The use of a variable cost function in the regulation of the Italian water industry

The purpose of this study is to estimate a multivariate variable cost function in order to analyze the cost structure of a sample of Italian water distribution companies.The empirical results of this study could be used by the Italian Regulation Authority of this sector to improve the actual tariff regulation process.A variable cost function was estimated using panel data for a sample of 32 water distribution firms operating at the provincial level over the period 1991–1995. Results indicate the importance of explanatory variables such as price of labor, water loss and service area characteristics.Results also indicate the existence of economies of output and customer density and the presence of small diseconomies of scale.