Natural gas distribution in Italy: when competition doesn’t help the market

by Susanna Dorigoni and Sergio Portatadino

In this article consequences of the introduction of competition for the field in the Italian natural gas distribution sector are analyzed. Natural gas distribution constitutes, due to its technical and economic features, a natural monopoly. For this reason, in the framework of the liberalization process, the Italian legislator has introduced, in addition to price regulation, competitive tenders in order to have different operators compete amongst each other for the service concession. After a brief overview of the economic theory referring to natural monopoly regulation and after presenting the liberalization goals and the new regulation system, the critical aspects of the outlined regulatory framework will be highlighted. More particularly the main features of tenders will be assessed, while, in the following section, the meaning of the imposed revenue cap and its tie to the concession fee will be explained. An analysis of possible reasons for extremely high concession fees will be carried out, while evaluating their impact on companies profitability. In the last part of the work, a solution will be proposed in order to build an effective regulation framework where competition for the field could actually lead the market to efficiency.