Reform of Italian Water Services Tariffs Calculations

18 September 2008
By Dr. Francesco Lo Passo and Maria Mocella with former NERA Senior Consultant Giordano Colarullo

On 18 September 2008, at the center of the Italian economic policy agenda, Italian industry trade body Confindustria gathered an audience of academics and politicians to present the results of their research on the reform of local utilities and to provide an opportunity for debate on this topic. During the event, the Italian Minister for Economy and Finance, Giulio Tremonti, provided insights into the government position on the reform of local utilities, and a member of Parliament, Enrico Letta, provided the opposition party stance. The Head of Confindustria research, Luca Paolazzi, presented the results of the research report, entitled Economic Policy Challenges: Public Finance, Decentralization, Contracts Changes, and Local Utilities.

NERA has contributed a chapter to the Confindustria report on the reform of the Italian water services tariffs calculations. The authors provide an assessment of the state of the reform of the Italian water services started by the Galli Law in 1994. The authors highlight the shortcomings of the existing regulatory framework in providing adequate incentives to water companies to carry out the planned infrastructure investments and to attract private sector finance. They argue that the current water services tariffs calculations -- namely the price cap component K, the cost of capital, and the operating expenditure efficiency calculation -- are the main culprits for the lack of investments in Italian water infrastructure and that the procedures used to decide on the franchising of water services have favored public sector ownership. They provide an outline of a reform of tariffs calculation based on a building block approach, whereby tariffs are adjusted such that revenues are adequate to cover regulatory costs over the regulatory period. The authors also propose the inclusion of a risk-sharing mechanism between water companies and water customers and a tariff re-profiling mechanism to make water tariffs increases sustainable for customers and financially viable for water companies.