For capital intensive industries, like water sector, regulation on investment returns has strong implication on efficiency. In OFWAT regulation approach this aspect is strictly related to the Price Review process: every five years OFWAT sets the price limits that companies can charge to their customers, which are functions of many variables, including the level of investment. This work has the goal of analysing the incentive mechanism implemented by OFWAT for the Price Review process, inducing companies to submit Business Plans which include fair and efficient levels of investment from social point of view. Actually, empirical evidence leads to suppose that water and sewerage sector are affected by Capex Bias, which occurs when capital expenditure is chosen inappropriately over operating expenditure: we focus on the possible tools to affect Capex Bias. We conclude this work with some considerations over the possible application of OFWAT incentive mechanism to the Italian context.
Keywords: Return of on investments, efficiency.
Jel Code: L 95G3.