Consumer tariffs in practice

Transcription

1 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, Lisboa, Portugal 2007 IRAR Tel: , OECD Fax: November , JSPirar.geral@irar.pt,

2 Consumer tariffs in practice: the Portuguese experience Topics addressed 1 Framing the problem 2 Defining the guiding principles for a solution 3 Outlining, implementing and monitoring the chosen strategy 2

3 Framing the problem The 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. Retail water supply service providers Wholesale water supply service providers 23 wholesale water service providers who serve more than one municipality 275 retail water service providers, of which: 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 inhabitants 3

4 Framing the problem Financial 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 Combined wholesale water services Robust/ affluent Challenging Unsustainable 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. 4

5 Financial sustainability of wholesale operators The role of structural factors Although structural factors such as scale and demographic concentration play a key role, they do not tell the whole story Wholesale water supply turnover 2006 (1) A. Algarve A. Douro e Paiva Simtejo Analysis of the impact of contextual factors 700 A. Douro e Paiva Simtejo 600 Sanest A. Oeste Simria A. Cávado A. Mondego Thousands of households served (2) A. Algarve A. Ave A. Zêzere e Côa A.T.M. Alto Douro Simarsul A. Santo André A. Centro Sanest 300 A. Minho e Lima 200 A. Cávado A. Mondego Simarsul A. Oeste A. Zêzere e Côa A. Centro A.T.M. Alto Douro A. Centro Alentejano Simlis A. Minho e Lima Simria 100 Simlis A. Ave A. Centro Alentejo A. Norte Alentejano A. Norte Alentejano Million euros A. Santo André Area covered (Km²) (1) EPAL excluded from analysis because it is not a concession. Wholesale water supply activities cover Km², serve 1.2 million households and generate a turnover of 90 million euros. (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. 5

6 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 Days receivables of wholesale water service operators Recente evolution of wholesale average days receivables 2003/06 AdDP EPAL AdAlgarve AdM ondego Sanest Simlis AdM L AdOeste AdAve AdSA AdCentro Simarsul AdTM AD AdCA AdZC AdCávado Simria AdNA Simtejo SECTOR Dias Days receivables Retail average (25 to 40 days) 6

7 Retail price levels Insufficient 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. Retail water supply charges for residential customers Average for municipal concessions = 104/ household/ year Arithmetic average for 120 m³ water Média supply/ aritmética: year = 73/ 73/ household/ year Retail wastewater treatment charges for residential customers Average for municipal concessions = 43/ household/ year Arithmetic average for 120 m³ water Média supply/ aritmética: year = 22/ 22/ household/ year Average wholesale cost recovery levels 309 Portuguese municipalities (ranked in descending order) Sources: APDA Association of Portuguese Water Distributors, 2004; IRAR analysis. 7

8 Retail price levels Willingness to pay 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. How do you rate the quality of the water supply services you get? Bad 48% 9% 2% Average Good 41% Compared with the cost of other utilities my water bill is? Expensive 40% Cheap 6% 6% 48% Fair > 5 4% 2% 2 to 5 How do you rate the quality of the wastewater services you get? 18% Bad 47% Average 31% Good Would you be willing to pay a little bit more each month to guarantee a higher level of quality in your water services? 70% 9% 19% No < 2 Sources: IRAR Willingness to Pay Study, Results based on national survey comprising 1,010 face-to-face interviews of residential customers. 8

9 Willingness to pay Why not?... Yet, the more interesting issue is understanding why they are not willing to pay more... 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 I would pay more and nothing would change I already pay too much taxes 5% Business marketing challenge 16% 19% 44% Government/ Institutional marketing challenge 15% These services are already too expensive Its up to the government to guarantee these essential services Sources: IRAR Willingness to Pay Study, Results based on national survey comprising 1,010 face-to-face interviews of residential customers. 9

10 Affordability Identifying and quantifying the issue 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. Macro-affordability: Social issues in the provision and pricing of water services OECD, 2002 Micro-affordability: IRAR Affordability Study, 2007 (2004 data) Poland (99) Hungary (2000) Turkey (97) Portugal (97) - OECD Luxemburg (97) Netherlands (99) Austria (97) Germany (2000) England & Wales (97-00) Denmark (98) France (95) Slovakia (2001) Portugal (2000) - INE Scotland (97-00) Japan (2000) Italy (97) South Corea (97-98) USA (2000) Portugal (2004) - IRAR 2,2% 2,1% 1,2% 1,6% 1,0% 1,4% 1,0% 1,2% 1,2% 1,1% 0,9% 0,9% 0,8% 0,7% 0,7% 0,7% 0,6% 0,5% 0,4% 1,3% 1,5% 1,7% 2,4% Affordability threshold 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. 0% 1% 2% 3% 4% Water supply and wastewater charges as % of household disposable income Sources: IRAR Affordability Study, INE - Portuguese National Statistics Institute, National Survey of Household Expenditures, using UNESCO s COICOP classification,

11 Affordability Looking at the other 90% however, for the vast majority of Portuguese households, affordability is, fortunately, not an issue Residential utility expenditure as % of total household expenditure Portuguese average Restantes Household despesas 92,67% utilities 7,33% 1013/ year 106/ year Abastecimento Water supply e and saneamento wastewater 0,76% 0,76% Euros/ year 912 Annual household expenditure with different consumption categories Portuguese average ,33% 475/ year Residential Energia energy 3,44% (gas & electricity) 3,44% 310 Other household expenditures 92,67% 432/ year Telefone, Telco telégrafo e telefax services 3,12% 3,12% Clothing & footwear Personal transport vehicles Hygiene & personal care 218 Tobacco products 171 Alcoholic beverages 106 Water supply and wastewater services Sources: IRAR Affordability Study, INE The Portuguese National Statistics Institute, National Survey of Household Expenditures, using UNESCO s COICOP classification,

12 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. 250 Evolution of average prices per m³ and volumes supplied to end-users in Lisbon (1977/2000) Residential end-users 1986 Non-residential end-users 1986 End-user total Average price to endusers 150 (Esc/m 3 at constant 2000 prices) % vol (80-85) (1) % preço (80-85) 0 % - 8 % = % = % % Volume supplied to end-users in Lisbon city ( 000 m 3 ) Notes: (1) Estimates of demand-price elasticity in the literature tend to fall in the range of to Source: EPAL analysis; Commission staff working paper Water Pricing Policies in Theory and Practice, Jul

13 Framing the problem Understanding the current deadlock Social Environmental Distinct views on potentially conflicting goals among stakeholders and decision makers Economic efficiency 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. Business Very large heterogeneity of tariff structures in the sector Absence of a consensus around a common pricing framework Excessive complexity, politics and time-waste around tariff review processes Opportunistic and tactical reasoning behind tariff reviews Ad-hoc evolution of tariff structures Incomprehension and frustration among end-users and their representatives, amplified by the media Deficit of communication and pro-active end-user expectation management 13

14 Consumer tariffs in practice: the Portuguese experience Topics addressed 1 Framing the problem 2 Defining the guiding principles for a solution 3 Outlining, implementing and monitoring the chosen strategy 14

15 Guiding principles for a solution Promoting industry restructuring where it makes sense 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) common costs, income Wholesale water Wholesale supply water Wholesale serviceswastewater treatment Abastecimento and capital Saneamento em alta em alta Transfer prices/ prices charged to retail operators Allocation criteria for Auxiliary noncore, non regulated activities End-user tariffs Water services Retail water supply Retail water services Retail wastewater collection Abastecimento Saneamento em baixa em baixa 15

16 Guiding principles for a solution New national legislation 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 16

17 / m3 IRAR New national legislation Common tariff structure: rationale The rationale for a common pricing structure needs to be explicitly articulated, openly Custo marginal do serviço para o utilizador discussed, bought into and then, written in stone. Marginal cost of water supply service to end-users 1 household = (1 + VAT rate) = 1.45 business expenditure (1 CIT marginal rate) expenditure Nível de consumo por cada intervalo temporal de 30 dias) (m3) Wastewater variable = (Water volume x 0.8) x (water variable component) x relative cost = x% of water variable component (water volume) coefficient component Water consumption level during each 30 day interval (m³) 17

18 Consumer tariffs in practice: the Portuguese experience Topics addressed 1 Framing the problem 2 Defining the guiding principles for a solution 3 Outlining, implementing and monitoring the chosen strategy 18

19 New national legislation Common tariff structure: details Residential end-users Non-residential end-users 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) Water supply tariff structure Fixed (availability) tariff ( / 30 days), differentiated according to meter nominal diameter Flat variable tariff ( / m³), set equal to the 3 rd 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 19

20 Euro/ mês m3 IRAR Outlining the strategy Decision right allocation 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 Custos unitários Custos do serviço mensais de do abastecimento serviço de abastecimento e saneamento e por saneamento m3 de água consumida Illustrative Ilustrativo Monthly unit Monthly costs of costs water of services water services to end-users to end-users per m³ of water consumed Residential Mínimo (minimum) - Doméstico Illustrative Máximo Non-residential - Não doméstico (maximum) Non-residential (maximum) Máximo - Não doméstico Residential Máximo - Doméstico (maximum) Residential Máximo - Doméstico (maximum) Mínimo Non-residential - Não doméstico (minimum) Non-residential (minimum) Mínimo - Não doméstico Mínimo Residential - Doméstico (minimum) Monthly m3 de water água consumida/ consumption mês (m³) 20

21 Implementing the strategy The role of the regulator 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. Analysis of some tariff proposals Sept. to December Final decision by local authorities Nov. to January Reporting to IRAR (tariffs and operator financial statements) Feb. to May IRAR recommendation or periodic update Until June Regulatory cicle IRAR Data analysis, validation, interpretation and publication March to October 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 21

22 Monitoring the strategy The convergence zone IRAR will monitor the pace of conversion towards a full cost recovery zone, which in some cases will be quite challenging Retail water supply charges for residential customers (120 m³/ year) Convergence zone simulation Retail wastewater treatment charges for residential customers (120 m³/ year) Convergence zone simulation 309 Portuguese municipalities (ranked in descending order) Sources: APDA Association of Portuguese Water Distributors, 2004; IRAR analysis. 22

23 IRAR Regulation as an instrument to improve the efficiency and the effectiveness of public water and waste services Thank you! IRAR Instituto Regulador de Águas e Resíduos Centro Empresarial Torres de Lisboa, Rua Tomás da Fonseca, Torre G 8º, Lisboa, Portugal Tel: IRAR , Fax: , irar.geral@irar.pt, OECD 14 November JSP