Performance Benchmarking in Utility Regulation: The ... - IWA

Performance Benchmarking in
Utility Regulation:
The Worlwide Experience
R.C. MARQUES, CESUR, IST
P. SIMÕES, CESUR, IST
J.S. PIRES, IRAR
Benchmarking Water Services: the way forward
Amsterdam – 12/13 March 2009

Agenda
1. Introduction
2. Benchmarking application
3. Methodology
4. Results
5. Case-studies
6. Conclusions
2

Introduction
Water and
Wastewater
Services (WWS)
Monopoly
regime
Market failures
Sunk costs, scale and scope
economies, externalities and
public obligations
Reduced incentives towards efficiency
and innovation
3

Introduction (cont.)
Competitive
environment
Competition by comparison
(Yardstick competition - YC)
Benchmarking
“Benchmarking can be briefly defined as the process of
seeking excellence through the systematic comparison of
performance measures with reference standards”
(Marques, 2006)
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Benefits of benchmarking use in the regulation
Main
advantages
of
benchmarkin
g use
Strong incentives are provided to operators to be efficient and innovative, mitigating the
costs of operation and the capital expenses;
An on-going pressure is put on the water utilities to improve the quality of service;
A fairer recovery of costs and of the capital investments is assured;
An increase of transparency and sharing of information, minimising its asymmetry
between different stakeholders (specially between regulator and operators).
Benchmarking
5

Benchmarking approaches
YC
X factor computation
price cap formulas
Techniques
• Data Envelopment Analysis (DEA)
• Total Factor Productivity (TFP)
• Ordinary Least Squares (OLS)
• Stochastic Frontier Analysis(SFA)
UK
Colombia
Australia
Portugal
Zambia
Sunshine
regulation
Efficient
company model
Chile
Peru
6

Methodology
Firstly
Secondly
Questionnaire sent to all regulators and entities with this kind of attributions
Six Chapters
General aspects of the WWS
Scope of regulatory activity
General aspects of the regulatory functions
Economic regulation and public service obligations
Quality of service regulation
Supplementary information
7

Methodology (cont.)
The questionnaire was sent to 279 entities (63 answered it)
136 regulators were found in the world
57 countries
25 % of
the world
countries
12 in Africa
5 in Asia
16 in Europe
2 in Oceania
22 in America
23 % in
terms of
population
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Results
9

Results (cont.)
Blue: countries with water
regulation.
Red: countries that
answered the questionnaire.
Green: regulators that apply
benchmarking and
answered the questionnaire.
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Case-studies
studies
Victoria, Australia
The regulator (now
Essential Services
Commission – ESC)
applies sunshine
regulation here since
1994.
Responsible for…
• the quality of service delivered
the quality of the supplying (e.g. water quality and compliance with the norms);
the service reliability (e.g. interruptions, non-revenue water and blockages);
the services availability (e.g. prices, special customers and lack of payment);
the customer service (e.g. call centres, claims and customers’ satisfaction).
• the economic regulation
… increases the transparency and accountability of the WWS.
The operators’ progress can be
seen, for example, in the evolution
of the indicator water interruptions
(ESC, 2007).
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Case-studies studies (cont.)
Chile
… efficient operator is imposed
to enable the regulator to
determine the base costs for
tariffs setting and it can further
include the expected
productivity earnings (X factor)
in the price cap formula
Colombia
La Comisión de Regulación de Água
Potable y Saneamiento Basico (CRA)
Sector economic regulation
Definition of methods and tariff formulas
Regulatory
Process
It uses DEA to compute the efficient administrative costs and the efficient OPEX;
Based on a system of price caps defined for a period of five years which also
includes a minimum limit of 50 % (price floor).
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Case-studies studies (cont.)
Zambia
The National Water Supply and
Sanitation Council (NWASCO)
guarantee the quality of the services provided
including the quality of water.
… is assured by the comparison of a PIs set applied to each operator followed by its
public display (sunshine regulation).
NWASCO PIs for
water supply and
their weights
(NWASCO, 2007)
Reference values are made available by the regulator for each PI.
NWASCO develops a ranking based on the PIs results, assuming weights for the PIs.
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Case-studies studies (cont.)
WSS regulation in England and Wales is pointed out, in the literature, as a
Southern, ,
benchmark for the application of benchmarking inAthe regulatory system.
Yorkshire, ,
The Water Services Regulation
Authority(OFWAT)
Regression
DEA
Determine the efficient costs that are
the basis for the X factors calculation
(in the price cap formula)
OPEX
B
C
D
E
Anglian, &
West
Hampshire
Severn , ,
Sutton &
,
Essex &
Suffolk
, Tendring
Hundred
Dwr Cymru,
Folkestone &
Dover, Mid
Kent
South East
,
Three
Valleys
South
West
E D C B A
CAPEX (maintenance)
The efficient costs are transformed into X factors and become the
goals to be reached by each WWS in the following regulatory period.
YC (Sunshine regulation)
A – Most efficient;
B – Over average;
C – Average;
D – Below average;
E – Less efficient
Quality of
service
Overall Performance Assessment, measured through a compilation of 9 PIs;
International benchmarking studies, comprising a set of PIs for several
utilities comprising different countries (Scotland, Northern Ireland, EUA,
Canada, Scandinavia, the Netherlands, Portugal and Australia).
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Case-studies studies (cont.)
Italy
WWS are regulated by an authority created in 1994,
the (Comitato per la Vigilanza sull'uso delle Risorse
Idriche - COVIRI)
… widelly influenced by the success of OFWAT
regulatory system…
… COVIRI regulatory method based on
benchmarking uses parametric benchmarking
techniques to estimate the factor X.
COVIRI computes
a set of 55 PIs of
the WWS which
are published in
an annual report.
19 technical indicators;
18 management indicators;
18 economical-financial indicators.
15

Case-studies studies (cont.)
Portugal
Belgium
Waloon region the regulatory
authority (Comité de Contrôle
de l’Eau - CCE)
Quality of service;
Catchments protection;
Management and
sustainability of assets;
Pricing and management;
Coverage and solidarity;
User satisfaction and
communication.
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Conclusions
Benchmarking…
… creates a competitive environment;
… creates strong incentives towards efficiency and inovation;
… promotes the efficiency with regard to capital expenses;
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Conclusions (cont.)
Benchmarking…
… assures the “fair” recovery of costs and a “fair” return of the
capital invested;
… increases the information sharing and transparency;
… has enormous potentialities in the supervision of the levels of
quality of service and in the setting of prices and tariffs.
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Thank you for your attention !
Rui Cunha Marques – rcmar@civil.ist.utl.pt
Pedro Simões – psimoes@civil.ist.utl.pt
Joao Pires – joao.pires@irar.pt
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