The potential dangers of quality degradation under price-cap regulation are well recognised by regulators. In parallel with the price-cap system, the Italian regulator introduced an incentive scheme for electricity continuity of supply to apply during the period 2000-2003. The objective of this paper is to evaluate the effectiveness of this system by studying the effects of regulation on the electricity distribution industry and to identify scope for improvement of the regulation in subsequent regulatory periods. The evaluation shows that designing a regulatory system that was inherently compatible with the internal objectives of the network companies strengthened the acceptance and effectiveness of the system. Spill-over effects of quality from the monopoly to competitive markets have contributed to the effectiveness of the regulation. Quality regulation remains an innovative part of regulation and requires periodic evaluation and verification of its outcomes. (c) 2004 Elsevier Ltd. All rights reserved.