10 October 2018

WATER SECTOR ECONOMIC REGULATION WORKSHOP

PORTUGUESE EXPERIENCE

Ana Barreto Albuquerque

Susana Rodrigues

2

AGENDA

Background on Portugal’s water sector

• Starting point, results and lessons learned from implementing water policy

• Highlight of management models

Water and Wastewater sector regulation in Portugal

• Objectives of regulation

• The regulatory authority (organization ; governance model)

• Approach to regulation and regulatory model

• Process and methodology

BACKGROUND ON PORTUGAL’S WATER SECTOR

Results achieved

Key success factors

4

EVOLUTION OF THE WATER SECTOR IN PORTUGALBEFORE 1993

80%

50%

31%

Population with access to public drinking water supply:

Population with

access to drainage

and treatment of

urban wastewater:

Drinking water in compliance with European standards:

> 96%

> 80%

> 99%

25

YEA

RS

AFT

ER

5

WHY? and HOW?

Why?

• Strong need to close the gaps to other EEC countries

How?

• Strong political commitment for water sector reform

• Global, integrated and stable public policies

• Coordination between sector's stakeholders

• Follow-up / Monitoring

6

WATER SECTOR REFORM

• In 1993 (and the following years) there was a strong political commitment for water sector reform

• The main improvements happened with the definition of global, integrated and stable public policies. The main components are:

– Definition of a clear strategy for the sector (Strategic Plans)

– Creation of a legal framework

– Definition of the institutional framework (including regulation)

– Promotion of a territorial reorganisation of the services (economies of scale)

– Definition of new management models

– Development of the business sector and introduction of competition

– Focus on full-cost recovery

– Definition of quality of service goals and improvement of drinking water quality

– Protection and raising awareness of users; Making information available

• Today:

– The reform is still ongoing but the country witnessed great improvements

– There are still areas needing improvement

Global, integrated and stable public policies

7

PUBLIC POLICIES - Strategic plansCOORDINATION WITH OTHER POLICIES

It is necessary to ensure the links between the Strategic Plans and other action lines seen as of national interest(eg. Water resources policies; EU directives), as well as the EU funding

Financing / Eligibility criteria

Investment

Management models and

organization of the sector

Tariff Policy

Strategic Plan

The Portuguese Environment Agency (APA)

and ERSAR are the bodies responsible for

adopting adequate measures, coordinating

the follow-up and monitoring of the

implementation of the Strategic Plans for

water and waste sectors

Linkage

Coordination

Follow-up / Monitoring

8

PUBLIC POLICIES - Strategic plans

• The definition of development strategies is key to outline the targets and the meansto achieve them.

• Six-year strategic plans guided the implementation of the country's public policy, concomitant with EU funding under the Cohesion Fund and other programmes.

• The strategic plans for the water services have a global, integrated approach,address all the relevant components of the public policy and are closely linked to other national strategies for water.

• Stability in the last 20 years.

1998 2000 2006 2007 2013 20202014

PEAASAR I in force

PEAASAR II in force

PENSAAR 2020in force

Drafting ofPEAASAR I

Drafting ofPEAASAR II

Drafting ofPENSAAR 2020

Clear

Adequate

Stable

9

PUBLIC POLICIESINSTITUTIONAL FRAMEWORK

Definition of the institutional framework

Clear assignment of responsibilities for the services…:

₋ Owner of the service₋ Operator

... And for supervisory activities:₋ Environmental₋ Water resources₋ Water services₋ Public Health₋ Competition

Water resources

Water

services

regulator

Health

regulator

Competition

regulator

Water

resources

regulator

Operator of

the service

Owner of

the service

Environmental

regulator

Clear assignment of responsibilities

10

PUBLIC POLICIESLEGISLATIVE FRAMEWORK

Definition of a legislative framework

• Clarification of rules governing the sector

• Approving new and modern legislation:

₋ Legal framework for State and municipal services

and for regulation

₋ Legislation for tariffs, quality of service, water

quality and technical issues

• Issuing regularly sound recommendations for the

sector

LEGAL FRAMEWORK FOR

STATE LEVEL SERVICES

TARIFF REGULATIONS

QUALITY OF SERVICE REGULATIONS

DRINKING WATER QUALITY

REGULATIONS

LEGAL FRAMEWORK FOR

REGULATIONTECHNICAL

REGULATIONS

LEGAL FRAMEWORK FOR

MUNICIPAL LEVEL SERVICES

Split between State/Municipalities (creation of AdP – Águas de Portugal)

Creation of a Regulation Authority

11

PUBLIC POLICIESMANAGEMENT MODELS

Concessionedmanagement

(>1993)

Delegated management

(1974)

State owned or privately owned

services (regional bulk

services)

Municipally owned services

(local retail services)

Delegated management

(>1998)

Direct management

Direct management

Concessionedmanagement

(>1993)

Definition of adequate management models

• Provision of water services is a public responsibility (by

the State or municipalities), but these can be operated by

public, private or public-private entities

• There is a range of management models available, but the

choice must be based on robust viability studies

• "Competition" between different models enacts a strong

pressure towards service improvement

Corporatisation and access of private capital to service operation

12

PUBLIC POLICIESSECTOR REFORM

Bulk services(mostly regional systems –

State can intervene)

Retail services(municipal responsibility)

Water and wastewater services

Split between Bulk / Retail

13

ERSAR

Universe of

400operators

… State 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

Ten million consumers

EXTERNAL ENVIRONMENT OF DIVERSITY

The size and diversity of the regulated operators are vast, spanning state owned companies and numerous municipalities

14

PUBLIC POLICIESSECTOR ORGANIZATION – Bulk Services

Drinking water sector (2016)

Operators (11)

Operators (9)

Source: RASARP 2017

Wastewater sector (2016)

Population (7 M) Population (7,7 M)

15

PUBLIC POLICIESSECTOR ORGANIZATION – Retail services

Drinking water sector (2016) Wastewater sector (2016)

Operators (319) Operators (257)

Source: RASARP 2017

Population (10 M) Population (10 M)

16

AGGREGATION OF SMALL SCALE OPERATORS

Regulatory goals

• Promote the aggregation of small scale operators of municipal water services in order to gain economies of scale

Actions performed

• ERSAR implemented the Technical Support Unit to address three strategic issues:

1. Offer technical support to small scale operators: Update and improve technical and managerial knowledge of the operators

2. Analysis of management models for municipal operators (retail) in order to facilitateand promote the agreggation process

3. Analysis of municipal concession contracts

• Specific EU funding of 75 M€ available for aggregated operators (POSEUR)

17

TECHNICAL SUPPORT UNIT

Results

• Analysis and public information about 2 success cases (motivations; difficulties; critical success factors; results): Ex. Águas do Ribatejo;

• Analysis of different statutory schemes and management models available for municipal services

(Assign the responsibility for the service to an Intermunicipal Community; Creation of an Association of Municipalities for Specific Purposes; Creation of Intermunicipalized Services (directmanagement); Creation of and intermunicipal company(delegation); Expansion of an existing municipal company; Creation of a State-munipalities partnership; Intermunicipal concession to a private company);

• Definition of nine pilot cases (see map);

Pilot cases

18

TECHNICAL SUPPORT UNIT

Results (cont.)

• Applied study of each pilot based on indicators (analysis of profile indicators of the operators involved in order to identify potential synergies; analysis of economic and financial indicators; predictive analysis of impacts and evolution of tariffs in the aggregation and for each of the non-aggregated operators);

• Technical support and capacity building of operators regarding the upscaling to an aggregated operator (ex: step-by-step information to the operators about the aggregation; definition of a draft contract for the constitution of the new aggregated operator; definition of the economic and financial model).

WATER AND WASTEWATER SECTOR REGULATION IN PORTUGAL

Objectives of regulation

The regulatory authority (organization ; governance model)

Approach to regulation and regulatory model

Process and methodology

20

ROLE OF REGULATIONINSTITUTIONAL DEVELOPMENT OF REGULATION

1993 1997 2009 2014

Opening of water services to private participation (concessions)

Regulates concessions

Regulates all operators

Instituto Regulador de Águas e Resíduos (IRAR) –Institute for the Regulation of Water and Solid Waste

Entidade Reguladora dos Serviços de Águas e Resíduos

(ERSAR, IP) – Water and WasteServices Regulation Authority

ERSAR as an independent

regulation authority

Re-enforced powers and independence

(Law nº 10/2014, 5 march)

2013

Privatization of the waste servicestate owned concessionaires

capital

21

ROLE OF REGULATIONGOALS OF REGULATION

Water operatorprotection

Contribution to the economicsustainability of the operators and their

interests

Consumerprotection

Protection of user's interests (access to the service, quality of service and

pricing)

Environmentalprotection

Contribution to the environmentalsustainability (impacts on water, air

and land)

22

ROLE OF REGULATIONGOALS OF REGULATION

In detail:

Contribute to the universal access to water and waste services with a good quality and affordableprices

Contribute to the economic efficiency and sustainability of the operators

Limit the market power of monopolies

Contribute to a stable and predictable environment that enables investment in infrastructure

Set incentives to share efficiency gains with consumers

Avoid risks of operators failure to provide the services

Disclose acessible information to consumers and operators

Protect users (complaint analysis, infractions proceedings, etc.)

Protect the environment, avoiding negative impacts

Prevent long-term scarcity of water resources

23

INTERNAL ORGANIZATION

Board of Directors

Advisory Council

Tariff Council

Statutory Auditor

6 operational departments covering engineering, economics and legal expertise + 3 support departments

3 members appointed for a 6 year non-renewable term after parliamentary hearing

2 advisory councils with representatives of all the major stakeholders:

Advisory Council – Appraisal and advisory role on major guidelines of ERSAR's activity(35 members)Tariff Council – appraisal and advisory on the tariff regulations and economic matters (18 members)

Follows and controls the financial management of ERSAR

• Functional, organic and financial Independence from theGovernment

• Strong organizational and technical capacity

• Small structure (90 employees)

24

INTERNAL ORGANIZATION (UNTIL JAN. 2018)

• Internal and functional organization based on regulation areas and expertise

• 5 operational departments: water and waste engineering, economics, drinking water quality and legal

• 4 support departments: strategic projects, Administration and HR, Information Tech and support to the management

25

INTERNAL ORGANIZATION (SINCE FEB. 2018)

• Internal and functional organization focused on the "client" (consumer and operators), with multidisciplinary units

• 6 operational departments: Waste Systems Department (multimunicipal concessions), Water Systems Department (multimunicipalconcessions), Contract Management Department (municipal delegations and concessions), Direct Management Department (municipalities), Legal Department and Quality Department.

• 3 support departments: Administration and HR, Technology and Information and support to the management

26

REGULATORY MODEL

Structural regulation

Organisation of the sectors

Legislation of the sectors

Regulation of utility behaviour

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

Regu

lato

ry m

odel

Regulatorysynergies

27

STRUCTURAL REGULATION

Cooperation with the Government in the formulation of the national strategies

Proposal of measures targeted at solving dysfunctions

Monitoring and regular reporting on the degree of implementation of the national strategy

Proposing new legislation or upgrading of legislation

Approving regulations (regulatory procedures, tariffs, commercial relations, …)

Issuing recommendations

Strategic Plans

Sector legislation

ERSAR's Regulations

ERSAR's Recommendations

28

REGULATION IN PORTUGALLEGISLATIVE AND REGULATORY FRAMEWORKFramework Law for Regulation Authorities

In order to pursue their mandate with independence, independent regulation authorities are entitled to:

• Regulate

• Approve regulations

• Impose penalties

Set or support tariff definition, set rules of access to the regulated activity, ensure the fulfillmentof public service obligations, apply laws and regulations, …

Define and approve regulations and other general rulesDefine and approve instructions or other particular rules aimed at interests, obligations or rights

of operators or regulated activities or their users

Supervise and audit the enforcement of laws, regulations and contracts by regulated entitiesEnact sanctioning procedures or report infractions to the responsible authorities

29

STRATEGIC AND LEGAL FRAMEWORK

Strategic Plans

Sector legislation

ERSAR's Regulations

ERSAR's Recommendations

PENSAAR 2020 (water & wastewater)PERSU 2020 (municipal waste)

Special rules: ERSAR's Bylaw (Law no. 10/2014)Sanctions Scheme(to be approved)

Statutory scheme for multimunicipal (bulk) systemsStatutory scheme for municipal (retail) systems

Statutory scheme for drinking water qualityGeneral rules: About local authorities, companies, public tendering, consumption, …

Tariff RegulationsRegulatory Procedures Regulation

Customer Relations RegulationQuality of Service Regulation

Tariff Recommendation, Septic Tanks Recommendation, Storm water Recommendation, …

30

STRUCTURAL REGULATION

ERSAR's regulation

• Densify and detail existing legislation

Approval procedure

• Public consultation (available on ERSAR's website and directly communicated to main stakeholders)

• Hearing of ERSAR's advisory body

• Report analysing all contributions receivedProcedural legitimacy

mechanisms

31

MANAGEMENT MODELS

Owner – has the ultimate responsibility for the service

Basic sanitation (drinking water supply, urban wastewater management and municipal waste management) is a municipal responsibility

The State has a subsidiary intervention

• In systems supplying two or more municipalities

• Need to intervene for reasons of national interest

• Activity limited to bulk service – municipal autonomy is preserved

Ownership

State

Municipalities

32

MANAGEMENT MODELS

Management model

• It is about how the owner decides to organize service supply

• It comprises different types of operators – responsible for service supply

• Determines different relations between owner/operator/ERSAR

• Must not affect the relation between the operator and the consumer

Ownership

State

Municipalities

Management model

Direct management

Delegation of service

Concession of service

Direct management

Delegation of service

Concession of service

Operator

State

State-owned company

State-owned company

Municipal services

Partnership between Stateand municipalites

Private company

Municipalized services

Association of municipalities

Municipal company

Parish

33

CONTRACTS FOR THE MANAGEMENT OF WATER SERVICES IN PORTUGALWith public-owned companies – in house organization

• Public procurement rules do not apply

• But there should be clear mandate set out in a contract (accountability)

With private operators – Public Private Partnership

• There is competition for the market – private operator

is selected through a competitive procedure

• Contract terms result from the conditions set in the tender and in the operator's bid

• Modifications are limited by the need to respect basic initial terms

"Concession" if with limited duration "Delegation" if for undetermined duration

Only operation (Affermage)OR Investment and operation

34

PUBLIC POLICIESMANAGEMENT MODELS – Private Sector

State owned-systemsManagement model Operator Public-private partnership?

Direct management State

Delegated management State owned company (unlimited duration)

Concessions State owned company (limited duration) (institutional – joint venture)

Municipal owned-systemsManagement model Operator Public-private partnership?

Direct managementMunicipal services

Municipalities association

Delegated management

State and municipal owned company (institutional – joint venture)

Municipal owned company (institutional – joint venture)

Parish

Concessions Private company (contractual – private concessionaire)

35

CONCESSION CONTRACTS WITH STATE-OWNED COMPANIES

Object:Build & Operate bulk regional

systems

Award:Direct adjudication through

legislative act + contract

Renegotiation:The contract can be modified if required to comply with new

needs (public interest)

Concessionaire's remuneration:Tariffs set each year according to

a cost-plus model

Regulation:Regulator issues opinion prior to

contract celebration or modification and sets tariffs

annuallyMonitoring of contract

execution

Duration10 to 50 years

36

DELEGATION CONTRACTS WITH MUNICIPAL-OWNED COMPANIES

Object:Build & Operate bulk or retail

services

Award:Direct adjudication

Renegotiation:Contract sets conditions for 5 years (within a context of a 15

year projection) and is reviewed every 5 years

Operator's remuneration:Tariffs set in the contract,

updated annually (within each 5 year period) based on

automated inflation-based formula

Regulation:Regulator issues opinion prior to

contract celebration or modification and tariffs update

Monitoring of contract execution

DurationNo time limit

37

CONCESSION CONTRACTS WITH PRIVATE OPERATORS

Object:Operation/affermage (1st

generation)AND

Build & Operate (2nd generation)Bulk or retail

Award:Public procurement procedure

(multiple award criteria –proposed tariffs have higher

weigh)

Renegotiation:Risk allocation clause

Mutually agreed modificationUnilateral modification

Concessionaire's remuneration:Tariffs proposed by the

concessionaire in the awarding procedure, updated annually

based on automated inflation-based formula

Regulation:Regulator issues opinion prior to

contract celebration or modification and tariffs update

Monitoring of contract execution

Duration5 to 50 years

(legislative reform 2009) > maximum duration of 15 or 30

years

38

REGULATION CYCLELegal and contractual monitoring of the utilities

ERSAR intervenes in all key moments of an operator lifecycle

• Creation

• Modification

• Termination

• Conflicts

Utility

Regulator

Consumer

Conciliation between parties

Contract modification and

renegotiation

Contract termination

Reconfiguration and merger of

utilities

Monitoring legal and contractual

compliance

Tender process and contract specification

Regulating main steps of the lifecycle of the utilities

39

REGULATION CYCLELegal and contractual monitoring of the utilities

Control of operators' compliance with applicable law and contracts throughout their lifecycle

• Analysis of tender procedures (concession) and contract modifications – non-binding opinions published on ERSAR's website

• Monitoring of contract execution – audits

• Imposition of fines in case of breach of law

Hard-law instruments

Soft-law instruments

40

AUXILIARY REGULATORY ACTIVITIESTechnical support to the utilities:

- The large number, diversity of size andcapabilities of utilities drives ERSAR topromote technical support

- Distribution of Technical guides and more than 20training actions p/year

- The Annual Report on Water and Waste Services in Portugal (RASARP) annually discloses all relevant information about the water and waste sectors based on an economic and quality of service assessment

4141

REGULATION OF WATER SERVICESPublicizingThis information is made public both after analysis and as raw data, so that it can be used by all thestakeholders, media and investigators:

Paper version

ERSAR's website

Smartphone app

42

REGULATION CYCLEAssessment of consumer complaints:

- Monitoring complaints and their resolutionbetween utilities and consumers andcontributing (when necessary) for theirbetter resolution

- Periodic statistic report (public)

- Access via Internet to status informationon complaint

Utility

Regulator

Consumer

Arguments from the consumer

Arguments from the utility

ERSAR recommendation for the resolution

Complaint

4343

- Promotion of efficient and affordable tariffs - Promotion of the economic & financial sustainability of the utilities

REGULATION CYCLEEconomic regulation

Utility

Regulator

Consumer

Right-of- reply by the utilities

Analysis of the proposal by ERSAR

Annual execution of the budget by the utility

Approval of the tariff by ERSAR

Proposal of budget and tariff by the utility

Assessment specification by ERSAR

Annual economic regulatory cycle for state-owned utilities

Random supervision by ERSAR

Reporting by ERSAR

Validation & processing of the results by ERSAR

Reception of the final results by ERSAR

Utility

Regulator

Consumer

Tariffs between operators and for consumers

Approval of the budget and tariff by the municipalities

Proposal of budget and tariff by the utility

Assessment specification by ERSAR

Annual economic regulatory cycle for municipal utilities

Random supervision by ERSAR

Reporting by ERSAR

Validation & processing of the results by ERSAR

Reception of the final results by ERSAR

Charges to consumers' publication

ERSAR issues opinion on the

compliance with regulations

44

REGULATION CYCLEEconomic regulation

Tariff definition is different depending on the management model/service ownership:

• State owned multimunicipal concessions:

• Tariffs are defined by ERSAR, according to a cost plus model

• Municipally owned direct and delegated management operators:

• Tariffs are approved by local competent authorities, after obtaining ERSAR’s opinion on the tariff proposal, focused on cost recovery levels and compliance with existing rules

• Municipally concessions:

• Tariffs are approved by local competent authorities after obtaining ERSAR’s opinion on the compliance with the contract and existing rules

45

REGULATION CYCLEEconomic regulation

Annual assessment of the economic performance for each utility Annual benchmarking

between utilities regarding the economic performance

Assessment of the evolution for the economic performance

4646

ECONOMIC REGULATIONObjectives

Economic objective of cost coverage(efficiency scenario)

Social objective of tariff affordability

- Operational costs- Investment costs

(expansion, renovation and/or maintenance)

Tariff definition has to balance between continuous and efficient service delivery, efficient water use and social concerns with access

Objetives of the regulation authority:

4747

ECONOMIC REGULATIONObjectives

Different regulated operators have different objetives

Operators whose goal is to improve economic and financial results(Excessively high tariffs/ reflecting monopoly power)

vs Operators whose goal is to define low tariffs for end-users

(Excessively low tariffs)

The main goal of a good regulation system is the allignement of the dicisions of regulated operators with the best possible decisions from a societal perspective regarding tariffs, and

expansion, renovation and maintenance investments

48

COST PLUS MODEL

Suited for less mature sectors

Simple calculations

Advantages /Disadvantages

Weak efficiency drivers

Risk-free for the operator

Unjustified investmentdecisions

Key highlights

• Tariffs defined annually on the basis ofanual budgets that include all serviceprovision costs

• Deviation of operational and financingcosts, and investments included in the tariff(lack of a risk matrix)

• Return on capital garanteed by contract,regardless of performance (based on sharecapital interest rate + legal reserve)

• Uneven financing structures and high tariffdispersion

4949

ECONOMIC REGULATIONEvolution of the regulatory model

Objectives of the new model

– Efficiency incentives

– Ensure service quality (based on ERSAR's indicators)

– Ensure public service obligations (continuity, etc.)

– Transparency and stability

Cost reduction

Incentives for responsible consumption

InvestImprove financing

conditions

𝑇𝑎𝑟𝑖𝑓𝑓𝑠 =𝑂𝑃𝐸𝑋 𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 + 𝑅𝑒𝑡𝑢𝑟𝑛 𝑅𝑎𝑡𝑒 𝑥 𝐵𝐴𝑅 + 𝐴𝑚𝑜𝑟𝑡.

𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑖𝑒𝑠

Tools of the new model

• Price fixing model

• Adequate return on investment rate

• Incentives for meeting the targets set

50

ECONOMIC REGULATIONMunicipal owned systems

Main regulation tools

Law no. 73/2013 (Financial Regime of Local Authorities and Intermunicipal entities) sets some salient principles concerning tariff definition for water and waste services

DL no. 194/2009: establishing the legal regime for water and waste municipal services

Recommendation no. 1/2009: "Tariff Definition"

Recommendation no. 1/2010: "Content of invoices for drinking water supply, wastewatermanagement and municipal waste management services"

Recommendation no. 2/2010: "Criteria for calculating charges of invoices for end-users of drinkingwater supply, wastewater management and municipal waste management services"

Technical Guide no. 18: "Calculation of costs and revenue in water and waste services operating underdirect management"

51

ECONOMIC REGULATIONRecommendation no. 1/2009: “Tariff Definition”

Scope• All operators of retail services

General principles

• Cost recovery

• Protection of user's interests

• Affordability

• Autonomy of service providers (municipalities)

• Avoid cross-subsidization (between services)

52

ECONOMIC REGULATIONCost recovery

Cost recovery enables:

• Operator's sustainability• Sustain and improve the quality of service• Expansion and retrofitting of the systems• Intergenerational responsibility

Construction and operation costs must be covered:

𝑇𝑎𝑟𝑖𝑓𝑓𝑠 =𝑂𝑃𝐸𝑋 + 𝐴𝑚𝑜𝑟𝑡. +𝐹𝑖𝑛𝑎𝑛𝑡𝑖𝑎𝑙 𝐶𝑜𝑠𝑡𝑠 − 𝑂𝑡ℎ𝑒𝑟 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠 + 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑟𝑒𝑚𝑢𝑛𝑒𝑟𝑎𝑡𝑖𝑜𝑛

𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑖𝑒𝑠

Total revenue (€/year)

Total costs (€/year)

53

ECONOMIC REGULATIONRecommendation no. 1/2009: “Tariff Definition”

Costs with the

provision of services

Revenue needed to

finance costs

Taxes(T2)

Tariffs(T1)

Transfers(T3)

Promote "efficiency" to reduce costsand, therefore, tariffs (important roleof regulation) This option is recommended by the

European Directive (user-paysprinciple), promoting equity andawareness of good water use.

Option to be used whennecessary, as it allows to reducecosts to the consumer, although itcontradicts the user-paysprinciple.

Option to be used wheneverpossible, as it reduces consumercosts (eg EU funds).

The reduction of T1, at the expense of T2 and T3, should be a political decision of the competent authorities, taking into account the need for tariff moderation.

54

ECONOMIC REGULATIONRecommendation no. 1/2009: “Tariff Definition”

Ensure an adequate tariff structure:

Tariffs(T1)

Only usage tariff (variable

component)

Only availabilitytariff(fixed

component)

It does not reflect on the consumer the quantity consumed, encouraging waste and issuing the wrong signal from an environmental point of view

It does not have an equal impact on costs for all consumers, benefiting those who have more than one dwelling over other single dwellers

Fairer solution for consumers

Usage tariff(variable

component)

Various types of tariffs can be used, all of which are capable of generating the necessary revenues to cover the costs.

The abolition of the fixed component (≈ 30% of revenue) would lead to an increase in the variable component, in order to financially rebalance the provision of services!

Availability tariff(fixed

component)

55

ECONOMIC REGULATIONRecommendation no. 1/2009: “Tariff Definition”

The absence of availability tariff would unfairly benefit 25-30% of households (with more than one housing), subsidized by the remaining (single housing) households.

That is, for an equal total consumption, Consumer B, which forced society to invest in the infrastructure of three dwellings, will not pay more, as it should, nor even pay the same, but will pay less than Consumer A, creating a situation of total lack of equity!

Consumer A led the company to invest in the infrastructure of a single housing

Consumer A, consuming the volume V1, would pay P1, against the existing tariff

Consumer B forced the company to invest in the infrastructure of three housing units

Consumer B, consuming the volume V2 = V2a + V2b + V2c = V1, would pay P2 <P1, due to

progressive blocks

56

ECONOMIC REGULATIONRecommendation no. 1/2009: “Tariff Definition”

Structure of costs vs Tariff structure

Current cost structureCurrent tariffs

structure

Fixed costs ("Bulk" + "Retail" 75% 33%

Variable costs ("Bulk" + "Retail") 25% 67%

Fixed tariff 6,05 €/ month

Variable tariff 1,19 €/m3

Tariff structure should follows structure of costs

Sometimes not possible due to environmental reasons

57

ECONOMIC REGULATIONRecommendation no. 1/2009: “Tariff Definition”

3º Block (15-25m3/ month)

(~10 a 20% of users)

2º Block (5-15m3/ month)

(~30 a 60% of users)

1º Block (0-5m3/ month)

(~25 a 45% of users)With main objective ofsocial protection

Availability tariff

(fixed component)

Usage tariff(variable component)

4º Block (25m3/ month)(~0 a 10% of users)

With main objective ofcost recovery

With main objective ofenvironmental penalty

Family tarifffor large families

Social tariff for low income families Prohibition of autonomous collection of activities

inherent to the normal provision of services (water meter, connection lines, etc.)

Seasonal tariffin tourist areas with water shortages

Prohibition of various existing distortions ("zeroed" blocks, oversized counters, etc.)

With main objective ofcost recovery

58

ECONOMIC REGULATIONRecommendation no. 1/2009: “Tariff Definition”

1. Special tariffs (Social and Numerous Families)

59

ECONOMIC REGULATIONRecommendation no. 2/2010: "Criteria for calculation"

1. Determination of the cost of the provision of each regulated services

60

ECONOMIC REGULATIONRecommendation no. 2/2010: "Criteria for calculation"

2. Tariffs definition

3. Definition of sources of funding

Subsidies

Municipal budget

Tariffs

Total costs of provision of services

Fin

anci

ng

sou

rce

Affo

rdab

ility

61

ECONOMIC REGULATIONAffordability

Average tariff charges (€/year/120 m3)

Average income per family (€/year)

• Affordability Indicator

Water Supply

WastewaterManagement

Good affordability

Average affordability

Poor affordability

62

ECONOMIC REGULATIONAffordability

Current levels of affordability allow for an increase in tariffs

63

REGULATION OF WATER SERVICES: HOW ?ANNUAL CYCLE

Technical guide and files

Beginning of the cycle

January

Data treatment by ERSAR

June to August

Publishing and publicizing

November

Data validation by ERSAR (audits)

May to June

Data reportby the utilitiesMarch and April

Right-of-reply by the utilities

September

Individual file

Portal ERSAR

Annual report

Website App ERSAR

Audits

64

REGULATION OF WATER SERVICES: HOWCLEAR PROCEDURES AND DEFINITIONS

Technical guide for the water and wasteservices quality of service assessment 3rd generation of indicators

Establishes all the definitions of data andindicators required, as well as the minimumprecision and accurateness of the information

This manual applies to every operator of waterand waste services , regardless of the activityscope, nature, management model or size ofthe operator

65

1997 2004 2009 2016

Regulation of concessions Regulation of all utilities

3rd generation1st generation

2011

2nd generation

20 indicators 16 indicators 14 indicators

QUALITY OF SERVICE ASSESSMENT3 GENERATIONS IN 12 YEARS

66

The three generations were inspired by the performance indicators published by IWA regarding the water supply andwastewater management services

Common goals:

compare results between entities (benchmarking)

encourage entities towards efficiency and effectiveness

consolidate a culture of information: concise, credible and easy to understand.

The indicators are organized in 3 groups:

1. Protection of user interests: based on accessibility criteria and quality of the provided service.

2. Service provision sustainability: aim to assess whether basic measures are being taken to ensure that theservice provided is sustainable; this group is further subdivided into the aspects of economic sustainability ofthe service, infrastructural sustainability of the service and physical productivity of human resources.

3. Environmental sustainability: aim to assess the level of protection of environmental aspects associated withthe operator’s activities; is further subdivided into efficiency aspects in the use of environmental resourcesand the prevention of pollution.

ASSESSMENT SYSTEMSCOMMON ASPECTS TO THE 3 GENERATIONS

67

Protection of

user interests

DR

INK

ING

WA

TE

R S

UP

PLY

IND

ICA

TO

RS

Service

provision

sustainability

Environmental

sustainability

Accessibility of service for users

AA01 – Service coverage

AA02 – Affordability of the service

Quality of service provided to users

AA03 – Service interruptions

AA04 – Safe water

AA05 – Reply to written suggestions and complaints

Economic sustainability

AA06 – Cost recovery ratio

AA07 – Connection to the service

AA08 – Non-revenue water

Infrastructural sustainability

AA09 – Mains rehabilitation

AA10 – Mains failures

Physical productivity of human resources

AA11 – Adequacy of human resources

Efficient use of environmental resources

AA12 – Real water losses

AA13 – Standardised energy consumption

Efficiency in pollution prevention

AA14 – Proper sludge disposal

Fed by

86 variables

DRINKING WATER SUPPLY PERFORMANCE INDICATORS3rd GENERATION

68

Protection of

user interests

WA

ST

EW

AT

ER

IN

DIC

ATO

RS

Service

provision

sustainability

Environmental

sustainability

Accessibility of service for users

AR01 – Service coverage through sewerage networks

AR02 – Affordability of the service

Quality of service provided to users

AR03 – Flooding occurrences

AR04 – Reply to written suggestions and complaints

Economic sustainability

AR05 – Cost recovery ratio

AR06 – Connection to the service

Infrastructural sustainability

AR07 – Sewer rehabilitation

AR08 – Sewer collapses

Physical productivity of human resources

AR09 – Adequacy of human resources

Efficient use of environmental resources

AR10 – Standardised energy consumption

Efficiency in pollution prevention

AR11 – Accessibility to the wastewater treatment

AR12 – Control of emergency discharges

AR13 – Compliance with discharge permit

AR14 – Proper sludge disposal

Feed by 86 data

Fed by

85 variables

WASTEWATER MANAGEMENT PERFORMANCE INDICATORS3rd GENERATION

6969

REGULATION OF WATER SERVICESADAPTABLE REFERENCE VALUES AND SEMAPHORIC EVALUATION

For each indicator we have defined reference values (range) for good, average or poor quality of service, and theresults are presented with a a green, yellow or red ball, like a traffic light for each operator:

– Ex 1. AR02b – Affordability of the service (%)

– Ex 2. AR01b Physical accessibility to the service(%)

APR – Rural areas; AMU – Periurban areas; APU – Urban areas.

This allows to assess all operators, treating equally what is equal, and differently what is different.

Reference values can be gradually adapted in order to push for improvement.

Indicator Boa Mediana Insatisfatória

0 - 0,5% 0,5 - 1,0% 1,0% - + ∞Acessibilidade económica do serviço

Indicator Boa Mediana Insatisfatória Boa Mediana Insatisfatória Boa Mediana Insatisfatória

70 - 100% 60 - 70% 0 - 60% 85 - 100% 70 - 85% 0 - 70% 90 - 100% 80 - 90% 0 - 80%

APR AMU APU

Acessibilidade física do serviço

7070

REGULATION OF WATER SERVICESCHARACTERISATION OF THE OPERATOR

Alongside with the individual file for each operator, a section with the main figures associated with the operator ispresented to make a global characterisation

7171

REGULATION OF WATER SERVICESEVALUATION OF THE OPERATOR

The individual file presents the evaluation of the quality of service for each indicator, and its evolution.

7272

REGULATION OF WATER SERVICESBENCHMARKING

For each indicator the operators are ranked and compared with theirpeers, organized in different regions and different types of áreas (rural, urban).

This information allows to easily identify the best performingoperators, those who are above and bellow average, or those who are within the different reference levels.

Benchmarking is a powerful regulating tool, as it creates an artificial competitive environment within the sector, which can lead to the

improvement of the utilities’ performance.

7373

Nearly thirteen years after the implementation of the 1st generation of the quality of

service assessment system, the system remains a key tool for regulation,

recognized by the Portuguese water and waste services' stakeholders.

FINAL REMARKS

It helps to monitor the utilities' performance, comparing between the expected

and the real performance results and between current and past performance

results, allowing to identify and prioritize improvement opportunities.

The information reported on the scope of the quality of service assessment allows

Portugal to respond with reliable information about the water sector

whenever requested.

74

DRINKING WATER QUALITY REGULATIONIMPROVEMENT OF THE DRINKING WATER QUALITY IN PORTUGAL

40 %

50 %

60 %

70 %

80 %

90 %

100 %

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% S

afe

Wate

r

Year

DL 74/90 DL 236/98DL

243/2001

DL 306/2007

50 %

99 %

The drinking water controlled and with quality according the European requirements improved 49%

between 1993 and 2017 (includes all drinking water suppliers and all water supply zones)

75

THE PORTUGUESE REGULATORY MODELDRINKING WATER QUALITY REGULATION

The Portuguese drinking water quality regulatory model is:

• A process based on the Portuguese drinking water legislation

• A recognized model by regulators networks (ENDWARE and REGNET)

• A recognized model by EC

• Based on a risk-based approach, throughout the supply chain:

Directive (EU) 2015/1787 transpositionWater Safety Plans, from source to consumer tap

ERSAR promotes:

• Technical support and guidelines documents

• Communication plans to consumer

76

- Assess every year 100% of the water supply utilities

- It is an effective, well defined and stable procedure

Legal framework:

- Decree-Law no. 306/2007, of 27 August; transposition of the Directive 98/83/CE, revised bythe Decree-Law no. 152/2017, wich made thetransposition of Directive (EU) n.º 2015/1787.

- Decree-Law no. 23/2016, of 3 June, transpositionof Directive EURATOM (radioactive substances), also included on the Decree-Law no. 152/2017.

Utility

Regulator

Consumer

Execution of the PCQA by

the utility

Approval of the PCQA by ERSAR

Random inspection to laboratories by

ERSAR

Random inspection to the utility by ERSAR

Preparation of the PCQA by the utility

Assessment specification

by ERSAR

Annual drinking water quality regulatory cycle for each utility

Penalties to the utility by ERSAR

when appropriate

Reporting by ERSAR

Right-of-reply by the utilities

Validation & processing of the results by ERSAR

Reception of the final results

by ERSAR

THE PORTUGUESE REGULATORY MODELDRINKING WATER QUALITY REGULATION

77

Operational monitoring

• Preventive tool to improve drinking water quality

• Detects drinking water quality problems avoiding them to reach the consumers’ tap

Inspections, focused on:

• Risk assessment (critical utilities and parameters)

• Rectification non-compliances process

• Communication to consumer

• Operational monitoring

• Increasing the small WSZ with control (disinfection)

• Reliability of values reported

• Reliability of analytical results

THE PORTUGUESE REGULATORY MODELDRINKING WATER QUALITY REGULATION

78

Strong links between ERSAR and:

Health authorities• Sanitary surveillance and risk analysis of the non-compliances• Declaration of National Health Authority (no epidemiologic outbreaks on drinking

water) Portuguese accreditation body

• LaboratoriesLaboratories associationsAgriculture authorities

• Definition of pesticides likely to be present in each supply zoneNuclear and Technological Institute

• Questions related with radiological parametersPortuguese environment agency

• Questions related with drinking water sourcesSafety food authorities

• Private drinking water suppliers and food industries

THE PORTUGUESE REGULATORY MODELDRINKING WATER QUALITY REGULATION

79

How does the procedure of non-compliances investigation work?

1. Water supplier communicates to Health Authority and ERSAR in 24 hours

2. For each non-compliance, the supplier carries out an investigation process with additional analyses (same consumer tap, other consumer taps, distribution network, water source, treatment plant, etc.). The process takes into account:

Parameter type and value deviation, historical data

Assessment risk by the health authority, etc.

3. Identification of causes, implementation of correctives measures and

verification analyses by supplier

1. Communication to consumers, if necessary

After consulting with the health authority, ERSAR

may determine the interruption of water

supply if there is risk for human health, or the

adoption of other measures

THE PORTUGUESE REGULATORY MODELDRINKING WATER QUALITY REGULATION

80

Establishment of an information management system (Portal ERSAR – online platform)

An advanced and effective national information management system was implemented, linking ERSAR with the water utilities and the water suppliers

Drinking water quality control program

Non- compliances

THE PORTUGUESE REGULATORY MODELDRINKING WATER QUALITY REGULATION

Water Quality Platform module

Quality of Service separator module

Thank you!