1 Implementation of Water Services Economic Regulation DWA WP10540 Framework for Economic Regulation of Water Services in Municipalities 14 June 2013

Index Water Pricing Chain Water Revenue Management Process Economic Regulation of Water Services Norms & Standards for tariff setting Water Tariff Models Debt Management Process 2

Water pricing chain Consumer Water resource management charge Raw water tariff (water resource development charge) Bulk water tariff Retail water tariff Bulk waste water tariff Waste discharge charge Sanitation charge 3 22 May 2013

Water pricing chain Consumer Water resource management charge Raw water tariff (water resource development charge) Bulk water tariff Retail water tariff Bulk waste water tariff Waste discharge charge Sanitation charge 4 22 May 2013

Problems in water pricing chain – Water Services Invoices submitted in absence of a signed contract Different interpretations related to contractual provisions or disagreements as to validity of an agreement Disagreement with quality of service provided and cost of service Cash flow constraints Personnel changes, loss of institutional memory Disagreements over interest charges on overdue accounts Municipal problems with revenue collection and effective credit control High levels of non-revenue water at municipal level and impact on revenue collection and cost recovery Reasons Municipalities owed water boards R3.4 billion for bulk water provided R28 billion owed to municipalities for water supply (90 days+) Municipal Debt (Apr 2013) 5

Water Revenue Management Process

Economic Regulation of Water Services DWA role: Act as regulator of water services from a national perspective WSAs and WSPs (municipalities) have a role to play at local government level Functions: o Consumer protection o Service quality regulation o Price or economic regulation o Competition regulation 7 No part of the water value chain is subject to formal economic regulation Constitution provides for national government to regulate water services Minister does not have authority to regulate water tariffs directly Cannot set or approve tariff levels Must rely on Norms & Standards for WSIs (Section 10 of the Water Services Act) Price or economic regulation is not the only type of water services regulation Tasks: o Set rules & make approvals o Monitor, analyse & publish o Enforce, decisions & intervene

DWA Functions & Tasks (National level)

Impact of Economic Regulation on WSAs & WSPs

Limitations of existing Section 10 Norms & Standards Do not provide for separation of functions, roles or responsibilities Do not differentiate between Water Services Authorities (WSA) and Water Services Providers (WSP) Do not make provision for Water Boards (Bulk WSP) Do not provide for ring fencing of WSPs Do not address Water Boards tariffs (only household) Do not adequately address sanitation services Do not provide for compulsory metering by WSAs Do not provide for any geographical differentiation Do not provide for drought or seasonal tariffs Do not provide for tariff determination or disclosure Limitations

New Norms & Standards for WSAs & WSPs Determine required revenue Cost recovery Loan repayments ROA & net surplus Establish future water consumption Differentiate between: Categories of services Levels of services Allocate required revenue to each category Meter all water supply services Tariffs for:- Household use Industrial & non- household use Droughts & seasonal (Special tariffs) Transfers & grants for basic water supply services to indigent registers only Provide for rising block tariffs, fixed charges Publish a Consumer Charter Consult with consumers Inform stakeholders on assumptions & tariffs:- DWA Other (e.g. SALGA, National Treasury) Disclose to public:- Website and/or Annual Report Consumer invoices Water supply function provides for – Preparing separate budgets & financial statements Separate setting of tariffs Provide for water resource segmentation Limited cross subsidization allowed Percentage of water revenues allocated to other functions

DWA legal mandate Regulate water services; can not set or approve tariffs at municipal level Monitor and enforce compliance by providing means to set tariffs according to Norms and Standards Using a WTM for setting tariffs Most municipalities fail to manage water services effectively; setting of tariffs a major task Not advisable to prescribe a WTM for municipalities due to a lack of capacity, competency, etc. within municipalities to implement and operate a WTM Progressive approach should be followed whereby municipalities first implement, and comply with, prescribed Norms and Standards Norms and Standards contain pro-forma templates or work sheets that will force municipalities to follow prescribed processes Water Tariff Models (WTM)

Role of Water Tariff Models (cont.) Advanced model currently being developed for DWA Based on National Treasury described budget process Model not yet completed; requires refinement and validation Consulted and tested with major metros and also smaller municipalities Aligned with, and support Norms and Standards Water Services Financial Model Used by National Treasury and SALGA Provides a guide for local government Developed to test transparent tariffs over various municipalities Includes items like Water, Electricity, Sanitation and Solid Waste in tariff modelling Includes a comprehensive guide Transparent Tariff Toolkit Various WTMs developed or in process of being developed for determining municipal water tariffs

Debt Management Process

Debt Management Process (cont.)

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