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© 2007 IRAR OECD – 14 November – JSP
IRAR
OECD expert meeting on
“sustainable financing for affordable water services: from theory to practice”
Consumer tariffs in practice
- The Portuguese experience -
João Simão Pires
Director, The Institute for the Regulation of Water and Solid Waste
Paris, 14 November 2007
IRAR – Instituto Regulador de Águas e Resíduos
Centro Empresarial Torres de Lisboa, Rua Tomás da Fonseca, Torre G – 8º, 1600-209 Lisboa, Portugal
Tel: +351 210 052 200, Fax: +351 21 371 26 61, [email protected], www.irar.pt
IRAR
© 2007 IRAR OECD – 14 November – JSP
IRAR
2
Consumer tariffs in practice: the Portuguese experienceTopics addressed
1 Framing the problem
2 Defining the guiding principles for a solution
3 Outlining, implementing and monitoring the chosen strategy
© 2007 IRAR OECD – 14 November – JSP
IRAR
3
Framing the problemThe Portuguese water services sector structure
• Starting point: fragmented industry structure, yet fully integrated local monopolies at the
municipal level.
– Recent (last 15 years) regional aggregation at the wholesale level;
– Introduction and expansion of new management models.
• 23 wholesale water service
providers who serve more than
one municipality
• 275 retail water service
providers, of which:- 245 cases of direct provision by
municipalities
- 15 municipal corporations
- 20 municipal concessions
• a Portuguese household may
have between 1 and 4 distinct
operators involved in the
provision of its water supply and
wastewater services
• 110 municipalities have less
than 10 000 inhabitants
Retail water supply service providers Wholesale water supply service providers
© 2007 IRAR OECD – 14 November – JSP
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Framing the problemFinancial sustainability of wholesale operators
• IRAR‟s assessment is that the financial sustainability of wholesale water service operators is
“challenging” in one third of the cases and another third is “unsustainable” unless significant
change is implemented.
Wholesale water supply only Wholesale wastewater
treatment only
Robust/ affluent
Challenging
Unsustainable
Combined wholesale water
services
Note: EPAL excluded from
analysis because it is not a
concession.
In addition to retail water
supply services to Lisbon
city, it is also a wholesale
water supplier to another 20
operators.
© 2007 IRAR OECD – 14 November – JSP
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Financial sustainability of wholesale operatorsThe role of structural factors
• Although structural factors such as scale and demographic concentration play a key role, they
do not tell the whole story…
0
100
200
300
400
500
600
700
0 2500 5000 7500 10000 125000 10 20 30 40 50
A. Norte Alentejano
A. Minho e Lima
Simlis
A. Centro Alentejano
A. Centro
A. Santo André
Simarsul
A.T.M. Alto Douro
A. Zêzere e Côa
A. Ave
A. Mondego
A. Cávado
Simria
A. Oeste
Sanest
Simtejo
A. Douro e Paiva
A. Algarve
Wholesale water supply turnover – 2006 (1)
Million euros
Analysis of the impact of contextual factors
Thousands of
households
served (2)
Area covered (Km²)
Simtejo
A. Algarve
A. Douro e Paiva
A.T.M. Alto DouroSanest
A. Ave
A. Oeste
A. Cávado
Simria
(2) Sum of the number of households served by wholesale water supply services with the number of households served
by wholesale wastewater services, when applicable.
A. Centro
A. Norte Alentejano
A. Minho e Lima
A. Mondego
A. Centro Alentejo
Simarsul
A. Zêzere e Côa
A. Santo André
Simlis
(1) EPAL excluded from analysis because it is not a concession. Wholesale water supply activities
cover 5 400 Km², serve 1.2 million households and generate a turnover of 90 million euros.
© 2007 IRAR OECD – 14 November – JSP
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Financial sustainability of wholesale operators (ii)Accumulation of customer receivables
• … lack of investment on the retail side means that wholesale operators are not being able to sell
the volumes for which they sized their infra-structure and,
– Not only are they selling less, but their customer receivables are also building up…
181
1.114
528
453
427
271
211
211
195
170
166
143
138
127
103
101
74
61
54
84
0 200 400 600 800 1.000 1.200
SECTOR
Simtejo
AdNA
Simria
AdCávado
AdZC
AdCA
AdTM AD
Simarsul
AdCentro
AdSA
AdAve
AdOeste
AdM L
Simlis
Sanest
AdM ondego
AdAlgarve
EPAL
AdDP
Dias
Days receivables of wholesale water service operators - 2006 Recente evolution of wholesale average days receivables – 2003/06
Days receivables
Retail average (25 to 40 days)
© 2007 IRAR OECD – 14 November – JSP
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Retail price levelsInsufficient cost recovery
• … and the financial bottleneck lies at the retail (municipal) level:
– End-users not being charged the full service costs;
– Competing demands for municipal budget appropriations.
Média aritmética: € 22/ ano
Média aritmética: € 73/ ano
Sources: APDA – Association of Portuguese Water Distributors, 2004; IRAR analysis.
309 Portuguese municipalities (ranked in descending order)
Arithmetic average for 120 m³
water supply/ year =
€22/ household/ year
Retail wastewater treatment charges for residential customers
Average for municipal
concessions =
€43/ household/ year
Arithmetic average for 120 m³
water supply/ year =
€73/ household/ year
Average for municipal
concessions =
€104/ household/ year
Retail water supply charges for residential customers
Average wholesale
cost recovery levels
© 2007 IRAR OECD – 14 November – JSP
IRAR
8
48%
40%
6%6%
Retail price levels
“Willingness to pay”
Sources: IRAR “Willingness to Pay Study”, 2007. Results based on national survey comprising 1,010 face-to-face interviews of residential customers.
48%
9%
41%
2%
“How do you rate the
quality of the water
supply services you get?”
“Good”
“Average”
“Bad”
47%
4%
31%
18%
“How do you rate the
quality of the wastewater
services you get?”
“Average”
“Good”
“Bad”
“Compared with the cost
of other utilities my water
bill is…?”
“Cheap”
“Fair”
“Expensive”
“Would you be willing to
pay a little bit more each
month to guarantee a
higher level of quality in
your water services?”…
19%
70%
2%
9%
• One can start by asking end-users if they “are willing to pay a little bit more to guarantee a
higher level of quality” in their water services…
– Which is what we’ve recently done.
“No” “<€2”
“€2 to €5”
“>€5”
© 2007 IRAR OECD – 14 November – JSP
IRAR
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Willingness to pay“Why not?”
Sources: IRAR “Willingness to Pay Study”, 2007. Results based on national survey comprising 1,010 face-to-face interviews of residential customers.
• ... Yet, the more interesting issue is understanding why they are not willing to pay more...
15%
5%
16%
44%
19%
“I already pay too much
taxes”
“Its up to the government
to guarantee these
essential services”
“These services are
already too expensive”
“I would pay more and
nothing would change”
“Business”
marketing
challenge
“Government/
Institutional”
marketing
challenge
Reasons advanced by the 70% of residential end-users unwilling
to pay a little bit more to guarantee higher quality of their water
supply and wastewater services
© 2007 IRAR OECD – 14 November – JSP
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AffordabilityIdentifying and quantifying the issue
Macro-affordability: “Social issues in the provision and
pricing of water services” – OECD, 2002
0,5%
0,6%
0,7%
0,7%
0,7%
0,9%
0,9%
1,1%
1,2%
1,2%
1,0%
1,4%
1,0%
1,2%
2,1%
2,2%
0,4%
0,8%
1,6%
0% 1% 2% 3% 4%
Portugal (2004) - IRAR
USA (2000)
South Corea (97-98)
Italy (97)
Japan (2000)
Scotland (97-00)
Portugal (2000) - INE
Slovakia (2001)
France (95)
Denmark (98)
England & Wales (97-00)
Germany (2000)
Austria (97)
Netherlands (99)
Luxemburg (97)
Portugal (97) - OECD
Turkey (97)
Hungary (2000)
Poland (99)
Water supply and wastewater charges as % of household disposable income
2,4%
• … If they are not willing to pay for it, can households at least afford it?
– One in ten are likely to be strained, and specific mechanisms have been designed to address their situation.
Sources: IRAR “Affordability Study”, 2007. INE - Portuguese National Statistics Institute, “National Survey of Household Expenditures”, using UNESCO’s COICOP classification, 2000.
1,7%
1,5%
1,3%
Affordability
threshold
Micro-affordability: IRAR “Affordability Study”, 2007
(2004 data)
Methodology
• Household income threshold set at one minimum wage
(€5,125/ year)
• Consumption level of 120 m³/ year
• Affordability threshold set at 3% of household
disposable income (OECD, UK)
Quantification
• 785,000 households below income threshold (19.3% of
total Portuguese households)
• Of these, 426,000 exceed the affordability threshold,
i.e. 54% of low income households
– National maximum of 7.5% likely to impact 6,600
households.
• Conclusion: 10,5% of Portuguese households fail the
chosen affordability criteria.
Location
• In 60 municipalities (out of 309);
• Mostly (47) in the North and Tagus Valley regions;
• In these municipalities, affordability constraints likely to
impact between 15% and 30% of households.
© 2007 IRAR OECD – 14 November – JSP
IRAR
11
912
804
310
218171
106
Personal
transport
vehicles
Annual household expenditure with different
consumption categories – Portuguese average - 2000
Affordability“Looking at the other 90%”
• … however, for the vast majority of Portuguese households, affordability is, fortunately, not an
issue…
7,33%
Restantes
despesas 92,67%Abastecimento e
saneamento
0,76%
Energia
3,44%
Telefone,
telégrafo e telefax
3,12%
€1013/ year
€106/ year
€475/ year
€432/ year
Other
household
expenditures
92,67%
Water supply and
wastewater
0,76%
Residential
energy (gas &
electricity)
3,44%
Telco
services
3,12%
Household
utilities
7,33%
Residential utility expenditure as % of total
household expenditure – Portuguese average - 2000
Sources: IRAR “Affordability Study”, 2007. INE – The Portuguese National Statistics Institute, “National Survey of Household Expenditures”, using UNESCO’s COICOP classification, 2000.
Clothing &
footwear
Euros/
year
Hygiene &
personal care Tobacco
products
Alcoholic
beverages Water supply
and wastewater
services
© 2007 IRAR OECD – 14 November – JSP
IRAR
12
0
50
100
150
200
250
0 15000 30000 45000 60000 75000
Volume supplied to end-users in Lisbon city („000 m3)
(Esc/m3
at constant
2000 prices)
Average price to end-
users
19791979 1979
198619861986
2000
2000
Evolution of average prices per m³ and volumes supplied to end-users in Lisbon (1977/2000)
% vol (80-85) (1)
% preço (80-85)
0 % = - 0.08 = - 0.05- 8 %
+ 100 %
- 5 %
+ 100 %
Residential end-users
Non-residential end-users
End-user total
Source: EPAL analysis; Commission staff working paper “Water Pricing Policies in Theory and Practice”, Jul 2000.
Notes: (1) Estimates of demand-price elasticity in the literature tend to fall in the range of -0.10 to -0.25.
Retail price levels“Ability to pay – a case study”
• … In fact, during the early 1980‟s, over a five-year period, retail water supply prices more than
doubled in real terms in Lisbon city.
© 2007 IRAR OECD – 14 November – JSP
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• To address the problem, one needs to understand the system
mechanics governing the interactions among stakeholders and
decision makers that govern decision outcomes around water
service pricing.
Absence of a
consensus around a
common pricing
framework
Opportunistic and
tactical reasoning
behind tariff reviews
Excessive
complexity,
“politics” and
time-waste around
tariff review
processes
Ad-hoc evolution
of tariff structures
Incomprehension
and frustration among
end-users and their
representatives,
amplified by
the media
Very large
heterogeneity of
tariff structures
in the sector
Deficit of
communication and
pro-active end-user
expectation
management
Environmental
Economic
efficiencySocial
Business
Distinct views on
potentially conflicting
goals among
stakeholders and
decision makers
Framing the problem
“Understanding the current deadlock”
© 2007 IRAR OECD – 14 November – JSP
IRAR
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Consumer tariffs in practice: the Portuguese experienceTopics addressed
1 Framing the problem
2 Defining the guiding principles for a solution
3 Outlining, implementing and monitoring the chosen strategy
© 2007 IRAR OECD – 14 November – JSP
IRAR
15
• Service provision cost efficiency also needs to be improved and that requires the clarification of
the “ground rules” needed to allow capturing potential:
– Economies of scale (increasing the geographical market served)
– Economies of scope (synergies between water supply and wastewater services)
– Process economies (synergies in the vertical integration between wholesale and retail services)
Abastecimento
em alta
Wholesale water supply
Abastecimento
em baixa
Retail water supply
Saneamento
em alta
Wholesale wastewater treatment
Saneamento
em baixa
Retail wastewater collection
Wholesale water services
Retail water services
Water services
End-user tariffs
Transfer prices/ prices charged to retail operators
Allocation criteria for
common costs, income
and capital
Auxiliary non-
core, non
regulated
activities
Guiding principles for a solutionPromoting industry restructuring where it makes sense
© 2007 IRAR OECD – 14 November – JSP
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• Key principles of the “Pricing regime governing water and solid waste services provided to
end-users”:
– Full long-term service cost recovery in a continuous improvement scenario
– Promoting the efficient use of water resources and the protection of their quality
– (Urban solid waste: RRRR)
– Defending end-users from monopolistic price-quality value offerings
– Ensuring affordability conditions for those who need them
– Avoiding cross-subsidisation
– Transparency and public disclosure
– Common tariff structure and terminology nationwide
– Equilibrium and common sense
Guiding principles for a solutionNew national legislation
© 2007 IRAR OECD – 14 November – JSP
IRAR
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Custo marginal do serviço para o utilizador
-5 0 5 10 15 20 25 30 35
Nível de consumo por cada intervalo temporal de 30 dias) (m3)
€/ m
3
New national legislationCommon tariff structure: rationale
• The rationale for a common pricing structure needs to be explicitly articulated, openly
discussed, bought into and then, written in stone.
Marginal cost of water supply service to end-users
Water consumption level during each 30 day interval (m³)
€1 household = (1 + VAT rate) = €1.45 business
expenditure (1 – CIT marginal rate) expenditure
Wastewater variable = (Water volume x 0.8) x (water variable component) x relative cost = x% of water variable
component (water volume) coefficient component
© 2007 IRAR OECD – 14 November – JSP
IRAR
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Consumer tariffs in practice: the Portuguese experienceTopics addressed
1 Framing the problem
2 Defining the guiding principles for a solution
3 Outlining, implementing and monitoring the chosen strategy
© 2007 IRAR OECD – 14 November – JSP
IRAR
19
New national legislationCommon tariff structure: details
• Water supply tariff structure
– Fixed (availability) tariff (€/ 30 days), equal regardless of
meter nominal diameter (up to 25 mm)
– Variable tariff (€/ m³), with 4 increasing blocks
– 0 a 5 m³/ 30 days (25 a 45% of end-users)
– 5 to 15 m³/ 30 days (30 to 60%)
– 15 to 25 m³/ 30 days (10 a 20%)
– Above 25 m³/ 30 days (0 a 10%)
• Wastewater treatment tariff structure
– Fixed (availability) tariff (€/ 30 days)
– Variable tariff (equivalent to a % of the variable water
supply component)
• Possibility of “social” price plan for low income
households (below 2 minimum wages)
Residential end-users Non-residential end-users
• Water supply tariff structure
– Fixed (availability) tariff (€/ 30 days), differentiated
according to meter nominal diameter
– Flat variable tariff (€/ m³), set equal to the 3rd residential
block
• Wastewater treatment tariff structure
– Fixed (availability) tariff (€/ 30 days)
– Variable tariff (equivalent to a % of the variable water
supply component) or flat variable tariff when
measurement is technically and economically justifiable
• All non-residential end-users pay according to a
common price plan
– Government, municipalities, …
– Only possible exception is non-government social
solidarity institutions
Other clarified aspects
• End user and operator rights and duties
• Minimum information requirements and terminology for invoices, meter reading periodicity, invoicing frequency and payment terms
• Possibility of seasonal variable water tariffs (peak-load pricing) in the case of excess demand/ abnormal resource scarcity
• Clarification of activities are already included in the service tariffs and, therefore, cannot be charged separately
• Identification of auxiliary services that can be charged specifically
• Cost items to be included in the determination of service costs
• Rounding procedures
© 2007 IRAR OECD – 14 November – JSP
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• The strategy reflected in the new legislation seeks to ensure an adequate and politically
balance in terms of decision-right allocation:
– Some key features become a matter of law and are mandatory;
– In addition, the regulator issues non-binding recommendations (coaching role, in addition to controller);
– Significant margin for discretion is still given to local authorities who approve water service tariffs.
“Principles in the new legislation (Tariff Regime)”
+ “Common tariff structure”
+ “Specific local circumstances”
+ (“IRAR recommendation”
x “degree of discretion used by ultimate
decision maker”) =
“Water service tariffs”x
Service utilisation (time and intensity)
=Service costs for each end-user
Outlining the strategyDecision right allocation
Custos mensais do serviço de abastecimento e saneamento
0
20
40
60
80
100
120
140
160
180
200
0 5 10 15 20 25 30
m3 de água consumida/ mês
Eu
ro/ m
ês
Máximo - Não doméstico
Máximo - Doméstico
Mínimo - Doméstico
Mínimo - Não doméstico
IlustrativoMonthly costs of water services to end-users
Illustrative
Monthly water consumption (m³)
Non-residential (maximum)
Residential (maximum)
Residential (minimum)
Non-residential (minimum)
Custos unitários do serviço de abastecimento e saneamento por m3 de água consumida
0
2
4
6
8
10
12
5 10 15 20 25 30 35 40 45 50
m3 de água consumida/ mês
Eu
ro/
m3
Máximo - Não doméstico
Máximo - Doméstico
Mínimo - Doméstico
Mínimo - Não doméstico
Monthly unit costs of water services to end-users per m³ of water consumed
Monthly water consumption (m³)
Non-residential (maximum)
Residential (maximum)
Non-residential (minimum)
Residential (minimum)
Illustrative
© 2007 IRAR OECD – 14 November – JSP
IRAR
21
• IRAR‟s role will go beyond the mere enforcement and supervision of the adherence to new legal
requirements
– It will also act as a coach to help the most challenged operators to gradually change.
IRAR
recommendation or
periodic updateUntil June IRAR
On-going activities
• Development of software applications aimed at assisting the operators in implementing the tariff
regime
- Management accounting criteria and tools to determine each service’s P&L
- “On-line Tariff Regime” (simulation of tariff compliance with legislation and IRAR’s
recommendation, revenue simulator and interface for data reporting)
• Training initiatives, ad-hoc financial audits and inspection initiatives to monitor compliance with
new legislation
Analysis of some
tariff proposals
Sept. to December
Reporting to IRAR
(tariffs and operator
financial statements)Feb. to May
Final decision by
local authorities Nov. to January
Regulatory cicleData analysis,
validation, interpretation
and publicationMarch to October
Implementing the strategyThe role of the regulator
© 2007 IRAR OECD – 14 November – JSP
IRAR
22
Monitoring the strategy
“The convergence zone”
Convergence
zone simulation
Retail water supply charges for residential customers (120 m³/ year)
Convergence
zone simulation
Retail wastewater treatment charges for residential customers (120 m³/ year)
Sources: APDA – Association of Portuguese Water Distributors, 2004; IRAR analysis.
309 Portuguese municipalities (ranked in descending order)
• IRAR will monitor the pace of conversion towards a full cost recovery zone, which in some
cases will be quite challenging…
© 2007 IRAR OECD – 14 November – JSP
IRAR
IRAR – Instituto Regulador de Águas e Resíduos
Centro Empresarial Torres de Lisboa, Rua Tomás da Fonseca, Torre G – 8º, 1600-209 Lisboa, Portugal
Tel: +351 210 052 200, Fax: +351 21 371 26 61, [email protected], www.irar.pt
Thank you!
IRAR
Regulation as an
instrument to improve
the efficiency and the
effectiveness of public
water and waste
services