Price Cap Regulation Approach to Improve Productivity in Iranian Municipal Water and Wastewater Companies

The water distribution department of urban water and wastewater companies is of natural monopoly characteristic, and requires regulating. The aim of this research is to regulate urban water and wastewater companies in Iran using a price-cap regulation approach to improve their productivity. For this purpose, using the data of municipal water and wastewater companies over the period 2011-2016, the X-factor for the price-cap regulation is calculated using two productivity growth and inefficiency balance scenarios. In this scenario building, the quality of service is included in the calculation of the X factor. Experimental results show that the inclusion of the service quality index in the calculation of X-factor reduces the rate of productivity improvement of the companies. In addition, the more efficient companies have the lower X-factors, and as a result, experience a higher price cap. This reality encourages companies to increase their efficiency and productivity.