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Regulation and water pricing to simulate efficiency in water services: the role of the regulator

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Presentation hold during EIP Water Conference in Porto, as part of the Porto Water Innovation Week in Session 6 “Financing innovation in the water sector”

Published in: Environment
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Regulation and water pricing to simulate efficiency in water services: the role of the regulator

  1. 1. WATER INNOVATION: BRIDGING GAPS, CREATING OPPORTUNITIES 27 AND 28 SEPTEMBER 2017 ALFÂNDEGA PORTO CONGRESS CENTRE FINANCING INNOVATION IN THE WATER SECTOR REGULATION AND WATER PRICING TO STIMULATE EFFICIENCY IN WATER SERVICES: THE ROLE OF THE REGULATOR PAULO MARCELO ERSAR
  2. 2. Paulo Lopes Marcelo ERSAR Executive Board Member September 27th, 2017 Water Innovation Week, Oporto HOW REGULATION AND WATER PRICING IN PORTUGAL ARE STIMULATING MORE EFFICIENT WATER SERVICES?
  3. 3. 3 WATER REGULATORS IN THE WORLD (2016)
  4. 4. 4 THE NEED FOR WATER REGULATION IN PORTUGAL • Market failures in the water sector demand independent regulation • The diversity and complexity of water operators with diverse governance models • Benchmarking and competition between these different models should incentivised Concessioned management Delegated management State owned or privately owned services (regional bulk services) Municipally owned services (local retail services) Delegated management Direct management Direct management Concessioned management
  5. 5. 5 Water and Waste Services Regulation Authority (ERSAR) Universe of 400 operators … State owned, privately owned and municipalities … in direct management model, by delegation or concession … operating bulk or retails systems or both 265 water supply entities 266 wastewater management services entities 280 municipal solid waste management entities 11 million consumers THE RATIONALE FOR REGULATION IN PORTUGAL The size and diversity of the operators is huge, including State owned companies (wholesale) and numerous municipalities and private operators (retail)
  6. 6. 6 PORTUGUESE WATER AND WASTE SERVICES REGULATION AUTHORITY • Operates at national level (mainland) • Regulates all the utilities, regardless the governance model • Regulates with an holistic approach, based on a global and integrated regulatory model • Guaranties articulation with other relevant authorities without overlapping: - Water resources - Public health - Competition • Guaranties transparency and stakeholders participation (ex. consumers and utilities)
  7. 7. 7 PORTUGUESE REGULATORY MODEL Structuralregulation Organisation of the sectors Legislation of the sectors Regulationofutilitybehaviour Legal and contractual monitoring Economic regulation Quality of service regulation Drinking water quality regulation Consumer complaint assessment Information of the sectors Capacity building of the sectors Regulatorymodel
  8. 8. THE IMPACT OF REGULATION ON INNOVATION IN THE WATER SECTOR
  9. 9. 9 Usually we tend to see regulation as an obstacle to innovation due to complexity and compliance costs But empirical based literature shows that a stable and predictable regulatory framework is an important factor to create trust and through that promoting research and innovation Negative effect of compliance costs (short run) are compensated by dynamic effects of regulation: stability, transparency and predictability of the regulations can be innovation incentives (long run), reducing technical and financial risks to companies Good and stable regulations should work as a common ground between scientists, engineers, economists and lawyers in the water sector CAN REGULATION PROMOTE INNOVATION?
  10. 10. 10 SOCIAL REGULATION Social regulation protects environment and the safety and the health of society at large; in the water sector mainly address market failures and negative external effects of water scarcity Empirical studies shows the relevant impact of this water regulations in the protection of the environment and also to consumer health, safety and protection, namely universal access, continuity, quality, affordability and sustainability of water services ERSAR uses water quality rules as a public policy instrument to promote social development and foster innovation
  11. 11. 11 Example: PORTUGUESE WATER POLICIES ACHIEVEMENTS (1993-2016) 99,8% of the water supplied in Portugal has good quality for public comsumption (2017)
  12. 12. ECONOMIC REGULATION
  13. 13. 13 ECONOMIC REGULATION Market failures in the water markets demand independent regulation to maintain (substitutive) competitive pressure, through the adequate economic incentives to force companies to: (i) Improve cost-efficiency and efficiency (ii) Search and implement innovation to be sustainable or even profitable ERSAR has a complex system of quality of service indicators to analyze and compare operators' performance, promoting a healthy competition between different models and technologies to incentivize efficiency
  14. 14. 14 BENCHMARKING BETWEEN UTILITIES TO COMPARE AND PROMOTE BEST PRATICES AND ECONOMIC EFFICIENCY Assessment of the evolution for the economic performance
  15. 15. 1515 PUBLIC INFORMATION AVAILLABLE TO STAKEHOLDERS All information is publicly available both after analysis and as raw data, so that it can be used by researchers and consumers: Paper version ERSAR's website Smartphone app:
  16. 16. 16 ECONOMIC REGULATION CHALLENGE Efficiency Sustainability Affordability Throught tariff regulation find the balance between:
  17. 17. 17 • Tariff economic incentives to ensure efficiency gains and increase cost recovery levels • Efficiency gains mechanisms (revenue cap model) • Regulatory cost system • Stability in tariffs evolution • Simplicity: the efficiency will depend crucially on implementation New water tariff regulation is beeing drafted by ERSAR
  18. 18. 18 The future water tariff regulation addresses innovation as a strategic pilar for higher efficiency in the value chain Wholesale Retail Expected impacts of new regulatory model for water services •Evolution from a cost-plus to a revenue cap model •Separation between core and non-core revenue and costs (new accounting model) •Sharing of economic benefits between the tariff and the shareholders • Gradual recovery of economic and capital costs through end user tariffs • Adoption of reference costs for capex and opex, considering innovation impacts • Capacitation of operators with new financial capabilities (e.g. using UTA) •Implementation of regulatory incentives to develop new commercial revenues • Reformulation of the regulatory framework to eliminate tariff imbalances
  19. 19. 19 New tariff regulation can promote innovation by providing proper incentives to water operators Drivers of innovation (non-exhaustive) Wholesale Retail • Revenue and collection management • Telematics and digital processes • Shared services for support functions • Open market services (e.g. labs) Challenges to address • Smart meetering and invoice control • Commercial back-office processes • Marketing and social responsibility • Cross-selling of consumer services • Incentives alignment • Operators with limited scale to invest in innovation • Focus is on the infrastructure expansion • Financial constrains arising from tariff deficit
  20. 20. FINAL CHALENGES AND REMARKS
  21. 21. 21 CHALLENGES Portugal witnessed a huge evolution in the water sector but there is a need for improvements, namely: • Ensuring the adequate maintenance of infrastructures, through monitoring and incentive programs • Improving the structural efficiency trying to find the optimal scale of operation • Improving the operation efficiency through cost reduction and increase in productivity • Ensuring the economical and financial sustainability
  22. 22. 22 REGULATORY FRAMEWORK: THE COMMON PLAYGROUND TO FOSTER INNOVATION Role of water regulators could be decisive: regulation should be the common ground between water scientists, engineers, economists and lawyers, promoting trust that is key to innovation Need to harmonize internationally regulations: differences in regulatory rules should not turn into artificial barriers to market access and common research programs between companies and public entities Let's see this conference as an opportunity to share experiences and good practices to promote a true innovation culture
  23. 23. Thank you! Paulo Lopes Marcelo Paulo.marcelo@ersar.pt

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