The Process of Tariff Setting with an Unstable Legal Framework: an Italian Case Study

The Italian water sector has undergone profound change since 2006, when a revised governance framework and new tariff models became law; further innovations were introduced after a national referendum in June 2011. This paper discusses the process of tariff setting in Italy in the light of reforms since 2006; a qualitative case study approach is used to investigate the tariff-setting process and the impact of the new regulatory framework on water utilities and local regulatory authorities. Results show that both utilities and authorities altered their investment policies to reduce financial risk in view of the uncertainty surrounding the new regulatory framework. Moreover, several water utilities have not yet fully implemented the new tariff model introduced by the June 2011 referendum, for the reason that it prohibits the inclusion in water tariffs of a fixed return on investment component; when applied, the new model is expected to determine a significant decrease in both the annual income and cash flow of water utilities.