (d) a return on investment based on the net replacement value (VNR in its Spanish acronym) of the equipment used in distribution. VNR equipment includes costs for renewal of all the installations and equipment used to provide distribution services, including intangible assets and working capital.
The process to set the VAD gathers distribution companies in groups hereinafter referred to as Typical Sectors or ST, which are established by The Ministry of Energy and Mines based on factors such as energy consumer density or equipment density in the distribution network. Different efficiency standards are applied depending on the ST.
Based on the efficiency standards obtained from a selected real company, OSINERG chooses a model company for purposes of setting the VAD. A given distribution companys actual return on investment is dependent on its performance relative to the standards chosen by OSINERG for the model company. The tariff system allows for a greater return to distribution companies that are more efficient than the model company.
Once OSINERG has established the performance standards, the distribution companies retain specialized consultants who perform a parallel tariff study subject to OSINERG guidelines. Preliminary tariffs established by OSINERG are tested to ensure that they provide an average real annual internal rate of return between 8% and 16% on the VNR of assets for the entire distribution industry.
Once the component of the VAD for the tariff has been set, it will remain in effect for a period of four years unless the adjustment tariff index has doubled during such period. The VAD index allows adjustments based on variations on node prices and distribution costs, including wages, the wholesale price index for domestic products, aluminum prices, copper prices, currency exchange rates and import duties. The VAD index is adjusted when the underlying variables in the formula to project the VAD then in effect would result in a variation in excess of 1.5%. The current VAD component of the tariff was set in November 2005 and should be valid until October 2009.