GIUSEPPE URBANO
ELISA CALACIURA CLARICH
Judgment No. 16/2025 of the Plenary Session of the Council of State focuses, within the framework of public utility services (or, in EU terminology, services of general economic interest), on the scope and limits of tariff-setting powers, based on a case concerning, in particular, the integrated water service.
The latter is a typical ‘network’ service, that is, a service that is necessarily organised through structural networks linking the sites of production or provision of the service in question.
The presence of ‘networks’, which are generally non-replicable, creates a situation that economists describe as a ‘natural monopoly’ and which leads to such inefficiency as to result in a ‘market failure’. From a legal perspective, this situation makes corrective public regulation unavoidable. In reality, such regulation serves not only to correct market failure but also to actively pursue further public interests worthy of protection.
The ruling of the Plenary Session is based precisely on this premise. In particular, it classifies the integrated water service as a service of general economic interest (referring to Article 2(1)(c) of Legislative Decree No. 201 of 23 December 2022, Consolidated Law on Local Public Services) and highlights its elements of a ‘natural monopoly’, due to the presence of non-duplicable infrastructure entrusted on a concessionary basis, in accordance with principles consistent with ‘market-based’ competition.
Precisely because, without public law rules, the service could be provided in an inconsistent manner or under conditions of accessibility not aligned with objectives of general interest, tariff regulation becomes one of the key instruments for restoring balance. It is within this framework that the regulatory acts of ARERA challenged by two water service operators, Acqualatina S.p.A. and Siciliacque S.p.A., are situated.
The regulatory framework from which the Plenary Session proceeds is, in itself, undisputed. The real crux of the dispute is more limited: according to the appellants, the tariff measures did not ensure full cost recovery, with specific regard to the biennial adjustment mechanism between estimated and final amounts. In particular, the adjustment recognised only inflation, but not the financial costs arising from the prolonged unavailability of the sums due (for example, due to the use of medium-term bank loans).
The Plenary Session, partly on the basis of an expert report, nevertheless deemed the resolutions to be lawful, stating that the tariff regime must guarantee the full recovery of efficient costs alone, so as to preserve the economic and financial balance of the operation; an equilibrium which, according to the judgment, requires an overall assessment of the ‘sustainable’ remuneration guaranteed to the operator, and not the inclusion in the tariff of every single cost item incurred, including the financial charges in question.
The ruling thus reopens a classic debate: is the power of tariff regulation confined to technical discretion, or does it allow for choices involving the weighing up of interests – and therefore distributional choices – which, in the absence of direct democratic legitimacy, should remain within the Parliament-Government circuit? The regulation of public utility services, in fact, does not protect a single interest: it establishes a balance between the operator’s economic interest and diverse general objectives (competition, infrastructure development, environmental protection, social and territorial cohesion). Law No. 481/1995 itself, as cited in the judgment, places tariffs within a certain and transparent system, designed to reconcile economic and financial objectives with general, environmental and resource-efficiency objectives.
The Plenary Session’s analysis highlights a number of guiding principles.
First and foremost, the tariff must enable profitable management, because without profitability the continuity and development of the service over time are compromised; profitability may, in certain cases, also be supported by transparent compensation for public service obligations, not solely by tariffs charged to users.
In the water sector, the key regulatory reference is Article 154 of Legislative Decree No. 152 of 3 April 2006 (Environmental Code), which requires full coverage of investment and operating costs in accordance with the principle of cost recovery and the ‘polluter pays’ principle; Constitutional case law (judgments Nos. 325/2010 and 26/2011) requires the inclusion of operating, maintenance and capital costs (risk and credit).
Secondly, the tariff must be ‘incentivising’: it must encourage efficiency and cost reduction, to prevent the monopolist from passing on to users prices higher than those that would be expected in a competitive market. Hence the central importance of recognising only efficient costs and models such as the price cap, consistent with Article 25(2)(a) of the Consolidated Law on Local Public Services, which links efficient costs and revenues to the achievement of economic and financial equilibrium.
Thirdly, the tariff must internalise environmental costs and those linked to resource scarcity, in accordance with Article 119(1) of the Environmental Code; finally, it must take social equity into account, including measures for vulnerable groups, whilst providing for corresponding compensation for operators (Article 26(2) of the aforementioned Consolidated Law on Local Public Services).
So far, the framework of the decision is sound.
The point that warrants further analysis, however, is the management of the time lag between costs incurred and costs recognised in the tariff, particularly in four-year regulatory periods (in the case under review: 2016–2019 and 2020–2023) with biennial adjustments. It is precisely this discrepancy that gives rise to potential financial burdens, which the technical report has identified as not being covered by the method adopted.
The Plenary Session subjects the regulatory acts to a review of reasonableness and proportionality, consistent with the nature of regulation: judicial review is not the classic ‘fact-versus-rule’ comparison, but rather the verification of compliance with legislative guiding criteria, which normally allow for multiple legitimate solutions. In this context, the decision to recognise only inflation in the adjustment, excluding financial costs, is deemed reasonable and proportionate, because economic and financial equilibrium would not require the reimbursement of every specific cost.
The reasoning, however, presents at least three points of contention.
Firstly, the decision tends to downplay the impact of the exclusion, characterising the risk borne by the operator as limited to the two-year period, mitigated by the recognition of the inflation rate and by rebalancing mechanisms (including for exceptional events, such as an unforeseeable rise in energy costs). But if the financial burden is the natural consequence of regulatory deferral, and not an abnormal cost for the operator, its irrelevance does not appear justifiable. This conclusion seems to be the result of an empirical compromise of reasonableness reached by the regulatory authority that has no basis in law.
The second point of contention revolves around the concept of efficient cost. If the financial burden arising from the deferral is, in practice, an efficient cost, arguing that its non-recognition is justified in the name of the incentive function risks creating a logical short-circuit that legitimises an indefinite extension of regulatory power: the incentive for efficiency cannot become a general clause of last resort authorising discretionary cuts even on costs that are already efficient.
A similar concern applies to the argument regarding moral hazard. The ruling fears that including financial costs in the adjustment may encourage opportunistic behaviour: preferring bank loans to the use of profits, or even delaying collection from users. But the choice between self-financing and debt is a typical corporate financial policy decision, influenced by legitimate variables (capital strengthening, dividend distribution, investment strategies). If recourse to credit takes place on market terms and the cost can be classified as efficient, there is no discernible ‘technical’ reason to exclude it from the recovery mechanism.
Behind these passages lies the ruling’s underlying principle that even an efficient cost may not be recognised in the tariff, provided that the operator, on the whole, achieves a reasonable and sustainable return.
It is precisely this leap that creates difficulties.
First of all, there is a question of ARERA’s legitimacy, because it is not clear what technical criterion allows the Authority to select, at its discretion, which of the efficient costs should be recognised and which should be borne by the undertaking: the choice resembles an administrative balancing decision, not a technical-economic assessment.
Furthermore, regarding the substantive legitimacy of the regulatory decision, European and national legislation on cost recovery – in particular Article 9 of Directive 2000/60/EC and Article 154 of the Environmental Code – and the case law of the Court of Justice (Court of Justice, 7 December 2016, C-686/15, paragraph 23, on the obligation to recover the costs of water services, which was also referred to by the Plenary Session) seem to favour a broad recovery of efficient costs, rather than a ‘selective’ recovery based on an overall assessment of profit.
On the other hand, however, the matter appears to remain open. Indeed, another European precedent (Court of Justice of the EU, 16 July 2020, C-771/18), concerning access to electricity and gas networks, states that not every cost must necessarily be taken into account when setting tariffs. In that case, the discussion centred on specific costs (namely taxes paid by the operator) which could indeed justify excluding their pass-through to users via the tariff. However, the overarching approach of the reasoning – centred on the idea that the tariff is not merely a reflection of costs, as other factors may come into play, and that the operator may still achieve a reasonable level of profit – bears a clear resemblance to the solution adopted by the Plenary Session.
In the context described, a reference for a preliminary ruling to the Court of Justice, pursuant to Article 267 TFEU, could have provided definitive clarification on the relationship between ‘efficient costs’ and the recovery obligation, distinguishing between what is truly a matter for regulatory technique and what involves choices regarding the allocation of economic risk between the operator and users. The Plenary Session, however, considered the matter resolvable on the basis of the ‘clear act’ criterion.
The ruling brings the case to a close, but leaves the underlying issue unresolved: whether, and to what extent, the recovery of efficient costs constitutes a full and unconditional legal obligation or, rather, an objective to be pursued ‘in principle’, within a regulatory margin that risks straying from technical considerations into the realm of tariff policy.
