This document discusses how water regulation and pricing in Portugal is stimulating more efficient water services. It provides an overview of water regulation authorities worldwide and the rationale for regulation in Portugal given the large number and diversity of water operators. The Portuguese Water and Waste Services Regulation Authority regulates utilities to incentivize quality of service, economic efficiency, and innovation. Regulation aims to balance efficiency gains, sustainability, and affordability through tools like benchmarking, information sharing, and new tariff models that promote cost recovery while incentivizing operators to invest in innovation. Challenges remain around infrastructure maintenance, operational efficiency, and financial sustainability.

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. 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
WATER REGULATORS IN THE WORLD (2016)

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
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
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
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. THE IMPACT OF REGULATION ON
INNOVATION IN THE WATER SECTOR

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
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
Example: PORTUGUESE WATER POLICIES ACHIEVEMENTS (1993-2016)
99,8% of the
water supplied
in Portugal
has good
quality for
public
comsumption
(2017)

12. ECONOMIC REGULATION

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
BENCHMARKING BETWEEN UTILITIES TO COMPARE AND
PROMOTE BEST PRATICES AND ECONOMIC EFFICIENCY
Assessment of the evolution for
the economic performance

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
ECONOMIC REGULATION CHALLENGE
Efficiency
Sustainability Affordability
Throught tariff
regulation find the
balance between:

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
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
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. FINAL CHALENGES AND REMARKS

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
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. Thank you!
Paulo Lopes Marcelo
Paulo.marcelo@ersar.pt