Energy Regulators Regional Association Possible Water Regulatory Activities

1. Energy Regulators Regional Association PossibleWater Regulatory Activities Krisztina Kasza Program Director ERRASecretariat DanubeWater Program Annual EventMay 7, 2014 Vienna, Austria

2. About ERRA • What is ERRA: Voluntary, not-for-profit organization of independent energy regulatory bodies of the Central Eastern Europe (CEE), South East Europe (SEE), the Commonwealth of Independent States (CIS), Baltic States (Estonia, Latvia, Lithuania)and Affiliate members from Jordan, United Arab Emirates, Africa, Saudi Arabia and USA.

3. AboutERRA • Objectives: • To improve national energy regulation in member countries and foster development of stable energy regulators with autonomy and authority→stable investment climate • To improve cooperation among Energy Regulatorsand facilitate the exchange of information, research, training and experience among members and other regulators around the world→harmonizedregulatory framework → more chance for regional market building

4. About ERRA • ERRA Members: Currently 24 Full Members: Albania, Armenia, Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia, Moldova, Mongolia, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Turkey, Ukraine 5 Associate Members: Regulatory Commission for Electricty in BiH, Regulatory Commission for Energy of Republik of Srpska (BiH) National Commission for Regulation in the Sphere of Communal Services of Ukraine, Energy Regulatory Office (ERO) of UNMIK, Energy Regulatory Commission of the City of Moscow 7 Affiliate Members: Electricity Regulatory Commission of Jordan, Regulation and Supervision Bureau of United Arab Emirates, Electricity & Co-Generation Regulatory Authority of Saudi Arabia, NARUC (USA), Nigerian Electricity Regulatory Commission (NERC), Ecowas Regional Electricity Regulatory Authority (Africa), Electricity Sector Regulatory Agency of Cameroon

5. About ERRA CONSTITUTION Article III/Section 2-4. Membership Full Members: Energy Regulators with primary responsibility for electricity regulation. Only one Energy Regulator from each country may be a Full Member of the Association. Associate Members: Additional Energy Regulators (with primary responsibility for natural gas, district heating or other energy areas) from countries located within the Region. Associations of Energy Regulators from countries located within the Region. Affiliate Members: Energy Regulators and Associations of Energy Regulators from countries located outside the Region. Other state authorities within the Region who are not Energy Regulators but who have responsibilities related to Energy Regulation. Organizations that qualify as Associate Members but choose Affiliate Membership status.

6. About ERRA ERRA Members - Map

7. About ERRA ERRA in Numbers:

8. About ERRA ERRA's Structure: • The supreme body of the organization is the General Assembly, comprised of all Full Members. • The representative and executive body of the association is the 7-member Presidium. • The ERRA Secretariat provides administrative assistance to the Members, the General Assembly, the Presidium, the Standing Committees and Working Groups of the Association.

9. Main Activities About ERRA • Standing Committees with detailed work plan and deliverables: • Licensing/Competition Committee • Tariff/Pricing Committee • Working Group on Customers and Retail Markets • Chairmen meetings • Deliverables: discussion papers, case studies, issue papers • Energy Investment & Regulation Conference (since 2001) • Technical Exchange Programs • Peer Reviews • Website (library – issue papers as background material for training and self-development!) • Tariff Database • Newsletter • Training programs

10. ERRA TariffDataBase Premier data source on the official electricity and gas tariffs of the ERRA member-countries (2008 – 2012 Quarter 2) Highlights: - Quarterly Electricity Prices for Residential and Non-residential Consumers; - User friendly format, option to export data into Excel sheets for application in Power Point Presentations and energy industry analyses; - Producer, Wholesale and End-user prices for Electricity; Wholesale and End-user Prices for Natural Gas; - Per capita Electricity Consumption; - Composition of Tariffs (Wholesale/Retail Margins, Taxes). • Payment fee for renewing subscription within 1 yearfrom the expiry date of subscription: €500 + VAT Subscription Feefor 1 year online subscription:€1,300 + VAT Subscription for ERRA members: Free of charge

11. Tariff Database 11

12. Tariff Database 12

13. Tariff Database 13

14. Tariff Database 14

15. Residential Natural Gas Prices with taxes in USD/GJ from Q3 of 2009 to Q2 of 2012 for the Baltic States

16. About ERRA ERRA TrainingCourses Background As our association evolved and members faced staffing issues (recruitment of qualified staff, staff changes etc.) it became clear that there was a strong need for formal, structured training programs to augment the best practices transfer exercised in ERRA meetings and other activities of the association. ERRA has developed a systematic in-house training program to reach its members in what is probably the largest geographic area covered by any single regional professional regulatory association. As ERRA’s courses have gained international recognition the association has welcomed participants from Africa and Asia.

17. About ERRA ERRA TrainingCourses Energy Regulatory Training Programs: Introductory level: • Summer School: Introduction to Energy Regulation Intermediate level: • Principles of Electricity Markets • Gas and District Heating Regulation • Monitoring Activities of Energy Regulatory Commissions • Price Regulation & Tariffs • Regulatory Information & Public Participation • Renewable Energy Regulation • Energy Regulation in Emerging Countries High-level: • Seminar for NewlyAppointedCommissioners and Chairmen

18. About ERRA ERRA TrainingCourses Main Characteristics of ERRA Training Programs The guiding principles for the development of our in-house training courses have been the following: • the courses should focus on applied, hands-on experiences of practising regulators; • consideration of members’ needs when developing new training modules; • courses are available in classroom format; • strong cooperation with researchers and academia;

19. About ERRA ERRA TrainingCourses A unique feature of ERRA’s applied training programs is the use of current and former ERRA members with academic background as well as select industry experts as course instructors. This characteristic allows ERRA to design training courses that focus equally on practical applications and theoretical methodology, and include the transfer of relevant direct experience. The added value that ERRA brings to regulatory training is the real-life applied experience of its instructors as professional regulators in the transitional economy environment.  The programs include: • case studies, • preparatory homeworks, • group works, simulations, practical exercises and • final tests.

20. About ERRA ERRA TrainingCourses Course Materials Participants receive a vast array of documentation to support the different themes and modules. These materials include: • training handbook, • powerpointpresentations of all course instructors, • list of suggested readings and • reference materials. Personalized certificates are awarded to participants who successfully complete the programs. ERRA acknowledges participants who have successfully participated in a minimum three of the training programs organized by ERRA. The Credit System is based on credits which are earned following successful completion of the ERRA training courses. Certified Energy Regulator Programme (CER)

21. About ERRA ERRA TrainingCourses Course Faculty Team Most of the training programs are facilitated by the Regional Centre for Energy Policy Research (REKK). REKK provides comprehensive research, consulting and teaching in the field of electricity, gas and carbon-dioxide markets. Prof. PéterKaderják, Director of REKK, serves as director for most of the training courses, who was the former President of the Hungarian Energy Office (HEO), former Chairman of ERRA. Currently he is a Professor at the Corvinus University and the director of a Regional Centre for Energy Policy Research (REKK). In the framework of a long-lasting partnership between ERRA and REKK, Dr. Peter Kaderjak is the Training Director of ERRA. In addition to research associates of REKK, classes and group exercises are taught by former and practicing energy regulators, most of them representing the ERRA region and the European Union. Occasionally we invite utility representatives to join the course faculty.

22. ERRA TrainingCourses About ERRA Training Participants: January 2005 – April 2014 Total Number of Trained Participants from 2005 to April 2014: 1,879 Number of employees from the ERRA Member organizations: 1,222 Commissioners: 92 22

23. ERRA Experience in KnowledgeTransfer:RegulatingEmerging Markets Good example: INOGATE project: "Capacity Building for Sustainable Energy Regulation in Eastern Europe and Central Asia „ 3 successful INOGATE projects since 2007 11 INOGATE beneficiaries: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan About ERRA

24. About ERRA ERRA’s International Relations • ERRA is active in the international arena of regulators. • Close working relationship with NARUC (National Association of Regulatory Utility Commissioners) and CEER (Council of European Energy Regulators). • Membership in ICER • Bilateral cooperation with many individual non-member regulators

25. ERRA Website: www.erranet.org

26. ERRA Website http://www.erranet.org/Library/Search

27. ERRA Website /MemberArea

28. ERRA Website/ MemberArea

29. ERRA and WaterRegulation Background Information • Growing tendency among ERRA member regulators to assume water regulatory tasks • In 2008 only 35% of member organisations were responsible for water regulation, in 2013: 50% of full members cover water regulation • The currentlist of ERRA Membersinchargewithwaterregulation:

30. ERRA and WaterRegulation Background Information

31. ERRA and WaterRegulation Background Information Independent water regulators in the ERRA region: Albania, Mongolia, UNMIK Western European tendencies:the same tendency applies, e.g. the Italian regulator assumed responsibility over water regulation, strongPortugesewater regulator

32. ERRA and WaterRegulation Publicationsin 2002 Threeeducationalmaterialsproducedin 2002 withfundingreceivedfromthe Local Government Initiative of the Soros Foundation • Monitoring Water, Sewage and DistrictHeatingActivities • Performance Management • Price Setting and Revenue Administration

33. ERRA and WaterRegulation • 1st ERRA Water RegulationWorkshop(June 12, 2013, Budapest) • Participants: 25 regulatorsjoining the meeting • The Agenda wasdevelopedaround the followingtopics: • Legal Framework of the Water Management Regulation • Market Structure and Operational Model Issues • Benchmarking in the Water Regulatory Sector • Pricing Issues • http://www.erranet.org/ErraEventPages/waterregulation2013/presentations

34. Most importantquestions of the Workshop: Canremain a local issue? Justifiedcost Needcapitalinvested! Aginginfrastructure Tariffsetting??? The role of governments? Capital sensitivity Overlap withenergy? Socialtariffs??? Investmentsneeded!!! Technical/ commerciallosses? Disproportional market share Benchmarking is key!

35. Key pointsof the Workshop: • Water is differentfromenergy • Youcanstoreit • Fixed costsaremuchgreater • Efficientcost mix varies (e.g., surface v. ground) • Seasonal v. dailypeaks • Monopoly is stronger (e.g., differentenergysources) • Conflict over rawmaterialwithothersectors • Much more local b/c water is heavy Source: The manager's dilemma: How to price water for cost recovery, operational efficiency and customer satisfaction by David Zetland, Wageningen University, The Netherlands

36. …survey respondents considered aging infrastructure as the most important issue facing our industry, with managing costs, funding or availability of capital, and energy costs closely behind. Key pointsof the Workshop: Energy costs can account for as much as 30% of most utilities’ [water and wastewater] operating budget. Survey results found in 2012 Strategic Directions in the Water Utility Industry, Black and Veatch Source: by Denise Parrish, Deputy Administrator, Office of Consumer Advocate, State of Wyoming, USA, (NARUC)

37. Hungarian water utility Benchmarking Club Key pointsof the Workshop: Benchmarking Club within the Water Utility Association Launched in 2007 Voluntary and open to new entrants 20-24 companies, representing • 60% of water service • 30% of wastewater service Individual company data is strictly confidential External experts 37 Source: Benchmarking in the Water Regulatory Sector by András Kis, Regional Energy Research Center (REKK)

38. Selected conclusions Economies of scale are present, and take place through: unit consumption (cost of water, cost of sewage, labor efficiency) and the number of customers (cost of sewage, electricity consumption) Household income: has an indirect impact on costs through consumption higher income equals more efficient labour Hills/mountains (measured through the variation of altitude above sea level within the service area): contribute to higher costs for water but not for wastewater service higher electricity consumption, especially for water Network density: counterintuitive results for the unit costs but higher density implied higher labor efficiency Differences in drinking water treatment technology significantly influenced costs Key pointsof the Workshop: Source: Benchmarking in the Water Regulatory Sector by András Kis, Regional Energy Research Center (REKK)

39. Selected conclusions Higher water loss: implies somewhat higher unit costs for the water service A higher number of settlements increases the unit cost of sewage service but limited impact on the cost of water service Ratio of industrial consumption: no significant role 40-60% of differences among company values can be attributed to different operating conditions  good first result, but further work and larger sample is needed Key pointsof the Workshop: Source: Benchmarking in the Water Regulatory Sector by András Kis, Regional Energy Research Center (REKK)

40. Key pointsof the Workshop: • SeawaterDesalination • A burningissueinmembercountriesfrom the MiddleEastregion • (increasingshare of waterproductionfromdesalinationplants) • Imminentneedfordesalinationcodewhich • responds to the development in desalination industry • to privatize the sector and increase private investment participation • standardizesprocedures • providesregulationfor the development of newplants and theoperation of existingplants Source: Nasse al Quahtani, ECRA Saudi Arabia

41. Most importantquestions of the Workshop: • Benchmarking, legal and economical issues should be discussed in detail! • Aging infrastructure is a problem from the point of view of finding the capital. • Technical losses are difficult to identify, cause it is underground. • The UN declaration on the right for water should always be considered! A certain amount of water has to be provided to each people! • Should water really be sold below the tariff? Should the rich pay for the poor people’s consumption? • If consumers require differentiated tariffs based on low quality, how would you regulate that? • A water company is not a welfare company, so it is not reasonable to give the water cheaper than the actual price. • The value of watercanvary based on the quantity consumed. • In case of benchmarking less is sometimes more, meaning that having too many indicators can result in the loss of focus. • Benchmarking should not be used to have the result as it is, but to understand why there are differences between prices. • Burningissuesincertaincountries: lack of unbundling of companies based on technological cycles; diversity of technologies; absence of private capital; great number and varying nature of regulated companies.

42. Most importantquestions of the Workshop: • Burningissuesincertaincountries (cont’d): water utilitiesare oftenowned by municipalities;the difference between actual tariffs for residential consumers and economically justified costs is too high, these tariffs do not cover costs thus, particular water utilities badly need investments. • Who is responsible for taking the final tariff? The Parliament or the Regulator? • Is the Commission financially independent or financed from the national budget? • Growingneedfortransparency and publichearings! • Is the capital intensive characteristic of the industry a rather political or regulatory question? • Does the water regulator usually regulate resources and the quality of water? Or is this rather the responsibility of environmental authorities? • How is it possible to measure security of supply? • Needtothink more about the customers! • Stop usingblocktariffsfor policy proposal! • Balancebetweenconsumerprotection and sustainability of operator is veryimportant.

43. Key messages of the Workshop: • The workshop was very successful, with a very topical agenda, good and lively discussion and with a clear request from the participants to continue organizing similar workshops on an annual basis • Suggestion: to evaluate the possibility of organizing a water regulatory training course

44. Key messages of the Workshop: • What othertopics would be suggested? • Process of measuring water consumption • Processing meter values • Quality of supply • “Philosophy” of water sector (natural resource, consumers – their way of thinking) • Incentive regulation, improving water efficiency • Political intervene • Othersuggestions: • Should be longer • Needtreatmentplantvisits! • Pricingtopicshould be dividedfrom the rest asit is timeconsuming • Calculationswould be appreciated

45. The Danube Water Program–sponsoredbyThe World Bank ERSAR (Portugese regulator) launched a panEuropean initiative for water regulators and will organize a large-scale conference involving many water regulators in September 2014 in Lisbon As of 2012 AEEG (Italian regulator) has competencies in water regulation and recently has started intensive dialogues with other water regulatory organizations in order to promote cooperation. International Outreach of ERRA

46. ERRA participates in international fora dedicated to water regulatory issues in order to maintain and to possibly increase its role in water regulation. ERRA undertakesa formal regulatory training course designed for water regulators. ERRA continuestooffer a meeting platform forwater regulators. FutureInitiativesinWaterRegulation

47. The pilot trainingcourseonwaterregulation: Possiblylaunch: February 2015 in Budapest Professional contentprovidedby REKK Participantsareprimarily ERRA member regulators but the program is opentonon-memberorganisations and to the generalpublicaswell. ERRA is currentlyin the process of seekingpartnersforco-funding the project.

48. The pilot trainingcourseonwaterregulation: Preliminary Agenda topics • The regulator, water utility economics and regulatory models • Fundamentals of water utility economics • Regulatory models • Exercise: setting up a regulator from scratch • Price regulation; Benchmarking • Price setting • Special considerations • Modelling exercise • Asset management • Performance benchmarking – Introduction and Group exercise

49. The pilot trainingcourseonwaterregulation: Preliminary Agenda topics (cont’d) • Water utilities within the larger water management context • Water markets with active utility participation • Voluntary and negotiated agreement between the water utility and farmers • Innovative developments within the water utility sector. • Good regulatory practices

50. The pilot trainingcourseonwaterregulation: Courseoutline: The regulator The purpose of regulation. Authority, autonomy, and accountability of a water regulator. Organizationalstructure and management of a regulatory body. Leadership. Fundamentals of waterutilityeconomics The economics of naturalmonopolies. Supply and demandcharacteristics, customerprofiles. Elasticity of demand. Seasonality. The role of precipitation. Non-payment and disconnectability. Economies of scale. Fixed and variablecostsandrevenues. Roomforcompetitionwithin the industry. Regulatory models Licensing, tariffs, service quality. Models of ownership and operation. Differentlevels of regulation (EU, national, local). Handlinguncertainty and asymmetricinformationfacedby the regulator.