Local Regulation and District Heating in Italy

District heating (DH) suppliers enjoy ex-post monopoly power but, under appropriate circumstances, ex-ante competition among space-heating systems can constrain ex-post market power exercise. Key elements are absence of price discrimination between old and new customers and commitment to a price-adjustment rule. The development of DH in Italy provides examples of how ex-post market power mitigation can occur in practice. In mountain areas, full-fledged competition between space-heating systems was sufficient in a context of adequately informed customers, sometimes complemented by commitments not to reduce convenience with respect to heating oil-based systems. In areas served by natural gas networks, imperfect mitigation occurred due to mandated commitment to ‘price equivalence’ between DH and natural gas-based heating, in a context of significant informational asymmetries between regulators and customers, on the one side, and utilities, on the other side. The Italian experience suggests that it is possible to use market forces to discipline ex-post market power in DH provision by devising appropriate soft local regulation instruments.