Regulation in the Water Sector Bill Kingdom, Eric Groom and Jonathan Halpern

Program Objective Address realities and practical issues in design of regulatory arrangements i.e. “rules and institutions which set, monitor, enforce and change prices and service standards for water providers Identify broadly applicable solutions to practical problems as well as project specific solutions

Motivation Diverse experiences on what constitutes “establishing sound regulatory framework”. Pat formulas: eg. “establish independent regulator”, “codify regulatory principles in law”. False dichotomies: contracts versus regulation, discretion versus contract completeness. Non sequitors: establish national body to “regulate” locally issued contracts/service providers .

Scope of Research Program 6 Activities: Short explanatory notes on key topics In-depth case studies Development of low-discretion rules for regulation Pro-poor regulation of water services Incentive mechanisms for management contracts Regulating publicly-owned WSS utilities Discussion will focus on the output of the first 3 activities. Thanks to BNWP, PPIAF and World Bank for funding

Limit the scope of regulation

Designing regulation Narrower scope? Many other options: e.g contracts, monitoring units Supporting or alternative policy options: OBA, decoupling prices and provider revenues, pre-set transition paths Use existing institutions

Key attributes of good regulation and regulatory design Coherence in analysis and decision-making between prices and service standards Predictability and credibility consistent over time based on known rules Legitimacy, transparency and accountability consistent with policy frameworks known, transparent processes basis of decisions/price changes disclosed

Regulation by contract can work – but it needs help

Design in the politics – transparently Pricing for essential services is ‘political’ Problem is non-transparent, short-term and time-inconsistent political intervention But government support and policy consistency is important for regulatory credibility and sustainability And government’s should make decisions on difficult policy trade-offs Need to allow for politics but through transparent mechanisms – eg OBA, concessions providing provider with contractually guaranteed revenues

Limit discretion to increase certainty Wide Discretion + Independence = high risk Combining wide discretion and independence of decision-making => high risk for service providers and governments => greater pressures and risk of intervention in practice Risks are larger if the starting prices are highly distorted or a long way from cost-recovery A transition path with less discretion up front may increase practical independence (eg ‘hybrid’ models)

Mechanisms for limiting discretion Prior specification of initial price path In legislation, regulation or contracts Clearer objectives, processes and methodologies Transparency & disclosure of analysis During review and in reporting of decision Mandatory use of experts (and disclosure) Effective appeals processes (including expert panels) “Low discretion rules” for price resets Can be incorporated in contracts, legislation or regulations Or in rules made by the regulator to self-limit discretion

Scope of Rules The rules focus on: The cost components or scheduled price/revenue resets The rules for an extraordinary review: i.e. Specification of method of triggering a review The processes for an extraordinary review The methodology to be adopted in assessing the impact of the trigger events on costs/revenues Translating cost/revenue impact into price adjustments Several important issues are not yet covered E.g. accounting rules, information collection and reporting, demand estimation

Summary…moving from the standard model

… to a better approach to regulatory design

To Find More Information Discussion Paper #6: Explanatory Notes on Key Topics in the Regulation of Water and Sanitation Services: http://siteresources.worldbank.org/INTWSS/Resources/WSS6-final.pdf Handbook for Evaluating Infrastructure Regulatory Systems (Ashley C. Brown, Jon Stern, Bernard Tenenbaum and Defne Gencer) : Coming to a website near you in November. Available now in hard back.