Regulation of Water and Wastewater Services: An international comparison
The provision of drinking water supply and urban wastewater services are characterised by the presence of several market failures. These services can be described as geographically local natural monopolies with scale, scope and density economies. Moreover, the existence of both negative and positive externalities, the very long infrastructure life cycle, whose costs are effectively sunk, and the quasi-public good characteristics are some of the failures whose corrections can enhance social welfare (see Ballance and Taylor, 2005 and Rouse, 2007). Traditionally, since these services have been typically provided by public utilities at the municipal, regional or national level, it was assumed that these concerns would be “naturally” internalized in decision making, giving rise to the term “self-regulation”. However, in water utilities other network industries, even in the absence of private sector participation, the potential merits of sector-specific regulators are increasingly being recognised. As in other utilities (electricity, piped gas and telecom), regulatory agencies are being created in the water sector in a wide range of countries.
In this study, which was published in a book by IWA (Marques, 2010) 136 water service regulatory authorities were identified worldwide (January 2008). These regulators are spread across 57 countries, 12 of which in Africa, 5 in Asia, 16 in Europe (2 in Euro-Asia), 2 in Oceania and 22 in America. About 25% of countries have regulators for the water sector.
The book aims at presenting the regulatory practices in a variety of countries across the world, contributing to the identification of best practices and synthesizing relevant experiences from a wide range of regulatory aspects (Marques, 2010). For this purpose, a two step procedure was carried out. Firstly, for each country, the following data was collected: the existence of formal regulators in the water sector; the existence of other authorities responsible for activities related to regulation (i.e. tariff setting, quality of service and public service obligations); the main players of the water sector (operators, associations, ...); and any other relevant information about these entities along with the existing regulatory practices. The research identified 396 eligible entities from 174 countries. A bibliographic survey was carried out to allow for the compilation of information to fully describe the different experiences. Secondly, an exhaustive questionnaire with guidelines was sent to all regulators and public entities responsible for some kind of WWS regulation. This short note gives an idea of IWA book by presenting some key results of this questionnaire and of the research recently concluded.
Content Table
Public Service Obligations
Public service obligations are a fundamental issue in the water utilities. In less developed countries, poor people are still deprived of essential drinking water supply and, frequently, pay more for an alternative supply of water than wealthy people do for the same service. The service coverage level is even worse for wastewater collection and treatment. There are relevant negative externalities for the public health caused by the absence of these two services. Evidently there is a problem of poor governance in the water sector, to which the absence or inadequate regulation are contributing factors. In the case studies analyzed (e.g. Zambia and Mozambique), even in very low income societies, the regulatory framework established by their governments had significantly contributed to the WWS development. Public service obligations in this sector typically include promoting universal access to the services (coverage and affordability), service continuity, the protection of user interests from monopolistic abuse, and ensuring public participation and transparency.
Quality of Service Regulation
In 80% of the cases studied, regulators monitor and supervise the quality of service provided. Although all respondents recognised that quality of service regulation plays a fundamental role, not all of them implement the necessary practices. This was often explained by the existence of other priorities such as promoting greater access to the drinking water and wastewater services. Still, all reported a future intention of introducing or continuing to improve this practice. The objectives are clearly different depending on the country's level of development. Nevertheless, the methodologies to assess the quality of service do not differ significantly. Performance indicators are the most commonly used tool, accounting for 95% of the cases where there is quality of service regulation. The approach followed is, mainly that of sunshine regulation. This means that each operator’s performance is compared, publicly disclosed and discussed (without any formal penalty) to place public pressure on those with poor performance and to recognize the best practices (Marques, 2006). Sometimes rankings are also used to compare the operators’ overall performances (8% of the case studies). In other countries (roughly 25%) formal sanctions for failing to meet required service levels are imposed, impacting operator profitability. This may occur via the pricing system or through direct compensation to users or the government (around 12% of the cases studies). In some countries regulators lack competencies concerning the quality of service and others do not have regulators 
. Regarding the quality of service regulation, some cases, including certain States in Australia (e.g. Victoria), Portugal and England and Wales are recognised internationally as examples of best practices. The regulatory model adopted, based on the publication and open discussion of the benchmarking results has been extremely successful (with the help of external pressures, e.g. media) in promoting improvements to the quality of service. In England and Wales the quality of service assessment goes further insofar as it can also impact shareholder returns via tariff review procedures (a “carrot and stick” approach).
Economic Regulation
The economic regulation methods applied in the different countries/states surveyed range from rate of return regulation (e.g. USA and Indonesia) to price cap regulation (e.g. E&W and Zambia). 35 countries (approximately 58%) had implemented some kind of explicit economic regulation. Of these, 60% had adopted rate-of-return regulation. Price cap regulation is the predominant choice among incentive regulation method (59% of the cases). 41% of performance incentive methods use benchmarking techniques to obtain the X factor. The study also found that two countries (Chile and Peru) use an efficient firm model, and that four countries apply, in whole or in part, a revenue cap regulation method (e.g. Trinidad and Tobago, Australia, Brazil, and Scotland). Many countries use a combination of the aforementioned methods either allowing for their choice or changing from operator to operator. Although economic regulation methodologies based on an allowed rate of return are still dominant, the adoption of systems based on setting prices or revenue caps over multi-year periods has been expanding, mainly due to the incentives provided.
Resources
The issues in this article are addressed in the book, Regulation of Water and Wastewater Services by:
Rui Cunha Marques
Center of Urban and Regional Systems (CESUR), Technical University of Lisbon, Portugal,
The book presents the current state of water sector regulation worldwide and provided some insights into well established regulatory models. The following key messages emerge from this research: a) Regulation must balance the three ‘corners of the triangle’: the PSO, the quality of service provided, and tariffs; b) Many countries are increasingly recognising the merits of autonomous and even independent sector regulation in terms of overall welfare improvement and process credibility, transparency and accountability (see Kayaga and Franceys, 2008); c) The regulators should have appropriate powers vis-à-vis rule making, supervision and enforcement; d) The regulatory framework must include provisions, mechanisms of public consultation, information disclosure and appeal to strengthen the regulator’s accountability; e) The regulatory process should be clear and transparent to all interested parties and information should be widely available; f) In developed countries, public service obligations, particularly universal access to services, should be met while ensuring economic efficiency through full cost-recovery, minimization of cross-subsidisation, and promotion of the ‘user pays’ and ‘polluter pays’ principles; g) The required service levels should be defined by law or regulation and regularly reviewed under public consultation and publicized; h) The use of benchmarking should be promoted while incentives should be at the core of economic regulation.
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References
Kayaga, S., Franceys, R. (2008). Water Service Regulation for the Urban Poor: Zambia. Water Management, 161, 65-71.
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