Organization and Regulation of Local Public Services in ... · Bouygues, SociØtØ d™AmØnagement Urbain et Rural (SAUR, 1950™s). Characteristics: Provide state-of-the-art in

Organization and Regulation of Local Public Services inFrance

The Case of Water and Sanitation ServicesInternational Summer School in Applied Environmental and Regulatory

Economics, Fondazione per l’Ambiente, TorinoISSAERE, 2011

J. C. ELNABOULSIUniversité de Franche-Comté, Besançon, France

CRESE

September 2011

J.C. Elnaboulsi (CRESE) Organization and Regulation of WSS September 2011 1 / 71

Overview

Introduction.

Water and Sanitation Services (WSS) Characteristics.

The French Water Sector.

Water and wastewater utilities problems.

Delegation of Water and Sanitation Services in France.

WSS Regulation.

Conclusion.


Introduction (1)

"The notion of public service obligation (or Universal ServiceObligation) has been defined in Community legislation as thepermanent and obligatory provision of a range of services easilyaccessible to users. Such services may also have to meetspecified quality targets and be available at affordable prices.Member States have wide discretion in defining the detailedspecifications relating to these aspects".

European Commission, 2007.


Introduction (2)

Since early civilization, accessibility to water has been of greatconcern to public authorities → water systems reflected the socialaspects of each society. In general, water was often distributedaccording to social criteria.Today, water continues to be viewed as an essential public good.Public authorities remain responsible for its harvest and distributionamong the population and different water consumers. Largeinfrastructures continue to be built to improve the accessibility ofWSS for the population.Statutory responsibilities for water regulation and planning withinFrance are split amongst a large number of authorities and agencies,all of whom operate at different levels (commune, department, region,state) depending upon the nature of the water (ground water, surfacewater, domainial rivers, estuaries and ports), the use (extraction forhuman consumption, industry, farming, leisure) and the type ofintervention (financial incentives, catchments planning).


Introduction (3)

In the last 60 years, the French local municipalities have faced manyproblems that are responsible for the poor performance, ineffi ciency,and low productivity in managing their WSS.After the “1982 Decentralization Act”and the “1992 Water Act”,many municipalities started looking for alternative ways of providingtheir WSS more effi ciently: delegation contracts.Attention: delegation is an old tradition in the French history: Stateand municipal services have been delegated in France at least since1270!The primary goals of the French local municipalities are: (i) toexpand the water and sanitation systems in order to increasepopulation coverage (especially for sewerage), (ii) to expand sewagetreatment in order to reduce water pollution, (iii) to respect EU andnational standards of effl uent discharges, (iv) to provide better qualityof service, (v) to finance the system with or without public subsidies,and (vi) to ensure higher operating effi ciency.


WSS general characteristics

Public services:

⇒ WSS must fulfill a set of institutional constraints.⇒ being a public service results in a set of obligations that must besatisfied either by a public or by a private operator.

In general, local authorities are responsible for providing WSS underthe oversight of different national or supra national institutions.

WSS management can be: public or private.

Attention: private participation does not relieve public authorities oftheir responsibilities to ensure safe and effi cient WSS and to preventthe abuse of monopoly dominant position.In any case, contracts specify the nature of expected services and thepricing issues (including price revision and indexation formula).

Water and wastewater utilities must be financially self-suffi cient.

Standards for pollution and drinking water must be met.


Economic characteristics of the water industry (1)

A water network includes all facilities from the pumping plant (s) tothe wastewater treatment plant (s). We can distinguish two types ofactivities in the water industry:

1 Drinking water services: withdrawal and treatment prior use, storageand transportation, distribution to final users;

2 Wastewater services: transportation and storage of used water,treatment.

The water and wastewater industries exhibit multiple market failures:

A network infrastructure is a costly long-term investment → sunk costs→ Natural monopoly (see appendix) → price regulation.Since there is little reason to expect a natural monopolistic industry toprovide the optimal level of service, there is tight regulation(Armstrong et al. 1995; Bös, 1994).Externalities exist at several stages of the water cycle → importantenvironmental damages (pollution, etc.).


Economic characteristics of the water industry (2)

General competition is neither possible nor desirable. The structure ofthe industry explain the regulatory supervision of WSS bygovernments in many developed nations.WSS demand is usually price-inelastic and is seasonal reaching itspeak period in summer time when the availability of raw water is atits lowest level:⇒ Quality: WSS quality is regulated by minimum standards relatedto microbiological, chemical, physical and aesthetic properties.⇒ Quantity: suffi cient pressure, etc.→ Capacity problems (Elnaboulsi, 2001).In general, water services prices involve a two-part tariff: an accesstariff covering fixed costs (consumer’s hook-up and a linear chargebased on usage (increasing or decreasing).Domestic wastewater services are priced within a local communityhomogeneously. Industrial wastewater services are priced accordinglyto effl uent discharges (strength and quantity).


Monopoly regulation

Figure 1: Economic regulation of WSS


The administrative organization

The French model of WSS is deeply rooted in the spatio-politicalsubdivision of the French territory and the French democracy: over36500 "communes"!Local organization: WSS are organized on a municipal basis. Since1790, the French local communities have been responsible for WSS→ Mayors hold legal responsibility, under the Communal Code, forthe provision of clean drinking water, collecting and treatingwastewater, and the supply of other local public services.Early 2000’s: ≈ 15000 independent water utilities dealing with watersupply and ≈ 14500 dealing with wastewater services.Intercommunal Grouping (Syndicates, Districts or Communautés):possibility to share sunk costs and to limit the risk of shortage in theevent of drought or under capacity problems.Water utilities must be financially self-suffi cient → “M49”Industrial and Commercial General Accounting Rule (1990’s): watermust pay for water.


Legal status (1)

WSS belong to a specific category of public services called industrialand commercial public services (SPIC):

Continuity of supply in quantity and quality: 24h a day, 7 days aweek, etc.Adaptability: flexibility, must take into account technology changes,new standards, environmental restrictions, etc.Equality: (i) level and quality of the service; (ii) tariffs; (iii) access tothe service for all consumers.

Local public missions are accomplished under the oversight of theInterior Ministry in cooperation with the Environment, Public Health,and Agriculture Ministries.Standards for pollution and drinking water must be met (EUDirectives).WSS management can be public or private → Delegation contractsdiffering according to:

the degree of the firm’s involvement in the service;the proportion of the risk that the external operator bears.


Legal status (2)

Water resources management is based on the principle of integratedriver-basin management (six hydro geographic zones).Water related-activities within a catchments area are performed by aWater Agency (6 water agencies, 1964 Water Act). It is a publicestablishment under State supervision. Missions:

Water resources management and protection: oversee the applicationof the Polluter Pay Principle.Water policy implementation and supervision.Local actions coordination.Collecting extraction and pollution taxes.Allocation of the collected funds between local authorities: subsidizewater resources conservation programs, investments to improve waterresources and to treat effl uents, etc.

Attention: the French water agencies do not carry out projects norregulate or supervise water and wastewater utilities!


Legal status (3)

Local public investments benefit from large-scale governmentsubsidies channeled through the Water Agencies or through theFNDAE.

National Water Supply Development Fund (FNDAE):

National solidarity fund.Levies a national tax on each distributed m3,Allocates the collected tax between rural communes and ensure that, inrural areas:

1 interests of consumers are protected,2 drinking water and sewerage services guaranteed, ensured and wellprovided.

The FNDAE disappeared in 2005. A similar tax levied by the 6 WaterAgencies, Tax on Water Consumption, replaced the FNDAE tax.


Water consumption in France (Ifen, 2005)


WSS prices in France (Ifen, 2005)


Water prices per commune (size)

Figure 2: Water prices (including taxes) by commune size. Source: Ifen, 2005.


Household WSS prices

Water price in France (€/m3)

2.54

3.282.97

0

0.5

1

1.5

2

2.5

3

3.5

Muncipal company Private company Mixed

Figure 3: Price of household water and sanitation services in France, Ifen 2007.


French water companies

Major companies:

VEOLIA Environnement (ex Vivendi, Compagnie Générale des Eaux,1850’s).SUEZ Environnement (ex Lyonnaise des Eaux —Suez, 1880’s).Bouygues, Société d’Aménagement Urbain et Rural (SAUR, 1950’s).

Characteristics:

Provide state-of-the-art in the field (national and international level).Financially strong, market-oriented, vertically and horizontallyintegrated.Qualified personnel.Well diversified: waste management, property services andmanagement, heating, cable TV, transportation, and other municipalfurnishing, etc.

The French water companies are often engaged in delivering otherservices to the municipalities. This creates potential lock-in effects.


Private participation in urban services in France

Delegation contracts Public managementCollective transportation 62% 38%Waste collection 50% 50%Waste treatment 80% 20%Catering 70% 30%Water distribution 80% 20%Wastewater treatment 60%-70% 30%-40%Parking 65% 35%Urban heating systems 75% 25%

Table 1: Private and public management of urban services.


Main operators in the French water sector

Table 2: Main operators in the French water sector. Source: Conseil de laConcurrence, avis n. 00-A.12, May 31st 2000.


Main operators: drinking water

Figure 4: Main operators: drinking water service. Source: BIPE, 2010.J.C. Elnaboulsi (CRESE) Organization and Regulation of WSS September 2011 21 / 71

Main operators: wastewater

Figure 5: Main operators: wastewater services. Source: BIPE, 2010.J.C. Elnaboulsi (CRESE) Organization and Regulation of WSS September 2011 22 / 71

Population served by type of operator in Europe

Figure 6: Population served per type of operator (ownership) in Europe. Source:Euromarket, 2003.


Population served by operator size in Europe

Figure 7: Population served per type of operator (size) in Europe, 2003. Source:Euromarket.


The French WSS problems

During the 1970’s, 1980’s and 1990’s, the General Accounting Offi cehave mentioned that there is growing awareness that public provisionof water and sewer services have been inadequate.

Different reports (1979, 1987, 1989, 1997, 2000, etc.) blamed theineffi ciency of WSS public monopolies and their failure providing safedrinking water and adequate wastewater collection and treatment tothe entire population.

Different problems may help explaining the poor performance and lowproductivity of most WSS:

Technical and operational: increasing technical and managerialcomplexity of the value chaine of WSS.Commercial and financial: ineffi ciency in many publicly-managed WSS.Human and institutional: government failures.Environmental: increasing EU environmental regulation.


Technical and operational

Ineffi cient public operational practices.

Regular maintenance (especially in small and rural public utilities) isinadequate or simply absent.

Neither preventive nor curative maintenance actions exist to reducephysical losses through old pipes (leaks). Networks are not properlymaintained nor replaced in a timely manner (lot of the French waterdistribution systems have been built by the end of the 1800’s) → noadequate renewing water distribution systems policies!

Technical problems are related to the lack of suffi cient knowledgeabout the state of the installations, the needs for replacement,rehabilitation and expansion, etc.


Commercial and financial

Commercial and financial problems are related to:

Consumption metering: in habitation complexes, consumption is basedon collective meters, this creates distortions in consumer charges andlegitimate consumer protests.Water demand evaluation: lack of reliable data makes planning diffi cultto manage water supply systems and thus wastewater services.Commercial losses due to the high level of unaccounted water(municipal uses, poor consumer records, unpaid bills, ineffi cient billingand collection practices).Pricing policies: they are ineffi cient and are based on average historicalaccounting costs rather than the economic costs.Tariff structures: in many cases WSS are under priced and tariffspresent cross-subsidies (industrial uses are subsidized by domestic uses).


Human and institutional

Human and institutional are related to:The excess staff in public managed WSS.The lack of adequate incentives to attract suffi cient and effi cientmanagerial talent.The lack of discipline of labor force and low qualified personnel.

WSS are also affected by excessive political appointments andinterventions → 1993 Political Transparency Act separates themanagement and delegation of WSS from all political appointmentsin a step to reduce corruption and eliminate political interventions.Lack of clear regulatory responsibility and the absence of adaptiveeffi ciency in WSS organization → for many years local communitieswere the operator and the controller of their actions → risk of apotential conflict of interest → The February 2nd 1995 Law.The absence of legal and institutional framework for long years:example the accounting rule applied before 1992.Public funds are insuffi cient (the French communes are responsible tomanage over 150 public services!).


Environmental

Diffi culties to meet EU directives and standards and to catch up withpast under-investments: Drinking Water Quality, UWWTD, WFD.EU environmental directives imply important and costly investmentprograms to achieve compliance with these directives.→ Rapidly increasing water and wastewater charges!→ In 2004, 2008, 2009, the EC has taken legal action against 13Member States for non-compliance with EU directives (Writtenwarnings).→ October 2004: EU Court of Justice condemned France overexcessive concentrations of Nitrates in tap water in Brittany.Attention: local authorities frequently benefit from large scalegovernment subsidies channeled through the Water Agencies and theNational Fund for the Development of Water Supply Systems.Problems related to the ineffi ciency of wastewater systems: largequantities of untreated sewage are discharged into rivers or reservoirslocated in the proximity of the commune → increased public healthhazards.


Delegation contracts

Delegation is a general term covering four main contractual forms,which differ in some characteristics, but rely on the same principles.Four types of contracts are used in the delegation of industrial andcommercial public services in France:

Concession.Lease Contract (Affermage).Management Contract or Gérance.“Commissioner management contracts”known as Régie Interessée.

Affermage and concession are by far the most common delegationcontracts. The Régie intéressée is rarely applied.Taking into account the present economic climate, concessions havepractically disappeared from delegated management contract: theneed to develop infrastructure no longer influences the choice mode ofmanagement, since investment funds are always guaranteed by localauthorities and government agencies (French Competition Council,2000).


Concession (1)

The private firm finances and builds utility installations and managesthem: the firm is responsible for the services including operation,maintenance, and management as well as capital investments forrehabilitation and expansion works.

The firm is remunerated directly by the consumers (through the priceof water defined in the contract).

The fixed assets, which remain the property of the commune, areentrusted to the concessionaire for the duration of the concessioncontract and must be returned in the same condition at the end ofthe concession period.

Before 1995, Concession contracts ran for long years and no limits ofduration exist (75 or 50 years)! The February 2nd 1995 “PublicServices Delegation”Law (art. 40 and 75) has restricted the time lagof a concession contract to 20 years and cannot be over the durationof investments’amortization.


Concession (2)

Before the 1995 Law, the concessionaires have been asked to payimportant “access fees1”to the local municipality who used thesefunds to recover the debt of the central budget of the commune →WSS users indirectly pay the concessionaire back.Since 1995 (art. 76), these fees are prohibited by the Law in thedelegation of water and wastewater services.The details of the price controls and evolution are contained in eachfirm’s contract in which a price revision’s formula is clearly defined:the growth rate follows the price of a basket of the firm’s costs ofinputs. The price revision’s formula varies across utilities and overtime.The contract stipulates although penalty fines if the private firm failsto meet the targets for service coverage or the quality of servicespecified in the contract.

1These practices were also largely used in lease contracts. For example, when waterservices have been privatized in Toulouse, The Compagnie Générale des Eaux paid about500 Million French Francs to the commune as access fees.


Lease contracts or Affermage (1)

This is the most common form of delegation (over 85% of the Frenchcommunes): a private company "rents" all WSS facilities to thecommune for a period of time.

The private firm is responsible for operation and maintenanceexpenditures (including offi ces, overhead costs, etc.), as well asbilling, collecting and financing management work.

In general, the commune, which remains the owner of the wholesystem, is responsible for capital expenditures for new projects,replacement of major works, debt service and tariffs and cost-recoverypolicies.

The firm must pay the commune a rental fee (surtaxes) included inthe price of WSS fixed in the lease contract, billed and collected bythe private company.

The duration of these lease contracts is about 10 to 12 years.


Lease contracts or Affermage (2)

The private firm is getting paid in the same way as in concessioncontract but receive only the part of water prices that coversmanagement costs → an incentive policy to provide good servicesand establish good billing and collection practices.

WSS prices are provided by the delegation contract, which defines theautomatic periodic revisions of the contractor rate using a price indexformula.

Rates re-negotiations and costs index formulas revisions are possibleperiodically, and can be based on results achievements.

These contracts are very flexible and can be adapted to a variety ofsituation and promote a sense of technical and economicresponsibility on the part of the private sector management company.

Risk involvement: very limited. The private company supports alow-risk option participation in providing WSS unless it assumes apart of investment capital risk (renewal main networks’expenditures).


Management Contract or Gérance

The gérance is the simplest and more comprehensive arrangementform of delegation.The public authority:

retains control of the installations,preserves to a greater or lesser extend a share of direct responsibilityrelated to operation and maintenance of the system,bears all the commercial risk and finances fixed assets as well asworking capital.

The contract defines:responsibility of both parties,terms and conditions of remuneration of the private firm (by thecommune and not by the customers of the service).

The responsibility of the operator is limited to managing its ownpersonnel and services effi ciently: it has the freedom to makeday-to-day management decisions without assuming any commercialor financial risks and has no legal relationship with the consumer.Payments to the operator are based on a guaranteed lump sum.


Régie intéressée

Same as the management contract or Gérance.

Difference: payments of the contractor are linked to a work performedinstead of guaranteed payments.

Payments are proportional to some parameters such as improvedeffi ciency and management.

This productivity bonus payment scheme creates incentives forincreasing productivity.Note: very few Gérance contracts in France.


Delegation’main features

Delegation ContractsMain features Concession Affermage Gérance Régie interesséeInvestments Private Public2 Public PublicOp. costs Private Private Public PublicOwnership Public Public Public PublicManagement Private Private Private PrivateRel. w/users Private Private Public PrivateFin. risks High Moderate Low LowDuration 20 10-12 Contract ContractRate setting Contract Contract Public Pub. and privatePayments Rate payers Rate payers Fixed fees Incentives3

Table 3: Industrial and commercial WSS delegation’main features.2Sometimes the private company is in charge of specific investment costs.3Fixed fees with incentives. Incentives are bonus based on productivity and

commercial performance.J.C. Elnaboulsi (CRESE) Organization and Regulation of WSS September 2011 37 / 71

WSS in France

Management Type Percentage in "communes"∗ Drinking Water- "Régie" 37- Delegation 63· Affermage 88· Concession and Others 12∗ Sewerage- "Régie" 62- Delegation 38· Affermage 85· Concession and Others 15

Table 4: Management type of WSS in France.


Why regulation?

Key objectives of regulation in WSS are to:protect the environment and to establish fair allocation of waterresources between competing users;ensure compliance with standards in order to preserve the environmentand natural resources;ensure public access to good quality WSS in order to protect publichealth —a universal service obligation;protect customer interests against monopoly power by establishingacceptable levels of service and price and effi cient operations, for whichthey would need to provide incentives for competition (for example inensuring competitive tenders are conducted properly);ensure that there is no undue discrimination between users;deal with market failures associated with the service provision —such asmonopoly abuses and imperfect information;create an operation and investment environment that focuses oncustomers and operate in a transparent and proportionate manner;improve effi ciency and innovation.etc.


Legal regulation (1)

French national legislation has introduced a number of notablechanges affecting private and public water operations.

Until recently, delegation contracts were frequently renewed withouttendering, according to the Cour des Comptes, France’s nationalaudit body.

It was only in 1993 that the Sapin Law, or anti-corruption law,provided for private operations to be publicly and "competitivelytendered".

In 1995, the Sapin Law was integrated by the Barnier Law whichlimited the maximum duration of delegation contracts at 20 years.

Also passed in 1995, the Mazeaud law on public procurement anddelegation of public service requires operators to submit to delegatingauthorities yearly reports containing accounts of all operations and ananalysis of service quality. The operator’s accounts can be subject tothe scrutiny of regional audit bodies.



1992 “Water Act”: water resources and the environment as anational patrimony; “M49”public services general accounting rule;flat water rates are prohibited.

1993 “Political Transparency Act”: the principle of delegationdocument; a committee for delegation; a transparent bidding, awardprocess and a publicity.

1995 “Public Services Delegation Act”: duration, contractmodifications, operator accounting and service quality report, watertariffs and level of service reports, pollution actions, etc.

The most important advantages in publishing of such reports are:better understanding by customers and more informed public debate;it would be used as comparative performance indicators; it would beused as evidence to enforce the statutory conditions with respect tothe present duty to supply and the proposed duty to improve levels ofservice.




Delegation process (1)

Delegation is accomplished under specific institutional features anddetermines the partial and temporary management of the service.

The territorial administration of the State (Prefecture) is in charge of:

the control of the legality of public procurements and of all activities oflocal communities;the compliance with technical standards

The local authority, as the organizer of WSS, must define the generalprinciples governing these service:

monitor the prices,control the firm operating in the market,organize the competition,ensure that WSS are well executed, etc.


Delegation process (2)

Mainly, delegation of WSS is governed by the "Sapin Law", January23 1993 and 1995 “Public Services Delegation Act".

Preparation of the principle of delegation document:

obligation of advertising and calls for tender;announcements must be done in the offi cial press (Journal Offi ciel);

Preparation of the bidding process: in general restricted calls fortender based on pre-qualification criteria.

Bidding process and the choice of the future operator: the awardingof contracts is based on the principle of intuitu personae:negotiations of the contract are conducted freely on condition thatthe Sapin law of 1993 is respected.→ intuitu personae principle: negotiation and mutual agreement.

Control of the procedure: duration, access fees, tariffs, etc.


Price setting mechanisms (1)

The weakness of competitive pressures in the French water sectorcreates a need for some economic regulation: since competition in themarket is not possible, regulation is necessary.

Delegation of WSS is characterized by deep imbalances: on the onehand, the three big groups in possession of strong technical andfinancial capacities and, on the other hand, the French municipalitieswith a weaker negotiating and controlling capacity.

In its 1997 report, the French national audit court identified a lack ofcompetition, frequent re-negotiations of initial contractual terms, atendency to extend existing contracts without subjecting them totender and the existence of bribery and corruption (Grenoble).

There is no independent price regulatory body in France. The pricesare generally negotiated between private operator and municipality inthe course of the tendering process.


Price setting mechanisms (2)

A fundamental principle of water management in France is "l’eau payel’eau" (i.e. full-cost recovery), meaning that water prices should comeup for all involved cost of operation and investment requirements.WSS for the first delegation year is computed from financial forcasts.For the following years, a rate revision rule.The price formula is based on costs’parameters like investments,salary costs, and other costs that can not be verified and monitored bythe local municipality and can be easily manipulated ⇒ rent seeking.WFD recommends using volumetric charges to reflect and recoverfinancial, environmental and resources costs (the sustainability ofwater resources).Non-respect of pricing rules or a disagreement on the price level canlead to non-renewal of the delegation contract (Neufchâteau, LeMonde Diplomatique, 2005) or going back to public managementwhich is not an easy task!Problem: asymmetry and availability of information, loss of technicalskills, administrative diffi culties!


Competition for the market (1)

The economic literature is unanimous in recognizing the limited scopefor competition in the market → competition for the market viacompetitive tendering.

Competition for the market can improve effi ciency under someconditions:

Contract completeness.Transactions costs.Information asymmetries among parties.Adequate number of operators.etc.

But, long-term contractual relations imply in general oppotunisticbehavior (quasi-rents, capture regulatory decisions, etc.). Thisrequires very complex adaptation and sophisticated contractualarrangements.


Competition for the market (2)

Only since the competition laws of the 1990’s the situation hasslightly improved, however, due to the extremely low number ofpotential bidders the competitive moment of auctions is rather low →competition that exists between operators is often oligopolisticpseudo-competition either there exists an understanding or marketsharing between them!

Joint ventures between the major players and collusion further limitcompetition.

Facing information asymmetry and high market concentration, somemunicipalities have found it necessary, in recent years, to go back todirect management of water and/or wastewater treatment (Paris,2010).


New Economics of Regulation

Regulation essentially means control under incomplete information.

Need of an independent regulatory authority.

Bidding process: determine the regulated economic variables (prices,rate of return, etc.).

Bidding must be competitive (problems of collusion in a highlyconcentrated market).

The public authority sets the rules for competition and enforces theterms of the agreement (contract specification and enforcement,price-revision formula, contract duration, etc.).

Optimal contract: sharing of risks and rewards between operator andthe regulator. Financial rewards or penalties are based on somemeasure of utility’s performance.


Conclusion (1)

Private sector involvement have had significant beneficial outcomeson the economy in general.However, in the network industry, this point is questionable: marketfailures need to be carefully considered and outcomes deserve acareful consideration.Some possibilities to introduce competition exist even if WSS remainfor a large part a natural monopoly → competition for the market (atleast for some part of the activity) → competitive auction and no“beauty contests”New institutional regime: greater degree of transparency, highercapacity to avoid collusion and corruption, new legal rules ofcontracting schemes.Economic regulation: linear mechanism rule

Reinforce or replace the existing juridical contracts.Outcome is significantly complex.Some improvement: effi ciency and performance.


Conclusion (2)

There is no “best”nor optimal regulation model.

Regulation depends on:

the type of the market failure,the type of relationships between politicians and bureaucracy,the quality and independence of public administration,the public service obligations,the sectorial and geographical situation,the technological development of a specific sector

Regulation must be seen as a dynamic process and needs: a stablepolitical environment, an absence of corruption and effectivecompetition in the private sector.


References (1)

Abbott, M. and Cohen, B., (2009): “Productivity and Effi ciency inthe Water Industry,”Utilities Policy, 17, 233-244.

Armstrong, M., Cowan, S., and Vickers, J. (1994). RegulatoryReform: Economic Analysis and British Experience, The MIT Press:Cambridge, Massachusetts.

Ballance, T. and Taylor, A. (2005). Competition and EconomicRegulation in Water: The Future of the European Water Industry,IWA Publishing: London, UK.

Bauby, P. (2009), The French system of water services, CIRIEC WP,N◦ 2009/03.

Bös, D. (1994): “Pricing and price regulation : an economic theoryfor public enterprises and public utilities”, Advanced Textbooks inEconomics, n◦34, edited by Bliss C.J. and Intriligator M.D., Elsevier,NH, 453 pages.


References (2)

Brown, S. J. and Sibley, D. S. (1986). The theory of public utilitypricing, Cambridge University Press, 252 pages.

Brown, Ashley C., Jon Stern, and Bernard Tenenbaum, with DefneGencer. (2006). Handbook for Evaluating Infrastructure RegulatorySystems. Washington, D.C.: World Bank.

Elnaboulsi J. (2001): “Organization, management and delegation inthe French water industry”, Annals of Public and Co-operativeEconomy, 72, 4, pp. 507 —547.

Elnaboulsi J. (2001): “Non-linear pricing and capacity planning forwater and wastewater services”, Water Resources Management, 15, 1,pp. 55 —69.


References (3)

Kessides, I.N. (2004). Reforming Infrastructure: Privatization,Regulation, and Competition, World Bank and Oxford UniversityPress: Washington DC.

OECD (2009), Managing Water for All: an OECD Perspective onPricing and Financing, OECD Publishing, 151 pages.

Panzar, J. (1989): “Technological Determinants of Firm and IndustryStructure,” in Handbook of Industrial Organization, vol. II, edited byR. Schmalensee and R. D. Willig, Amsterdam, Elsevier SciencePublishers.

Walter, M., Cullmann, A., von Hirschhausen, Ch., Wand, R. andZschille, M. (2009): “Quo Vadis Effi ciency Analysis of WaterDistribution? A Comparative Literature Review,”Utilities Policy, 17,225-232.


EU Directives

EU environmental legislation affecting the water sector can be dividedinto three categories:

1 Legislation on the protection of water sources (including the control ofpollution by commercial activities);

2 Acts regulating municipal activities in the water and wastewater sector;3 and finally the Water Framework Directive (WFD).

In some areas the effectiveness of these directives was questionable:water quality continued to deteriorate during the 1980’s (agriculture).

As a reaction to the inadequacies of the first wave of legislation, theDirectives for controlling certain sources of pollution were adopted.


Three periods

EU environmental and water policy can be divided into three periods:

The first period (1973-1986) includes the first three environmentalprograms. The EC had no mandate for environmental regulation butonly in areas affecting the core objectives of the Community.Environmental Directives focus on public health protection and theharmonization of environmental rules to avoid market distortion.

The second period (1987-1992) was marked by the Maastricht Treatyand the assignment of a European competence for a commonenvironmental policy: the emphasis passed on to pollution control andenvironmental protection (UWWTD).

The third phase (1993-· · · ) is still under way and is largelycharacterized by the adoption of the IPPCD (1996) and WFD (2000).


WFD: the new opportunities

The WFD is currently the best tool to ensure sustainable “use”ofwater and wetlands across Europe.

Restructuring administration:

Establishment, for the first time, of a single legislative framework.Long term planning in Water Resources Management.Decentralization of management to the River basin levels.

Rationalizing water costs.

Promoting economic sustainability: in water management and uses.

Prevention of further deterioration and achievement of good statusfor all waters.

Involving the greater public in the protection of the environment.−→ Effi cient Integrated Management Approach.


WFD: key economic inputs

Mainly four economic inputs:1 Recovery of costs: the costs associated to water uses are borne by thosewho generate them (attention: difference between “water services”(drinking water, irrigation, etc.) and “water uses” (navigation, fishing,etc.) → It brings transparency on financial flows associated to wateruses and services: understand which water services and which economicsector are actually paid for, to which extent, by whom and how.

2 Cost-effectiveness analysis: direct and indirect costs and benefits;economic and non-economic impacts, etc. in order to achieve thecompliance with the goal at the lowest cost

3 Cost-benefit analysis: to compare variations of quantifiable costs andbenefits, caused by the activities, for people affected by the policyunder consideration

4 Water pricing policies: ensure the fundamental requirement,Sustainability


Economic analysis is not an isolated exercise!

Integrated into technicalissues: water utilities,quality of water, etc..

Integrated intointerdisciplinary exercise

Integrated into technicalissues: water utilities,quality of water, etc..

Integrated intointerdisciplinary exercise

Decisionmaking oriented:concrete, operational,

"readytoapply"

Included into publicparticipation process:

clear, understandable...

Decisionmaking oriented:concrete, operational,

"readytoapply"

Included into publicparticipation process:

clear, understandable...

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"INTEGRATION“:Economics under

WFD

"INTEGRATION“:Economics under

WFD

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Figure 8: Economics under WFD


Economic Requirements

To report on:

Financialcosts

Pricing

Environmentalcosts

It’s also to report on:

Sustainability(renewal costs)

External or Crossedsubsidies

PPPimplementation

Identify incentive measures to achieve environmental objectives.J.C. Elnaboulsi (CRESE) Organization and Regulation of WSS September 2011 60 / 71

Water and wastewater supply chains (1)

Water supply chains comprise the following key activities:

source of water supply: dams to capture and store surface water runoff,groundwater reservoirs, etc.;treatment plants: to remove natural and other pollutants, and to treatraw water to a useable (potable or non-potable) standard;distribution infrastructure: including large/trunk pipelines before andafter treatment plants, and reticulation networks (medium and smallpipelines), pumping stations and local reservoirs, to transport waterfrom its source to treatment plants and then from treatment plantsonto customers;customer service activities, often referred to as retailing: includingbilling, meter reading, and responding to complaints or service failures.

Water and wastewater utilities also have activities or assets thatsupport these supply chain elements: for example, accounting, financeand general administration activities and assets (i.e., corporateoverheads).


Water and wastewater supply chains (2)

Wastewater service systems are typically made up of the followingactivities:

wastewater collection and transmission infrastructure: to transportwastewater from customers to treatment plants (reticulation pipelinesand associated fittings to transport wastewater from source to trunknetwork, trunk pipelines to transport wastewater from the collectionnetwork to treatment plants, pump stations and overflow structures);treatment and disposal facilities: comprise treatment plants to removethe sludge or biosolids from the wastewater, treat the wastewater tovarying levels (e.g., primary or tertiary treatment, depending on thereceiving environment and prevailing environmental standards), andthen dispose of the wastewater via emissions to rivers or the ocean orby providing it for recycled water generation;residuals management: involves removing sludge or biosolids from thewastewater, and then incinerating them, dumping them at sea or usingthem as fertilizer on farm land;customer service activities: including billing, meter reading, andresponding to customer issues.


Key Activities

Figure 9: Water and wastewater key activities.


The water industry is a network (1)

Definition (1)A network is a set of points or nodes, connection links built in order totransport some energy flows (electricity, heat, etc.), some informationflows (sounds, data, images, etc.) or some materials flows (water andwastewater, freight, passengers, etc.). From an economic point of view, anetwork is an intermediation platform between one or several producersand one or several consumers.

Definition (2)A node can be:- a departure node from which a flow is emitted;- a final node receiving a flow;- an intermediate node conceived for transmission, storage, coordination,dispatching, etc.


The water industry is a network (2)

Definition (3)An effi cient network allows to minimize all the production costs.

Network System Nodes Links FlowsAir Transportation Airports Airline Routes PlanesManufacturing Distribution Routes Parts/and Logistics Points ProductsCommunication Computers Cables MessagesEnergy Pumping Stations Pipelines Oil, Gas,

and Plants WaterTable 2: Some classical network systems.


Natural Monopoly (1)

Activity qualified as natural monopoly : sunk costs/increasing returnto scale → General competition is not possible nor desirable.

Let’s consider the monoproduct case and assume that the total costfunction is given by C (q) = CF + CV (q), with CF representing thefixed costs, CV (q) the variable costs. q is the production level and(q1, . . . , qn) denote fractions of the total production q such as∑ni=1 qi = q.

Definition (4)The cost function is strictly subadditive if:

n

∑i=1C (qi ) > C (q) , ∀q, i with q =

n

∑i=1qi


Natural Monopoly (2)

It is less costly to jointly produce the bundle (q1, . . . , qn) through asingle firm than to divide the production across two or more separatedfirms (or production units) → Definition of a natural monopoly.

Remark: Subadditivity can be defined locally. A cost function issubadditive at q′ if

n

∑i=1C (qi ) > C

(q′), ∀i with q′ =

n

∑i=1qi

The natural monopoly character of the water industry is so strongthat structural unbundling is rare, making vertical integration ofutilities dominant even in industrial countries:

transportation and distribution involve important fixed costs;it is very diffi cult to duplicate a water network which represent an entrybarrier → water industry = non-contestable monopoly;a lot of assets are specific: irreversibility of investment.


Economies of Scale

Definition (5)Economies of scale characterize a production process in which an increasein the scale of the firm causes a decrease in the long run average cost.There are scale economies if the average cost C (q)q is decreasing ∀q.

Remark: Similarly there are local scale economies at q′ if the average costC (q)q is decreasing at q = q′.

Definition (6)

We measure the degree of scale economies (S) using the cost elasticity,µC , which is equal to the ratio of the marginal cost (MC ) to the averagecost (AC ) :

S =1

µC=ACMC

There are scale economies iif S > 1.J.C. Elnaboulsi (CRESE) Organization and Regulation of WSS September 2011 68 / 71

Relationship between subadditivity and scale economies

Lemma (1)Locally, scale economies are suffi cient, but not necessarily, to have adecreasing average cost function. Decreasing marginal costs implydecreasing average costs which imply subadditivity but reciprocal false.

Proof.See Panzar, 1989, p. 8, 25-27.

If multiproduct firm → economies of scope. Consider q a vector of goodschosen among n (i = 1, . . . , n) possible goods.

Definition (7)There exist scope economies if it is less costly to jointly produce severalproducts (q1, . . . , qn) than to produce separately these goods

n

∑i=1C (0, . . . 0, qi , 0, . . . , 0) > C (q1, . . . , qn)


Few Empirical Studies (1)

Figure 10: Few studies estimating economies of scale and density (Source: Walteret al. 2009).


Few Empirical Studies (2)

Figure 11: Studies of economies of scope (Source: Abbott and Cohen, 2009).


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