Hot topics: an interactive session David Zetland, Assistant professor of economics at Leiden University College, The Netherlands Training Course: Introduction to Water Utility Regulation February 16-20, 2015 Budapest, Hungary

Compliance GH: What if regulatee does not comply? Penalize or fire manager? Other industries?

Efficiency LV: Benchmarking tariffs “unique” systems result in “unique” costs Inputs (staffing) vs outputs (m3/facility) vs outcomes (m3/capita, % leakage, etc.) IBNET, VEWIN DK: No mergers b/c new company cannot set a price higher than the lower of the two merging companies prices Start with two prices, or a blended (“weighted”) price Or…

Leakage GE: How much is appropriate? (S)ELL: “(Sustainable) economic level of leakage” depends on value/cost of water, i.e., lots of water = lots of leaks

Regulated Asset Base LT: How to estimate RAB value? Rate of return? DK: How to allow returns on CapEx? RAB important for investors (not performance) Incentive to inflate (“Averch-Johnson effect” = “gold plating”) Value on paper but worthless in use? Set RAB return on long term govt bonds

RAB – some ideas Capital belongs to municipality, so “returns to RAB” repay (open-bid) construction costs Set tariff on outcomes, i.e., bronze/silver/gold service quality. Managers choose mix of CapEx and OpEx Benchmark lower prices after all hit “gold”?

Resources and externalities LT: How to set extraction charges Consider alternatives; tax less attractive LT: How to avoid pollution Set acceptable levels for ALL users (e.g., ag)

Service charges RU: Connection fee to water supply and sanitation system, i.e., “how to share costs when the connection is made between interrelated organizations (organizations having mutual connection points when being connected to the same system)?” and “do you include in the connection fee the compensation cost of the regulated entity for paying the income tax?” MC vs AC

Shortage SA: Demand increasing faster than supply (both capacity and renewable groundwater reserves) Reducing demand (shift v slide) Benefit: reliability

Subsidies MD: Unwinding cross-subsidies among consumers classes (e.g., enterprises pay 4x residential tariff) Different fixed but same variable charges? Direct subsidy for poor? (SG, CL) GH: Subsidy to multifamily Via fixed charges (no submeters?)

Tariffs LT: customer classes, affordability and block rates As few classes as possible (Singapore) Uniform rates simplest (politicians hate) Affordability (better to subsidize poor than sell them cheaper water) – [micro/macro?]

Wastewater AE: Developing a [cost-based] tariff for “recycled water” (treated wastewater). Moving from subsidy to sale in competition with drinking water Cost pricing vs market pricing (e.g., auction)

Water Quality AE: Increasing the bromate (Br) limit/decrease bromate levels in drinking water