Incentive Price Regulation in Presence of Cost Heterogeneity: Some Considerations on the Basis of Price Regulation of the Water Service in Italy

This work draws on the analysis of price regulation of water services in Italy, the so-called "Metodo Normalizzato", to examine the issues related to the definition of a regulatory mechanism when the costs of providing the service depend on exogenous variables which are geographically differentiated. The first part describes the "Metodo Normalizzato" and derives, on the basis of the model, the effects of its application in the case of perfect information of the regulator about the exogenous supply costs. The second part of the paper considers the case of asymmetry of information between the regulator and the service provider; its purpose is to identify the features that a regulatory mechanism, based on the "Price Cap", should meet to incentivize the minimization of operating costs to induce a tariff reduction, so to ensure tariff uniformity and service provision in each area.