Resource and Economic Efficiency of Water Distribution Networks in the EU Copenhagen June 2011

1. Resource and Economic Efficiency of Water Distribution Networks in the EU Copenhagen June 2011 By John Maguire - Solventa

2. Contract & Contract Objectives TITLE: Resource and Economic Efficiency of Water Distribution Networks in the EU EC contract that we are implementing as part of the EC Water Scarcity and Droughts Policy Review OBJECTIVE: The overall objective of the project is to provide input to the EC which can assist in developing a policy to improve efficiency in the use of water resources by water supply utilities in the EU. To this aim, the project will develop 7 pilot studies in different parts of Europe.  The pilot studies will analyze and quantify the factors of relevance for leakages at a river basin level and determine the links between the leakages and the cost structures in each basin, inter alia the economic level of leakage (ELL). 

3. MAIN OUTPUTS The expected main outputs of the project are: A consolidated analysis of the 7 pilot studies into a ‘Water Efficiency Report’ where recommendations on how the findings of the project could be integrated into policy and the impacts thereof, and A ‘Policy Paper on Water Efficiency’ to support the improvement of water efficiency across the EU, and more specifically the development of the forthcoming ‘Blueprint to safeguard European waters’ by the end of 2012.

4. METHODOLOGY & PILOTS • METHOD: • Step 1- Design of the Work • Step 2 - Preparation of the 7 Pilot Studies • Step 3 - Preparation of a consolidated ‘Water Efficiency Report’ for the contract • Step 4 - Preparation of a ‘Policy Paper on Water Efficiency’ and • Step 5 - Work with the Commission to develop and complete 3 supporting ad-hoc briefing notes • PILOTS: • Pilot 1: UK, Anglian River Basin, Essex & Suffolk Water • Pilot 2: Turkey; Yeşilırmak River Basin, City of Amasya Water Utility • Pilot 3: France; Adour-Garonne Basin, Suez (Bordeaux) • Pilot 4: Germany, Danube (Donau) River Basin, SWM Services (Munich) • YET TO BE CONFIRMED • Pilot 5: Spain, Guadalquivir River Basin District, Empresa Municipal de Abastecimiento y Saneamiento de Aguas de Sevilla (Emasesa) • Pilot 6: Romania, SH Banat River Basin, Timisoara Water Utility • Pilot 7: Oporto, Portugal, DouroRiver (ARH Norte), Águas do Porto

5. Scope of Analysis The scope of the analysis for each pilot study shall include: Context Analysis (including inter-alia at national, basin/sub-basin and water utility level) Technical & Operational Analysis (of the specific pilot water utility) Financial & Economic Analysis

6. TECHNICAL v ECONOMIC EFFICIENCY 1 • indicators of technical efficiency are completely separate from indicators of economic efficiency and do not go hand in hand • (e.g. in economic terms water only has notable value if demand exceeds supply. There are many examples of utilities spending a lot of money to achieve high levels of technical efficiency where the additional costs incurred to achieve these technical levels yield no additional benefit to society, hence the cost exceeds the benefit and are economically inefficient.)

7. TECHNICAL v ECONOMIC EFFICIENCY 2 EXAMPLE 1: UTILITY A: - 74% technical losses - Carries out works in pressure management and DMA zoning to reduce losses to 50%. - When it reaches 50% losses because it has excess availability of raw water resources of good quality, has no pumping and only chlorination as a treatment cost, there is no economic benefit for it to achieve higher technical efficiency BUT it is economically efficient.

8. TECHNICAL v ECONOMIC EFFICIENCY 3 EXAMPLE 2: UTILITY B: - 18% technical losses (has invested heavily in renovating its network) – technically very efficient but could easily have operated with 35% losses (raw water quality was good and abundant / pumping requirements were moderate) - at 35% losses its water tariffs were EUR 1.50 / m3 - to acheive 18% technical losses it had to invest heavily in networks and has now to service that debt as well as maintain the additional new infrastructure. New tariff as a result are EUR 1.89 / m3 to customers. - So, same quality of service for a higher price – benefit to society??? - Technically efficient, but economically inefficient.

9. TECHNICAL v ECONOMIC EFFICIENCY 4 EXAMPLE 3: UTILITY C: - 28% technical losses - Has a lot of natural disadvantages: poor quality of raw water resources, raw resources must be pumped and fully treated - It serves an old city with an old network (with major sections >100 years) - Wastewater must also be pumped a lot and treated to a high level as it discharges to an inland sensitive receiving water. - it serves a busy urban area where the cost of construction and road-opening to carry out works on the network are high. - Cost of water is 1.02 EUR/m3 with full cost recovery. Technically efficient, and economically efficient.

10. WATER UTILITY EFFICIENCY IN A BASIN CONTEXT • Each river basin (sub-basin) has its own particular context • Physical • Financial • Legal / Institutional / Regulatory • Socio-economic • That impacts the technical & economic efficiency of the water utility that operates within it.

11. PHYSICAL topography; geology; raw water resources -  type, raw water chemistry, availability – quantity and distance; abstraction license conditions; level of water treatment required;   customer base: size, breakdown – (economies of scale) length of pipe per customer connection – (economies of density) level of pumping in the distribution network(s); level of zoning (DMAs) and strategic metering in the distribution networks; level of customer metering; Operating pressures of the distribution network and statutory requirements for pressure Non-revenue water, technical losses, ELL; long term resource planning and any water leakage reduction studies or programmes in place or in planning; Drinking Water Quality Standards; monitoring, policing and reporting requirements – events of non-compliance Demand analysis  - seasonal / climate correlation History of supply interruptions and / or restrictions

12. FINANCIAL Cost structure of the water utility: fixed and variable Cost and historical cost of electricity (Note: utility networks in some former socialist states developed and constructed networks under conditions were the cost of electricity was free or negligible resulting in network systems that are energy intensive.) Cost of raw water, Taxes, fees, levies and the cost of capital, Historic unit costs for renewals given local planning and construction context (i.e. unit construction costs for belowground works vary widely depending upon planning and road opening conditions, type of highway, highways specifications and reinstatement requirements) General asset condition – age, level of renewals, investment plans, and outstanding compliance obligations Revenue structure of the water utility; billing and collection;

13. LEGAL /INSTITUTIONAL / REGULATORY CONTEXT • Scope / Mandate of the utility’s core and non-core business operations • Legal risks and liabilities of the utility and associated costs • Industry Design and Regulatory context • The obligations and associated costs of adopting a Basin Management Plan for WFD compliance, • The legal and regulatory structure in place for the management and allocation of water resource rights and for the management and development of resources under water scarce or drought conditions, and tools available to water managers under drought scenarios. • The competition for (high quality) water resources within the Basin of the utility’s operations; • The monitoring, policing and enforcement programmes in place (number of court actions and rulings) that influences the utility and other water-users behavior.

14. Socio-economic Context • Ability-to-pay • National interpretation of the EC WFD principle of disproportionate cost, • The extent to which economic analysis has been carried out during the preparation of the Basin Management Plan (for WFD compliance); • The extent to which the water utility’s views were taken into account during the preparation of the Basin Management Plans (for WFD compliance) • The extent to which Basin Management Plans (for WFD compliance) have been harmonized with regional socio-economic development plans, integrated water resource management plans and spatial development plans.  • The extent to which Basin Management Plans (for WFD compliance) have considered and planned for changes to the water regime within the basin due to projected climate change scenarios. • The cost recovery mechanisms included in the Basin Management Plans (for WFD compliance) in order to pay for measures and actions necessary to achieve good water status; and how these will be passed on to water consumers.

15. MEASURES FOR EFFICIENT WATER USE Portugal: National Program for the Efficient Use of Water (PNUEA), 2001; (87 measures to improve the efficient use of water, 50 for the urban areas, 23 for the agricultural sector, 40industry. National Regulator - Technical Guide No. 8 "Efficient water use in urban areas’’; Section 6: Measurements of water use efficiency in public systems; to support the implementation of National Program for the Efficient Use of Water

16. MAIN POLICY OPTIONS Implement the principle of full cost recovery (only a few member states are actually doing it) Quantity management can be introduced in River Basin Plans (where quantity is an issue) Value water (implement abstraction fees where water has a clear economic value and is valued appropriately)

17. THANK YOU & QUESTIONS jmaguire@e-solventa.com