August 2004
ASSESSMENT AND DEVELOPMENT OF
MUNICIPAL WATER AND WASTEWATER
TARIFFS AND EFFLUENT CHARGES IN
THE DANUBE RIVER BASIN.
Volume 1: An Overview of Tariff and Effluent
Charge Reform Issues and Proposals
AUTHORS
PREPARED BY:
MAKK, Hungarian Environmental Economics Centre
AUTHORS:
Dr. Glenn E. Morris
Andrįs Kis
MAKK
glennmorris@bellsouth.net
Hungarian
kis.andras@makk.zpok.hu
Environmental Economics
Center
TARIFFS AND CHARGES VOLUME 1
PREFACE
The long term goal of the DRP is, in short, to strengthen capacities of key Danube
stakeholders and institutions to effectively and sustainably manage the Danube
River Basin's water resources and ecosystems for citizens of Danube countries.
Water and wastewater service tariffs and effluent charges, fines and incentives
(Tariffs and Charges) have the potential to improve both water resource
management generally and protection of water bodies from nutrification and
hazardous substances. They may be able to make a substantial contribution towards
increasing internal funds and releasing public budgets and thereby facilitate the
provision of baseline contributions for new investment projects in nutrient reduction
and pollution control.
The purpose of this assignment was to develop strategies for tariff and effluent
charge introduction and reforms given the prevalent conditions in the various
countries of the region and taking into consideration the implementation plans of the
EU accession countries. The assignment was intended to develop policy measures for
DRB countries that help assure economically and socially acceptable tariffs and/or
effluent charges. The assignment was also to consider the potential for the increase
of revenues of the companies operating in the water and wastewater sector. The
development and assessment of country-specific concepts for tariff and effluent
charge reforms was intended as well.
This report provides analytical background on, and summarizes results derived from,
the entire Tariffs and Charges Project. This work principally involved examination of
current conditions related to regional or Municipal Water and Wastewater Utilities
(MWWUs) in eight countries of the region, identification of possible tariff and
effluent charge reforms, and evaluation of these prospective reforms. A MWWU case
study was developed in each of the countries. Baseline physical and monetary
accounts for the MWWU were constructed and budgetary, tariff, service, and effluent
consequences of various reforms were tested. The baseline conditions and
simulations were undertaken within the framework of the Accounts Simulation for
Tariffs and Effluent Charges (ASTEC) model and numerous individual reform
proposals were identified and evaluated.
TARIFFS AND CHARGES VOLUME 1
Getting the MWWU in good financial order is a necessary pre-requisite for any tariff
or effluent charge reforms aimed at pollution reduction to be successful. A
challenge of this assignment, is, and will continue to be in Phase 2 of the DRP to
convince national policy makers, system managers, etc. of the general merit of the
reforms. The final success will also depend in part on the willingness of national
authorities to support the demonstration projects and make the allowances for these
experiments in national policies and institutions.
The results of this component are intended on the one hand for policy makers and
regulators at a central government level as well as for local governments and
managers of water and wastewater municipal companies at the more local (pilot
site) level.
The report was prepared by Dr. Glenn Morris, the consultant to the DRP, in
cooperation with Andras Kis from MAKK, Hungary and the team of national
consultants from Danube countries and reflects the views of the expert team. The
report and its contents remain the property of the UNDP/GEF DRP and should not be
used without providing full credit to the DRP.
For further information about the DRP, objectives, activities, results etc. please visit
the DRP webpage at: www.undp-drp.org
TARIFFS AND CHARGES VOLUME 1
INTRODUCTION
The international environmental community has been disappointed by the slow pace of improved
effluent control in the Middle and Eastern Danube River Basin (ME DRB) countries, especially the
pace of nutrient and toxics reduction signaled out for particular consideration in the Danube Regional
Project. Representatives of governments in the ME DRB countries, at all levels, say that there is
simply not enough money (resources) to make quick and substantial progress. The international
environmental community sometimes reflects the view that what is lacking is enough political "will"
to make such progress. Our task in the "Tariffs and Charges Project" was to see if, for the special case
of Municipal Water and Wastewater Utilities (MWWUs), there are some ways in which tariff and
effluent charge reforms can ease both the financial and political barriers to improved effluent control
and water quality in the ME DRB countries.
This document, Volume I of our final report, is one of the products of our efforts. It introduces the
reader to the objectives and methods of our Project. It also provides an analytical discussion of the
ways in which tariffs and effluent charges link to behavior - production and consumption decisions -
and on to pollution reduction. Such linkages must be understood before they can be effectively
utilized. This report also summarizes the current conditions of eight ME DRB countries pertaining to
1) the tariffs charged by MWWUs for water supply and wastewater collection and treatment services
and 2) the effluent charges to which their wastewater is subject. It then identifies a wide array of
potential reform proposals and discusses advantages and disadvantages of each considering their
"effectiveness, proportionality, and practicality". After summarizing suggested reforms and reform
strategies, our report concludes with a discussion of follow-up activities that would provide further
evaluation, fine tune reform ideas to match particular settings, and generally serve to promote
successful implementation of the suggested reforms.
Guide to Reading This Report
While we expect the reader to begin this report with the Executive Summary, we also encourage
reading the Glossary of terms before beginning the body of the text. Serious confusion has been
created by different usage and terminology in the general literature pertaining on legal forms, finance,
and economics. This Glossary is meant to help reduce this problem and anchor the readers
understanding.
While this report is organized in a linear, academic way, some readers may find it more useful to read
the chapters in a different order. After reading the Executive Summary and Glossary, we encourage
the reader who is more policy and results oriented to go to Chapters 5 and 6. These Chapters describe
the tariff and charge reforms considered and our proposals for mutually reinforcing reform "bundles".
Chapters 5 and 6 use terminology and results from a background examination of tariffs and effluent
charge designs that is developed in Chapter 2. Readers who want to understand more about tariff and
effluent charges design philosophies and the advantages and disadvantages of alternative tariff and
effluent charge designs should read Chapter 2 but, while it is helpful, it doesn't need to be read before
the other chapters. Those readers interested in more detail on the current water management and
service conditions in the ME DRP countries, including tariffs and effluent charges, can turn to Chapter
3. Chapter 4 is a synthesis chapter. The reader who wants to know more about how the analytics of
tariffs and effluent charge designs were combined with existing conditions to identify possible reform
issues and reforms themselves will find this discussed in Chapter 4.
Chapter 1 describes the administrative history and terms of the T&C Project and the way we have
organized our thinking to make this complex problem more tractable. It also describes in more detail
the way in which we executed the project and the materials produced by the Project. This Chapter is
useful to someone who wants to better understand the context of the Project and its implementation.
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UNDP/GEF Danube Regional Project
Finally, we provide four Annexes for those readers who desire deeper background on elements of
these tariff and effluent charge reform proposals. Annexes 1 and 2 provide a discussion of the
analytical links between tariffs and effluent charges, respectively, and water pollution reduction.
These links are regularly referred to when discussing reform advantages and disadvantages. Annex 3
provides `Users Guide" to the ASTEC (Accounts Simulation for Tariffs and Effluent Charges) model
for those readers who want to know more about the design and use of this case study tool. Annex 4
provides a list of currency exchange rates used to convert currencies in this Project.
Other T&C Project Products
Volume II of Tariff and Charges Project Final Report contains country reports for seven of the eight
countries of the ME DRB for which we compiled information. These countries are: Bosnia-
Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Romania, and the Slovak Republic. Each
country report has an Overview of issues and reforms in the country, a National Profile of trends and
conditions in local water and wastewater management, and a Case Study that examines in greater
detail the current and prospective budgetary, production, and consumption consequences of selected
reforms undertaken at a particular MWWU. We urge the reader to consultant Volume II in order to
get a fuller understanding of background conditions and the role of reforms in particular national and
case study contexts.
The T&C Project Team
The primary responsibility for the Country Reports rested with the country consultants hired by the
DRP (Danube Regional Project). The country consultants also provided critical support to this
volume. Their intellectual and personal contributions to the Project were invaluable. The country
consultants are listed in Table 1 below.
Table 1.
Country Consultants on the Tariff and Charges Project
Country Consultants
Country Consultant
Bosnia-Herzegovina
Ms. Ramiza Alic
Bulgaria
Dr. Galia Bardarska
Ms. Vania Shopova, MSc.eng
Mr. Dimitar Tropchev
Croatia
Ms. Dubravka Mokos, B.Sc
Czech Republic
Ms. Lenka Camrova
Hungary
Mr. Gabor Ungvari
Moldova
Ms. Elena Muntean
Romania
Mr. George Dulcu
Dr. Victor Platon
Slovakia Ms.
Danka
Thalmeinerova-Jassikova
Caution to Readers and Reformers
While we have tried our best to be as complete and up-to-date as possible in our descriptions and
analyses, some features, data, policies, and regulations may be overlooked or outdated. Indeed, in so
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
3
dynamic a setting even the passage of a few weeks time can leave a discussion out-of-date.
Furthermore, a more in-depth consideration of special national and/or local conditions can always
improve the analysis found in a survey such as ours. Thus we urge here, and again in our
recommendations in Chapter 7, that the descriptions and reform proposals provided, developed, and
assessed here be further evaluated and tested as part of any adoption and implementation process. At
the very least, there will always be particular design and operational issues that must be addressed and
tested before any set of tariff and effluent charge reforms should be considered for permanent,
widespread adoption.
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
5
TABLE OF CONTENTS
Introduction ........................................................................................................................ 1
Abbreviations ..................................................................................................................... 8
Executive Summary ........................................................................................................... 9
Glossary............................................................................................................................ 14
1
Methods of the Tariff and Charges Reform Project ..........................................................17
1.1 Objectives .................................................................................................................. 17
1.2 Organizing
Principles ................................................................................................ 17
1.2.1
Tariffs and Charges in the Middle and Eastern DRB......................................... 18
1.2.2
Country and Municipality Focus........................................................................ 22
1.3
National Profiles of Municipal Water and Wastewater Systems .............................. 22
1.4
Case Studies of Selected Municipal Water and Wastewater Utility Systems ........... 22
1.5
Reform Proposal Development and Evaluation ........................................................ 23
1.5.1
National Profiles and Case Studies Issue Identification.................................. 23
1.5.2 Reform
Proposals ............................................................................................... 24
1.5.3 Proposal
Evaluation............................................................................................ 24
2 Background on Water and Wastewater Tariff and Effluent Charge Designs
and Experience.................................................................................................................28
2.1
Tariff Design Options................................................................................................ 28
2.1.1
Revenue Requirement Designs .......................................................................... 28
2.1.2 Cost-Based
Designs............................................................................................ 29
2.1.3 Equity
Designs ................................................................................................... 33
2.2
Lessons on Tariff Reform from International Experience......................................... 34
2.2.1 Leveraging
Crisis ............................................................................................... 34
2.2.2
Consideration of Compensation for "Losers" .................................................... 34
2.2.3 Performance
Audits............................................................................................ 35
2.2.4
Multipart, Increasing Block Tariffs.................................................................... 35
2.2.5
Bundling of Tariff Reforms with Other System Reforms.................................. 35
2.3 Effluent
Charge Design Options................................................................................ 36
2.3.1 Effluent
Charges:
Fines or Taxes ....................................................................... 36
2.3.2
Effluent Charges Per Unit of Pollution .............................................................. 36
2.4
Lessons from International Experience with Effluent Charges................................. 37
3
Status of Municipal Systems in Danube River Basin Countries .................................39
3.1
Organization of Water and Wastewater Utilities....................................................... 39
3.2
Status of System Infrastructure.................................................................................. 45
3.3
Financial Status of Water and Wastewater Utilities in the DRB Study Countries.... 52
3.3.1
Financial Status: Country-Wide ......................................................................... 52
3.3.2
Financial Status: Case Studies............................................................................ 55
3.4
Water and Wastewater Tariffs................................................................................... 58
3.4.1 Tariffs:
Country-Wide........................................................................................ 58
3.4.2
Tariffs: Case Studies .......................................................................................... 69
3.5 Effluent
Charges ........................................................................................................ 73
3.5.1
Effluent Charges: Country-Wide ....................................................................... 73
3.5.2 Effluent
Charges: Case Studies .......................................................................... 77
4
Tariff and Effluent Charge Reform Proposals .............................................................78
4.1
The Background for Successful Implementation of Tariff and Charge Reforms...... 78
4.1.1
The Role of Good Governance........................................................................... 78
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UNDP/GEF Danube Regional Project
4.1.2
The Importance of Customer Satisfaction with Local Service Levels............... 79
4.1.3
The Complex Role of External Financial Assistance......................................... 79
4.2 Tariff
Reforms ........................................................................................................... 79
4.2.1 Tariff
Levels....................................................................................................... 79
4.2.2
Cost-Based Tariffs vs Cross-Subsidies ............................................................ 101
4.2.3 Tariff
Designs................................................................................................... 104
4.3 Effluent
Charges ...................................................................................................... 108
4.3.1
Effluent Charge Level ...................................................................................... 109
4.3.2
Effluent Charge Designs .................................................................................. 111
4.3.3 Process
Changes............................................................................................... 112
5
Supporting Reforms for Tariffs or Effluent Charges.................................................113
5.1
Bookkeeping and Accounting Reforms................................................................... 113
5.1.1 Bookkeeping/Accounting................................................................................. 113
5.1.2 Audit
Reforms .................................................................................................. 114
5.2 Financing
Reforms .................................................................................................. 118
5.2.1 Depreciation
Reforms ...................................................................................... 118
5.2.2
Central Managed Pooled Funds ....................................................................... 118
5.2.3
Government Fees and Taxes on Water and Wastewater Services ................... 120
5.2.4
Access to Direct Financing from Private and Quasi Private Capital Markets . 121
5.3
Institutional and Other Supporting Reforms ........................................................... 123
5.3.1
Regulation of Costs and Tariffs at the National Level..................................... 123
5.3.2
Coordination with River Basin Management................................................... 123
5.3.3
Perfection of Ownership................................................................................... 123
5.3.4
Customer Choice and Sewerage Connection ................................................... 124
5.3.5
Privatization of the MWWU ............................................................................ 124
5.4 Management
Reforms.............................................................................................. 129
5.4.1
Collection of Accounts (Revenue Recovery)................................................... 129
5.4.2
Concession or Franchise Agreements for Operating the MWWU................... 130
5.4.3
Structure of Water and Wastewater Utilities.................................................... 130
5.4.4 Community
Relations....................................................................................... 130
5.4.5
Training in Management and Finance.............................................................. 130
6
Conclusions and Recommendations.............................................................................135
6.1 Tariff
Designs/Bookkeeping/Audit ......................................................................... 135
6.2
Collection of Customer Accounts/Billing/Community Relations/Service Levels .. 136
6.3
Local Finance/Central Government Fees and Taxes/Effluent Charge Credits........ 138
6.4
Financial Risk Reduction/Management Strengthening ........................................... 139
6.5
The Responsibilities of the Central Government: A Local View............................ 140
6.6 Burden
Indices......................................................................................................... 140
7 Recommendations for Further Development and Testing of Reforms as Part
of an Implementation Process.......................................................................................143
7.1
Project Outputs to Build Upon ................................................................................ 143
7.2 Reform
Implementation........................................................................................... 144
7.2.1
Elaboration and Application of ASTEC-Based Case Studies.......................... 144
7.2.2
Workshop on Tariff and Charge Reforms for Policy/Decision Makers........... 144
7.2.3
Demonstration Workhops for MWWU Managers and Directors .................... 144
7.2.4
Coordination with Other Assistance Projects................................................... 144
7.2.5
Demonstration Projects of Municipal Tariff and Effluent Charge Reform ..... 145
8 References.......................................................................................................................146
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
7
9 Annex 1: An Analysis of the Links between a Change in Tariffs and
Pollution Reduction .......................................................................................................149
10 Annex 2: Effluent Charge Links to Pollution Reduction ..........................................155
11 Annex 3: The ASTEC Model Users Guide .................................................................159
11.1 General
Remarks.................................................................................................. 159
11.2
Structure of the Model ......................................................................................... 159
11.3
Operation of the Model........................................................................................ 160
11.3.1 Entering
Data................................................................................................ 160
11.3.2 Commands .................................................................................................... 166
11.4 Troubleshooting ................................................................................................... 167
12 Annex 4 Exchange Rates in Study Countries of the DRB.......................................169
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UNDP/GEF Danube Regional Project
ABBREVIATIONS
AC
Average Cost
ASTEC Model Accounts Simulation for Tariffs and Effluent Charges Model
B&H
Bosnia and Herzegovina
BGN
Local currency of Bulgaria
CEE
Central and Eastern Europe
CMPF
Central Managed Pooled Fund
CZK
Local currency of the Czech Republic
DRB
Danube River Basin
DRP
Danube Regional Project
FB&H
Federation of Bosnia and Herzegovina part of Bosnia and Herzegovina
GEF
Global Environmental Facility
GNI
Gross National Income
GWP
Global Water Partnership
HH
Household
HRK
Local currency of Croatia
HUF
Local currency of Hungary
IAWD
International Association of Water Supply Companies in the Danube River
Catchment Area
KM
Local currency of Bosnia and Herzegovina
MC Marginal
Cost
MDL
Local currency of Moldova
ME DRB
Middle and Eastern Danube River Basin
MRDPW
Ministry of Regional Development and Public Works
MU
Management Unit
MWWU
Municipal Water and Wastewater Utility
PIP
Project Implementation Plan
RBA
River Basin Authorities
ROL
Local currency of Romania
RS
Republika Srpska - part of Bosnia and Herzegovina
RU
Regulatory Unit
RWC
Regional Water Company
SK
Local currency of Slovakia
SU
Service User
T&C
Tariffs and (Effluent) Charges
UNDP
United Nations Development Program
W&WW
Water and Wastewater
W&WWS
Water and Wastewater Services
WEC
Water Extraction Charge
WW Wastewater
WWTP
Wastewater Treatment Plant
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
9
EXECUTIVE SUMMARY
SCOPE AND OBJECTIVES
The purpose of the Tariff and Effluent Charges (T&C) Project is to identify and assess 1) water and
wastewater tariff reforms and 2) effluent charge reforms that might be used to help reduce water
pollution emitted by Municipal (including Regional) Water and Wastewater Utilities (MWWUs). The
MWWUs of the Middle and Eastern portions of the Danube River Basin (ME DRB) provide the
geographic scope and point of departure for this investigation.
In this volume we provide analytical background on, and summarize results derived from, the Tariffs
and Charges Project. This work principally involved examination of current conditions related to
regional or MWWUs in eight countries of the region, identification of possible tariff and effluent
charge reforms, and evaluation of these prospective reforms. We also developed a MWWU case study
in each of the countries. In the case studies we constructed baseline physical and monetary accounts
for the MWWU and tested budgetary, tariff, service, and effluent consequences of various reforms.
The baseline conditions and simulations were undertaken within the framework of the Accounts
Simulation for Tariffs and Effluent Charges (ASTEC) model.
BROAD CONCLUSIONS
Getting the Municipal Water and Wastewater Utility in good financial order is a necessary pre-
requisite for any tariff or effluent charge reform aimed at pollution reduction to be successful.
Too often the MWWUs current account balances are weak and artificially bolstered by 1) failure to
write off bad debts, 2) insufficient expenditures on maintenance and repair, and 3) inadequate
provision for replacement of depreciating infrastructure. Pollution reduction generally requires large
investments and increased operating costs, further aggravating the financial difficulties of the MWWU
and/or escalating tariffs. Increased tariffs are difficult to justify without a corresponding improvement
of service quality and reliability, therefore use of tariffs as a means of financing an up-grade in
effluent control or extension of sewer service is contingent on using tariffs to first achieve financial
sustainability for the utility, preferably starting with investments that contribute to an improved
financial balance, such as leakage reduction.
A comprehensive program for installation of new wastewater collection systems and technically
advanced treatment systems from own resources or commercial loans is not a reasonable near
term strategy for most MWWUs even when coupled with an aggressive program of tariff or
effluent charge reforms.
The tariff increases required would mean that regional households would spend a share of their
disposable income on water services that was two to three times more than their counterparts in OECD
currently do. Given the cost of these systems and the low incomes of customers in the Region, it
makes more sense to devote efforts to planning use of the existing, limited resources in an efficient or,
at least, cost-effective, way. A less burdensome program may not only mean scaling back current
ambitions, but also scaling back current operations and use of small-scale, simple technology for
provision of safe water and wastewater services for the weakest and/or most over-built systems.
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UNDP/GEF Danube Regional Project
It is a mistake to consider tariff and effluent charge reforms too narrowly; to consider them only
as instruments for pollution reduction.
Tariffs and effluent charges are economic instruments and by their nature impinge on a variety of
behaviors and choices simultaneously. A single tariff or effluent charge intervention may affect
effluent levels through several pathways and each pathway may have qualitatively, as well as
quantitatively, different results. For example, higher tariffs may decrease wastewater flows but
increase wastewater concentrations. Moreover, there are also many other changes beyond a change in
pollutant levels per se that should be considered. For example, in evaluating a reform one would want
to also consider how the revenues produced by an increase in effluent charges would be used and
whether an increase in tariffs would result in some customers dropping the service.
Tariff and effluent charge reforms will need to be introduced concurrently with legal,
administrative, and institutional changes that will safeguard the integrity of the reforms.
The "constituencies" of the MWWUs are very skeptical about the merit of new policies and programs.
They are concerned, quite legitimately in our view, that the reforms will be designed to serve other
interests. The customers, especially, but also system management, ministry officials and municipal
owners need to be more assured that the MWWUs are run 1) without undue political influence, 2) that
the revenues produced by tariffs and effluent charges are efficiently allocated, and 3) that the donor
community will reward current sacrifices in the future. Some of the necessary institutional reforms
may be local, e.g. improved bookkeeping practices, or implementation of strategies to reduce non-
payment of bills. Other reforms are national, such as legal changes to assist enforcement of the
collection of bills, regulations that allow private participation in service provision, or national
oversight of public utility pricing.
REFORM PROPOSALS
We identified and evaluated numerous individual reform proposals and in some cases elaborated them
with reference to a specific country or MWWU. In keeping with the general conclusion just cited,
however, we encourage the following bundling or packaging of reforms in order that they might be
mutually reinforcing and operationally more effective. Of course, some of the assignments of
"component" reforms in each of these bundles are a little arbitrary; they may also be seen as
supporting both other reform components and other "bundles". What we present here are the main
reform themes identified in our Project.
Tariff Re-Design
1. Simple multipart tariff designs including a fixed cost component to provide revenue
stability and a commodity charge that approximates marginal costs.
2. Cost-of-service tariff setting to pass the differences in costs between customers, regions,
and water and wastewater services to the consumer of those services.
3. Book keeping improvements to support the more demanding tariff setting and cost
determination requirements.
4. Independent performance audits to assure that the costs are properly accounted and
assigned and folded into the tariffs.
Collection and Billing
1. Improved account collection to increase revenue.
2. Institutional support for collection enforcement to increase revenue.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
11
3. Provision of low-level water and wastewater services as an alternative for those
customers that are burdened by even modest tariffs.
4. Billing system improvements to increase the revenue stream and the transparency of the
tariff system.
5. Community relations to explain the reasons for, and consequences of, more active
collection of bills.
6. Metering to improve the fairness of the system through more reliable meters and assure
that a customer's payment matches the amount of service used.
Tariff Increases and Locally Financed and Directed Investment
1. Increases in average tariff levels - to support a sustainable provision of services and an
appropriate investment program.
2. Pooled capital (and pollution control credits) for pollution reduction allow MWWUs to
pool resources to invest in pollution reduction where it is most cost-effective.
3. Reduction in central government fees and taxes on water and wastewater services leave
more resources for investment in the local system at the discretion of local
managers/owners.
4. Build management capacity to improve tariff analysis, investment decision-making, and
streamlining operations.
5. Strengthen economic regulation - by an independent agency of the central government to
assure that costs are controlled and that the higher tariff levels, whether proposed by a
publicly or privately operated MWWU, are justified to support a well-designed and
executed investment program.
6. Private participation make regulatory changes to provide the possibility of private
participation in MWWUs.
Effluent Charge Introduction or Re-Design
1. Effluent charges should be directly linked to effluent levels to help ensure the incentive
for effluent reduction.
2. Effluent charge regimes should be developed to cover all pollution, not only above limit
pollution the effluent charge encourages exceedence of standards where it is inexpensive
to do so.
3. Set the level of effluent charges to levels that are commensurate with the environmental
damage - for efficient resource allocation.
4. Effluent charge revenues should be returned to MWWUs as a lump sum rebate whose size
is proportionate to the population served with wastewater collection services to
eliminate high transaction costs and misallocation of resources that commonly occur with
centrally directed Funds.
We offer these reform proposals with the acknowledgement that we are not as close and familiar with
specific problems as local system managers, local public officials, and, most importantly, the local
customers who pay the W&WW (Water and Wastewater) tariffs and live beside the water bodies of
the region. Consequently, this is not a blueprint reforms, but some ideas and proposals that 1) may
support detailed design and implementation of changes whose need had been understood for some
time and 2) inspire consideration of some new approaches that still need to be examined through the
lens of both national and local conditions. Indeed, we doubt the reforms we are proposing for
12
UNDP/GEF Danube Regional Project
consideration would work unless they resonate with the experience of local customers and assessments
of the water managers and planners of the Region.
Finally, we can't stress enough the need for coordination of these reforms. As both our analysis and
evaluations emphasize, each reform has its downside(s). If introduced without other, complementary
reforms it may do more harm than good. Unhappily, there are many examples of past "reforms" that
have not been successful because the downside had not been properly anticipated and addressed in
advance. This must always be part of our awareness as we encourage and assist reform design and
implementation.
RECOMMENDATIONS FOR FURTHER EVALUATION AND IMPLEMENTATION
Broad Recommendations
· Work closely with selected MWWU and country water and regulatory agencies to develop,
evaluate, implement, and monitor specific tariff and effluent charge reforms.
While the ultimate purpose is sustainable finances and improved pollution control at MWWUs
through upgrade of the pollution control technology, the collaboration should result in more specific
goals and tools to get there, including specific laws and policies to be enacted, and strategies and
reforms to be implemented.
· Develop working relationships with financial institutions, assistance programs, and
international organizations so that our contributions are as complimentary as possible.
Help the international community find attractive points of intervention: "bankable" projects, technical
and financial assistance opportunities. The reforms of the project should also provide a foundation for
other programs that support the reforms and wish to continue encouraging implementation and
assessment beyond the life of the DRP. The support and encouragement of these institutions is
believed to be instrumental in achieving improvements in resource allocation and successful tariff
reforms.
Specific Elements
· Elaboration and application of ASTEC-based case studies.
The existing case studies can be developed for 1) more detailed examination of policy strategies in the
specific MWWUs, 2) to provide materials for seminars and workshops for both policy makers, the
new municipal owners of systems, and water system operators. The existing set of case studies can be
supplemented with other cases of interest. We view this as a first step to building a constituency for
tariff, effluent charge, and related institutional and legal reforms through familiarity with the
possibilities and likely results. Close collaboration with local policy makers and operators is key to
the success of this element.
· Review of privatization and private operation experience in the region.
A number of the important MWWUs in the region have been partially privatized or they are fully or
partially operated by private partners most notably in Budapest, Bucharest, Sofia and Zagreb. The
experience gained in these cases is an important basis for setting parallel and complementary
organizational reforms. The prospects, as well as the pitfalls, of privatization and private operation are
great enough to merit special attention in future reform "bundles". Moreover, private participation is
often directly related to tariff reforms resulting in cost recovering tariffs, as private partners both
require that finances are sustainable and can often contribute with skills, experience and capital that is
useful in streamlining operations and improving the financial position of the MWWU.
Glenn Morris / Andrįs Kis
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· Workshop on tariff and effluent charge reforms for policy/decision makers in the ME DRB
countries.
These workshops should be designed to both inform participants and solicit views regarding the merits
and problems of various bundles of reforms. It seems especially important that the national policy
makers develop reforms that compliment the best opportunities for MWWU-specific tariff reforms and
investment programs.
· Demonstration workshops for MWWU managers and directors.
Development of local management capacity and experience is one of the key compliments of tariff and
effluent charge reforms. After all, the notion behind using incentive based instruments assumes that
operators can identify and appreciate the financial consequences of changes in tariffs and effluent
charges. This is not just a question of numbers, however. The workshops need to help the managers
and directors anticipate the issues that their decisions create for the customers and citizens of their
service community.
· Demonstration projects working with specific MWWU operators and owners to develop,
test, and implement a bundle of reforms.
This is the most important element of any successor to the T&C Project. We think that demonstration
projects are critical for both testing and establishing the practical legitimacy of the reforms. In the
process the demonstration projects would build ties with international programs and national policy
makers by providing experience that is useful in their program designs. Most importantly, we believe
that the local managers and municipal owners with experience in implementation of reforms are the
most important constituency for adoption of complementary legal and institutional reforms at the
national level.
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GLOSSARY
Amortization - a financial term that refers to the payments designed to pay off a debt. For example,
the amortization payment of a 1 million debt over 20 years (with an interest rate of 8%) is 101,852
per year to cover principle and interest in equal payments over the amortization period. Amortization
is determined by the terms under which debt, which may have been used to purchase an asset, is
financed. The amortization payment is contractually required; it is not, generally speaking, optional
and does not depend on production or revenues during the year. The payment term and interest rate
may have little or nothing to do with the life of the asset purchased with the 1 million. As such, it
may also have little or nothing to do with the physical depreciation of an asset.
Depreciation - an allowance, usually expressed in monetary terms, for actual wear and tear on long-
lived plant and equipment over time. For example, the depreciation on a water tower that is fifteen
years old may be 5,500 in the 16th year. Depreciation can be based on estimates of actual wear and
tear (useful for management decisions), the market value of used equipment, or a standard schedule
usually used for tax or bookkeeping purposes. Depreciation can be annual or cumulative.
Depreciation is not amortization. Despite the common use of cognates of "amortization" e.g.,
amortizing in Hungarian, to mean depreciation in many CEE (Central and Eastern Europe) languages,
in English amortization is very different from depreciation.
Effluent Charges a monetary charge assessed by central authorities for discharge of pollutants into
water bodies by MWWUs. The base for the charge can vary. Some of the variations are based on the
number of pollutants and the extent of discharge. The level of the charge can also vary: with the
pollutant, the level of treatment before discharge, and the receiving water body. The purpose of an
effluent charge is primarily to provide a "signal" to MWWUs about the social damage of their
pollution and an incentive to reduce that pollution. A good effluent charge design, then, is one that 1)
is based on the pollutants and pollution characteristics that cause the damage, 2) is set at a level that
reflects the marginal damages of these pollutants and pollutant characteristics, 3) effectively conveys
this information to the decision making entity so that they respond by taking appropriate abatement
actions. In this study we encounter "effluent charges" that are nominally tied to pollution levels but
which have an incomplete or poor basis for the scope and level of the effluent charges and do not
effectively convey this incentive to abate to decision makers. For example, effluent charges that are
assessed directly on customers based on MWWU behavior does not provide a direct incentive to the
MWWU to reduce pollution. While these may be ineffective designs, we still discuss them as effluent
charges.
Multipart Tariffs - Multipart tariffs refers to any tariff design that has more than one basis besides a
single commodity charge for computing the expenditure on water or wastewater services of a single
customer. The multipart tariff can have a fixed charge and one/or more multiple "commodity"
charges. A tariff design with increasing block tariffs (IBT) rates where the commodity charge
increases as the customer consumes more water is a multipart tariff. A design in which the
commodity charges decline with the level of a customer's consumption is called a decreasing block
tariff (DBT) design. A design with a single commodity charge and a fixed rebate (a negative fixed
charge) is a multipart tariff, as is a design with a zero initial tariff for the first X units of consumption
and a positive commodity charge for all consumption greater than X. The problem with a lot of tariff
design terminology is one of non-uniqueness different terms to identify essentially the same designs.
It is best, we think, to use "multipart" and then describe the particular tariff algorithm that one is
referring to.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
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Net Revenue this is the difference between the revenue of an enterprise and its explicit costs.
Sometimes the cost elements are supplemented by some implicit cost items that are a little easier to
estimate because of the particular setting e.g., the cost of capital since it is "borrowed" at a given
interest rate or the cost of management in a corporation which pays its CEO and other leadership a
wage. Net revenues, in these later cases, can approximate profits but it is better to keep the concepts
distinct to reduce confusion. For example, most "profit taxes" are actually taxes on computed net
revenue (not profit).
Profit this term, like many others, has a technical meaning in economics that has sometimes been
confused by common usage. Technically, the economic "profit" is a return in excess of both explicit
costs (the purchased inputs) and implicit costs (the opportunity cost of a management or
entrepreneurial inputs, the depreciation of equipment). Because implicit costs are sometimes difficult
to estimate they are sometime (and incorrectly) ignored when calculating the return to an enterprise.
In long run competitive equilibrium economic profit will be zero. A perfectly regulated public utility
will mimic this "efficient", zero profit solution; the utility will operate at service levels where demand
is equal to long run marginal cost and its output will be priced so as to just recover both explicit and
implicit costs.
Public Enterprise - Any enterprise the majority of which is owned by any arm of government is a
public enterprise. Thus a municipally owned enterprise is just as much a public enterprise as one
owned by the central government. A further source of confusion can arise when a confederation of
states forms a republic. In this case you can have a "state" owned enterprise that is not owned by the
central government, but by one of the states of the confederation. We therefore recommend that when
describing ownership of a public enterprise that you note the particular public entity(ies) that own the
enterprise and avoid using the term "state" ownership when you mean central government ownership.
Sustainable Scenario In these scenarios the current service levels are sustained indefinitely in the
future. In addition to current costs, provision must be made for the full depreciation of plant and
equipment so that whenever a piece of infrastructure is worn out, it will be possible to replace it. The
level of service under a sustainable scenario is not necessarily the same for any two MWWUs, since
sustainability refers to maintaining present service levels, which may differ from case to case. A
complicating factor in determining the requirements for sustainable service is that elements of the
current system do not always make economic sense. These elements may have been added to the
system during a period of distorted prices or under different planning policies. Determining a
financially sustainable level of service therefore also means rationalizing service levels so that those
services that are disproportionately expensive may be scaled back or eliminated.
Tariffs - This is the "price" of a water or wastewater service. The point of departure for our
discussion of a tariff is a simple "commodity charge" where the tariff is set at X monetary units per
m3. Expenditures for the service, then, are the commodity charge times the consumption level. This
type of tariff is the norm for the MWWUs of the ME DRB since most customers' water consumption
is metered. Different groups of customers may have different tariff levels, but if they all have only
one commodity charge then this tariff design is still called a simple commodity charge design.
Upgrade Scenario In these scenarios in addition to maintaining service levels for an indefinite
future (see sustainable scenario) the MWWU also expands and/or upgrades the service that is
provided. These scenarios may involve adding new customers to the water or wastewater system, or an
upgrade in service such as development of a more reliable water supply, better treatment of drinking
water, or new or more complete wastewater treatment. There is no uniform definition to upgrade, in
fact, several upgrade scenarios can be defined for any particular MWWU depending on the mix of
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UNDP/GEF Danube Regional Project
system elements that will be developed. In this spirit, while upgrade in our project is usually
equivalent to improved collection and treatment of wastewater in order to reduce the release of
nutrients and toxics, we always try to provide details on particular assumptions of the scenario.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
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1 Methods of the Tariff and Charges Reform Project
1.1 Objectives
This Tariff and Charges (T&C) report was commissioned as part of Phase I, Objective 1 of the
UNDP/GEF Danube Regional Project (DRP) and embraces the overall objectives of that Project and
Objective 1 in particular. The DRP objective 1 is as follows: The Creation of Sustainable Ecological
Conditions for Land Use and Water Management.
DRP's Project Implementation Plan (PIP) (DRP, 2003) includes a call for production of two related
Outputs in support of Objective 1:
· Output 1.6 Policy reform and legislation measures for the development of cost-covering concepts
for water and wastewater tariffs, focusing on nutrient reduction and control of dangerous
substances,
· Output 1.7 Implementation of effective systems of water pollution charges, fines and incentives,
focusing on nutrients and dangerous substances.
The PIP lists activities and products for Phase I of the DRP that support achievement of Outputs 1.6
and 1.7. These include review, analysis, and evaluation of municipal water and wastewater utility
(MWWU) tariffs and effluent charges in the countries of the ME Danube River Basin (DRB). The PIP
called for both general, and country-by-country, consideration of these tariffs and charges and
development, at the end of Phase I, of proposals for institutional and design reforms related to
MWWU tariffs and effluent charges. These reforms, when properly and thoughtfully implemented,
would assist the Region in meeting the objective of "sustainable ecological conditions" for municipal
water and wastewater management.
This report, in two volumes, meets the Phase I output targets for assessment of, and recommendations
for, tariffs and charges institutional and design reforms. This volume, Volume 1, describes the
methods used in this study. It also summarizes the data, assessments, and results, including tariff and
charge reform proposals that emerge from Phase I activities. This volume also includes a brief
discussion of implementation activities under Phase II that compliment the reform proposals offered
here. We also include an Annex that describes the Accounts Simulation for Tariffs and Effluent
Charges (ASTEC) model. ASTEC is a spreadsheet model developed as an assessment tool for the
MWWU case studies undertaken as part of this study.
1.2 Organizing Principles
In developing this Phase I T&C study, we took our guidance from the descriptions, activities, and
outputs of the DRP PIP. We examine "municipal" water and wastewater tariffs and the effluent
charges applied to these municipal sources.1 This scope reflects the fact that, to various degrees, all
the ME DRB countries have established and implemented policies devolving water system ownership
and management to local authorities. The extent of this devolution varies from country to country, so
some of the countries have district or regional water systems. For our purposes, we consider all of
these "municipal" water systems, even if they serve several municipalities or are regional in scope.
1 The term "tariff" as used here is nearly synonymous with water or wastewater "price" or "rate". The tariff is the basis for
determing what a customer owes in exchange for receiving water and wastewater service. As this suggests, the tariffs for
water service are usually different from the tariffs paid for wastewater service. As a practical matter to obviate the need
for metering of wastewater and because wastewater quantities are highly correlated with drinking water quantities in urban
and suburban environments the wastewater tariff is almost invariably computed using the metered quantity of water
delivered.
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UNDP/GEF Danube Regional Project
The critical feature is that either all or a substantial amount of system ownership and control is vested
with the municipal governments of the communities served by these systems. Moreover, the
municipal water systems are, or are moving toward, more financial independence. For the most part
they no longer depend on the central government or adjacent water systems for operating subsidies
and plan and finance more of their infrastructure "internally".
Likewise, we examine and evaluate the existing system of effluent charges that affect wastewater
collected and discharged by municipal utilities. This focus is implicit in the activity descriptions of
PIP Objective 1.7 and the fact that effluents originating from other sources, including specific
activities addressing agricultural and industrial sources, are addressed by other DRP components.
1.2.1 Tariffs and Charges in the Middle and Eastern DRB
Before we could identify and evaluate potentially attractive MWWU tariff and effluent charge
reforms, especially reforms "focusing on nutrient reduction and control of dangerous substances", it
was necessary to put both tariffs and effluent charges in proper context. Both tariffs and effluent
charges are "economic instruments". As described below, they operate by providing financial
incentives for MWWUs and their customers to change behavior in ways that ultimately result in
reducing pollution discharged to receiving water bodies. In order to know how reforms might work,
one needs to understand the financial and institutional setting in which the reforms would function.
Consequently, we made it a priority to examine the current operations of MWWUs and the role of
tariffs and effluent charges in those operations. As part of this effort we reviewed recent regional
studies of water management and environmental regulation, especially those addressing the situation
regarding tariffs and effluent charges. Included among our sources were K. Berbeka, et. al. (2000);
Speck, McNicholas, and Markovic (2001); IAWD International Association of Water Supply
Companies in the Danube River Catchment Area - (2002) and background papers of the Global Water
Partnership (GWP) study of water and finance in Central and Eastern Europe (CEE) (various years).
These documents, together with consultations with the professional staff from expert organizations
and our own pool of local experts strongly suggested that many MWWUs of the study countries are
either now, or shortly will be, financially unstable. Since tariffs are primarily a revenue tool, one
cannot effectively address their use for financing pollution control independently of the need to use
tariffs to stabilize the financial condition of the water utilities per se. Use of tariffs as a means of
financing an up-grade in effluent control or extension of sewer service is contingent on using
tariffs to first achieve financial sustainability for the locally owned and operated water utility.
Consequently, we found it necessary to examine tariff reform as a means of achieving financial
sustainability generally as well as a means of financing upgrades in the provision of wastewater
services.
Recognizing that economic and financial conditions, both current and prospective, are critical to the
effectiveness of various tariff and effluent charge reforms, we adopted an analytical framework in this
study based on the notion of a system of accounts (Morris and Kis, 2003a). These accounts are
"balance sheet" systems that represent: 1) current account or budgetary balances based on current costs
and current revenues, 2) capital accounts that allow for long-lived debt and infrastructure services and
3) social accounts that reflect environmental and social goods (and bads). Each of these accounting
schemes broadens the basis of the accounting calculations: the movement from current to capital
accounts to examine longer term financial sustainability, the expansion from capital accounts to social
accounts to examine aspects of economic welfare that aren't well reflected by product and capital
markets e.g. externalities and transfers.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
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These systems of accounts are focused on the entity that operates the MWWU (the "management unit"
or MU).2 The analytical framework we introduce and use also identifies two other groups of entities
that play a critical role in the accounts of the MU. These are the "service users" (SU) that are the
customers of the water utility and the "regulatory units" (RU) that condition the activities and finances
of the MU. These entities are then linked to each stage of the process that characterizes the operation
of the MWWU: raw water production and treatment, water distribution, water use, wastewater
collection, wastewater treatment and discharge. The relationships among MUs, RUs, and SUs along
this continuum of activities are depicted in Figure 1 and Figure 2 below.
2 The MU is often synonymous with the MWWU. There are times, however, when the MWWU managements
discretion is curtailed and the "management unit" includes not only the MWWU but also some active input from
owners or their designates e.g., when the central or local government, in its capacity as owner or co-owner,
delegates one of its administrative units as an active partner in municipal water and wastewater system
management.
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UNDP/GEF Danube Regional Project
Figure 1
Municipal Drinking Water Supply Service Accounts and Links to Markets and Regulation
RUt
RUg
RUg
MUD Costs
MUd Revenues
SUi,d Costs
Exchange
SU
Purchased Operating
Variable Revenue
Purchased
1
Inputs (P
Exchange
iXi)
(PjXd)
Output (PdXd,j)
Rd or Cd
Capital Charges (Pk)
Fixed Revenue (Pf)
Fixed Cost (Pf)
Revenues
Taxes (Ti)
C1
MUd
Grants and
Grants and
SU2
Subsidies(G
Subsidies(G
Non Purchased
i)
i)
Inputs (X
R
i)
MU
Other Revenues
Other Costs
X1
External Costs (Ei)
(PiXd, Pi, etc,)
(PiXd, Pi, etc,)
SU3
Commentary on Figure 1:
The first of the three large boxes contains the water service cost accounts of the management unit for drinking water (MUd costs); the second one contains the water service revenue accounts of
the management unit (MUd revenues). As depicted in the Figure, the MUd exchanges costs (Ci) for inputs (Xi). It then produces drinking water services in exchange for revenues (RMU) of
various sorts, including grants and subsidies. Regulatory units (RUs) can intervene to affect both the cost or revenue accounts of MUd (RUt for is a tax cost and RUg is a possible government
transfer). The third box of the Figure contains the costs of the drinking water service users (SUi,d costs). These items are the service user expenditure account and they can include not only
purchased drinking water but also transfers or taxes (involving RUg) and own costs. The drinking water service provider's revenue account and the drinking water service users expenditure
accounts are linked by a market for drinking water where revenues or costs (depending on whether you are the MUd or the SUd) are exchanged for drinking water services.
Specific notation: RUt is regulatory unit collecting taxes, charges and fees for water abstraction or use; RUg is regulatory unit providing grants and subsidies; PiXi is X amount of purchased input
i for price P (e.g. labor, energy); Pk is capital charges (e.g. investment into capital infrastructure); Ti is tax payment; Xi is non-purchased input (e.g. water in some cases); Ei any external cost;
RMU is revenue of the MUd that is paid out in exchange for inputs; Ci is the actual cash paid for inputs; PjXd is commodity charge revenue received by the management unit for service quantity
Xd at a price of Pj; Pf is fixed charge revenue (e.g. monthly fixed charge) received from the service users; Gi is grant or subsidy received from the regulatory unit; SU is the service user.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
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Figure 2
Municipal Wastewater Service Accounts and Links to Markets and Regulation
RUg
RUt
RUg
MUeRevenues
MUe Costs
Exchange
SU1
SU
Variable Revenue
Purchased Operating
i,eCosts
(PeXe,j)
Inputs (PiXi)
Purchased Eff
Serv (P
Fixed Revenue
Exchange
Capital Charges
eXe,j)
Re
(Pe,f)
Fixed Cost (P
(P
Revenues
k)
e,f)
Taxes (Ti)
SU2
Grants and
MUe
C
Grants and
i
Subsidies(G
Charges (Ce)
e)
Subsidies(Gi)
R
Other Costs
MUe
Non Purchased
Other Costs
Inputs (Xi)
(PiXe, Pi, etc.)
(P
Xi
External Costs (Ei)
iXe, Pi, etc,)
SU3
Commentary on Figure 2:
Figure 2 is organized like Figure 1, except that it depicts accounts and transactions for wastewater services rather than drinking water services. The first box contains the wastewater service cost
accounts of the service users (SUi,e costs). The second box contains the wastewater service revenues of the management unit for wastewater (MUe revenues). Between the two is the market for
wastewater. In this case, both the wastewater and money flow from the SU while wastewater services flow from the MUe to the SUs. The third box represents the cost accounts of the
wastewater service provider (MUe costs). The service provider purchases inputs and pays taxes and fees, including effluent charges, as part of providing wastewater treatment services. The
regulatory units responsible for the level and administration of the taxes and fees are shown as RUt and RUg respectively. Likewise, RUg is depicted as providing financial support to the cost
account of SUs and the revenue account of MUe. The figure does not exhaust the possible relationships between MUg, RUs, and SUs, but indicates the complexity of possible relationships that
may exist in any given setting.
Specific notation: RUt is regulatory unit collecting taxes, charges and fees; RUg is regulatory unit providing grants and subsidies; PiXi is X amount of purchased input i for price P (e.g. labor,
energy); Pk is capital charges (e.g. investment into capital infrastructure); Ti is tax payment; Ce is charge payment (e.g. effluent charge); Xi is non-purchased input; Ei is external cost; RMUe is
revenue of the MU that is paid out in exchange for inputs; Ci is the actual cash paid for inputs; PeXe,j is revenue received from assessment of a commodity charge by the management unit for
service quantity Xd at a price of Pj; Pe,f is fixed charge for the wastewater service (e.g. monthly fixed charge) received from the service users; Ge is grant or subsidy received from the regulatory
unit in relation to wastewater services; SU is the service user.
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UNDP/GEF Danube Regional Project
1.2.2 Country and Municipality Focus
The activity descriptions associated with the Tariff and Charge Outputs 1.6. and 1.7 make it clear that
the DRP recognizes the value of examining T&C reforms from both a regional and country
perspective. We have adopted this approach in our study and commissioned a series of Country
Reports (see Vol. II of this report). These allow us to consider tariff and charge reforms on both a
regional and country-specific basis. At the same time we have extended this concern for singular
conditions to the municipal level and encouraged the examination the particular circumstances of
municipalities.
Country Reports have been developed for the following ME DRB countries: Croatia, Czech Republic,
Bosnia-Herzegovina, Bulgaria, Hungary, Romania, and the Slovak Republic.3 Each of the Country
Reports has been produced by a local expert or experts following common guidelines regarding
structure and content. The Country Reports consist of a National Profile of MWWU systems and a
Case Study that describes conditions and prospects for a fairly typical municipal water utility. The
content of these components of the country reports are reviewed below.
1.3 National Profiles of Municipal Water and Wastewater Systems
Each National Profile provides an overview of country features that affect water management
generally and MWWUs in particular, including a brief history of municipal water service provision.
The Profile includes a discussion of the legal and institutional setting affecting MWWUs. This
includes identification and discussion of RUs (such as ministries, water authorities, regulatory
commissions, etc.), MUs (ownership and operation regimes), and SUs (the different classes of
customers). The body of the Profile includes discussions of various dimensions of MWWU
operations: service provided, water production, and water quality; regulatory conditions including
permitting, approvals, and performance limits; financial and economic data including tariff setting;
and physical infrastructure technology, age, and operating condition. Throughout this discussion the
authors made a special effort to identify issues of concern that were related directly or indirectly to
tariffs and effluent charges. The concluding section of each National Profile reviews key issues or
problems faced by the MWWUs in the country and possible tariff, effluent charge, and related
institutional reforms that could address the issue or problem.
1.4 Case Studies of Selected Municipal Water and Wastewater Utility
Systems
Each Country Report also includes a Case Study of a representative MWWU in that country. The
Case Study provides background information on the MU and from this background develops
"Baseline" information. The information includes current production and service levels, customer
usage by different groups of customers, water discharge quantities and quality, water and wastewater
tariffs, production and treatment costs, and revenues from the sale of the different water and
wastewater services. As in the case of the National Profile, the case study text includes identification
of issues or problems directly or indirectly linked to water or wastewater tariffs or effluent charges -
identified during development of information about the case study MWWU.
The case study data was used either directly in, or modified for entry into, the input data array of the
ASTEC model. Then the model was run for a variety of scenarios. One scenario confirms the current
financial condition of the MU. Other scenarios can explore the financial, effluent, and other impacts
3 Preliminary work on national profiles and case studies for Moldova and the Republic of Serbia was also done
as part of the T&C Project.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
23
of different tariffs or effluent charges, maintenance programs, and management practices under the
"baseline" conditions.
The case study data was also used to investigate the implications of "sustainable" service levels. In
this instance one includes the full capital accounts necessary to sustain current service levels
indefinitely in the ASTEC data entry. Scenarios under these data explore the financial and activity
implications for the MU, SU, and RU of maintaining current levels of service in the long run. These
explorations include consideration of different policies and designs for water and wastewater tariffs
and effluent charges.
The "sustainable" data entries for the case study community were then supplemented with cost and
financing data for MWWU development plans, including both voluntary and mandated changes in
service and wastewater treatment. These combined data constituted the basis for "expansion/upgrade"
scenarios with ASTEC. The development plans vary from case study to case study but usually
included new or improved levels of wastewater treatment. Additional data needed under the service
expansion/upgrade scenarios included the capital and operating costs of implementing these plans.
The results obtained provide a basis for estimating the tariffs levels sufficient to cover these costs,
including any effluent charge payments. ASTEC also simulates concurrent changes in water
consumption, debt payments, and other physical and financial conditions.
Box 1
ASTEC Features
As the name suggests, the ASTEC model simulates MWWU accounts. This simulation includes
separate accounts for drinking water and wastewater services and both financial and physical
accounting for those services. In ASTEC, MWWU case study customers can be divided into up to
nine groups and distinguished by any dimension considered important by the model user. In
general, service users are distinguished by the type of activity in which they are engaged e.g.,
households vs. industrial; the type of services they use e.g., water only vs. water and wastewater;
and the costs they impose on the MWWU e.g., local vs. remote location.
The input data of the model can be changed to represent different conditions. As noted above, the
progression from baseline, to sustainable, to expansion/upgrade circumstances can be reflected in
ASTEC input data. For any data set, ASTEC also allows the user to make some choices as to how
costs are allocated to different SU groups and what SU groups must pay the same rates. The user
can also select some built-in options regarding tariff design e.g., fixed fees vs. fixed fees and
commodity charges. The model also has an "optimization" option: the user can ask the model to
compute the minimum tariffs necessary to just cover the costs of service. ASTEC also has features
that allow the user to incorporate into a scenario the consequences of tariff and effluent charge
levels for water use, wastewater production, and effluent output. The interested reader can learn
more about the features and structure of ASTEC in the User's Guide attached as an Annex to this
Volume.
1.5 Reform Proposal Development and Evaluation
1.5.1 National Profiles and Case Studies Issue Identification
The National Profiles and Case Studies include identification of issues and opportunities for
institutional and policy reforms at both the national and local level that would enhance the use of
tariffs and charges for water pollution reduction generally and nutrient and toxic effluents reduction in
particular.
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UNDP/GEF Danube Regional Project
1.5.2 Reform Proposals
In the last sections of the National Profiles and Case Studies the issues and opportunities identified in
the body of these two documents were recast as broad reform proposals. These circumstances of
MWWU and these proposals are further summarized in the Overview of the Country Reports. These
proposals were therefore based on both general national conditions and the specific results obtained
from the Case Study scenarios investigated using ASTEC. Some of these proposals address specific
tariff and effluent charge levels and designs; some address the process by which these tariffs and
charges are set. Others address institutional and legal arrangements that influence the effectiveness of
tariffs and effluent charges. In structuring reform proposals, the authors reflect an understanding of
how these various design, process, and institutional conditions interact to determine ultimate
effectiveness. In order to aid the reader in understanding these interactions and their role in
conditioning our proposals, we offer summary analyses of the general functioning of tariffs and
effluent charges in Chapter 2, Annex 1 (for tariffs) and Annex 2 (for effluent charges).
1.5.3 Proposal Evaluation
The contributors to both volumes of this Report have tried to assess the merit of various T&C reform
proposals using three criteria: are they 1) effective, 2) proportionate, and 3) practical. While it is
difficult to make these criteria operational in an objective way, we have tried to elaborate them for the
purpose of evaluating reform proposals as follows.
Effective Given the objective of reducing polluting effluents from MWWUs, can we be reasonably
assured that the tariff or effluent charges reforms or related institutional and policy reforms will result
in less water pollution? In order to obtain this assurance, we need to understand how the incentives
created by the reform will work their way through the financial and physical system. Beyond this, we
need to have some quantitative sense that the possible multiple channels and direct and indirect effects
of the reform proposals, when implemented, will result in net reductions in polluting effluents.
Sometimes this is not as easy to determine as it might first appear (see Chapter 2).
Proportionate Assuming that the policy reforms are effective, can we also be reasonably assured that
the social benefits of the changes resulting from the reforms are at least as great or greater than the
costs that are also incurred. In order to make this principle more operational one needs to be able to
identify and trace all the major changes resulting from the policy change and compare the benefits
with the costs. Such a calculation may include costs or benefits that are incidental to reductions in
polluting effluents but that should still be reflected in our evaluation of the reform proposal.
Making such net-benefit calculations in practice is extremely difficult to do in a completely
satisfactory way. One problem is the difficulty of finding a common metric for the very different
classes of benefits and costs. A variety of approaches have been tried here. In our National Profiles
we sometime simply identify the main sources of benefits and costs (advantages and disadvantages)
associated with a reform proposal.
In our Case Studies we use our accounts framework to consider the financial costs and benefits (in the
form of revenues). This use of the proportionate criteria, in the form of account balances, helps
identify whether the case study MWWUs are in net financial balance in 1) their operating account, 2)
their capital account, and 3) their accounts when expanding or up-grading service. In the Case Studies
we also sometimes explore proportionality by comparing monetized costs and physical changes in
effluent production. This results in a kind of primitive cost-effectiveness analysis. We recognize that
this kind of comparison falls far short of the fully monetized ideal social benefit-cost proportionality
measure, but it can still be helpful in structuring analyses and guiding public policy decisions.
To supplement the financial balance and cost-effectiveness calculations in the Case Studies, we also
compute "burden indices" that suggest how much of a burden supporting a MWWU will be to a local
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
25
community or household.4 These indices are usually a percentage ratio of some measure of
expenditure on water and wastewater services to some measure of total budget. The question one
hopes to help address with this information is whether an increase in this percentage is reasonable in
proportion to the additional services received? More concretely, does the prospective increase in a
households expenditures for water and wastewater services from 2% to 4% of disposable income seem
reasonable in proportion to the increased level of service it may expect to receive?
Practical Assuming that proposals are found effective and proportionate, we are also concerned that
there is some basis for getting them implemented. Part of this criterion is economic. Is there some
way to put these reforms into operation with a minimum of "transactions" costs? Some way to further
limit the costs associated with any change? Part of this criterion is political. Is there the political
"will" to implement a proposed reform in an effective and proportionate way? Are there influential
groups or individuals who would be, or can be persuaded to be, supportive of the proposed reform?
Correspondingly, are there groups or individuals who will be likely to opposed to the reform? If so,
are there some variations of the proposal that might be used to reduce or eliminate this opposition
without compromising the effectiveness and proportionality criteria of the reform?
This criteria, too, is extremely difficult to make operational or determine with precision. In fact, we
don't try to provide any formal calculation of the practicality of a reform beyond citation of some of
the more obvious practical problems. We base our proposals and their variations on our judgment of
what is more or less practical. Ultimately, the process of review and implementation in Phase II will
determine the extent to which these judgments have been correct or not.
Figure 3 and Figure 4 present forms for reform strategy descriptions and evaluations that were
developed to help the T&C Project team describe and evaluate reform proposals. We would
recommend that any national and local policy maker also provide the information and answer the
questions asked in these Figures as part of their own evaluation process.
4 Such calculations are sometimes called "affordability" measures. We feel this is a mis-nomer since anyone can afford to
pay for a good up to the limits of their disposable income. The real issue is one of "burden" or reasonable burden given the
cost of other goods and services that are important to the household.
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Figure 3
Reform Strategy Description
TARIFF AND CHARGE REFORM STRATEGY DESCRIPTIONS
Author: _________________________________________
Date: ____________________________________________
Issue: The issue of particular interest
Issue Summary: Summarize the issue, including: scope, applicability, features of interest, and link to
other issues or considerations
Possible Reform Strategy(ies): List the strategy(ies) that you think should be considered. Add rows for additional strategies
or more numerous descriptive elements.
Strategy Name
Strategy Description
Comments/Concerns
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Figure 4
Reform Strategy Evaluation
TARIFF AND CHARGE REFORM STRATEGY EVALUATION
Author: _________________________________________
Date: ____________________________________________
Cross Reference the Reform Issue. Enter the issue and strategy descriptions that you are evaluating
Strategy Evaluation - Effective? Proportionate? Practical? For each strategy identified, note advantages and
disadvantages and evaluate each advantage or disadvantage qualitatively or quantitatively relative
Strategy
Advantages Disadvantages
Name
Advantage Evaluation
Disadvantage Evaluation
Recommendation(s) Make a recommendation(s) for these strategies-which to adopt, which to drop,
and which require more examination. If further examination is required, how would you recommend
it be undertaken?
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2 Background on Water and Wastewater Tariff and Effluent
Charge Designs and Experience
As "economic instruments", tariffs and effluent charges work by using financial incentives to
encourage behavioral changes. The linkages from these incentives to pollution reduction are
numerous and vary in both the direction and size of their effect. Annex 1 contains an analysis of these
linkages for an increase in a simple commodity charge tariff. Annex 2 contains an analysis of these
linkages for an increase in a simple, single pollutant effluent charge. We encourage those readers who
are eager for analytical background to read these Annexes. In this chapter we discuss the various
objectives of tariff and effluent charges, the way in which various designs achieve or fall short of the
different objectives, and some international experience when various tariff and effluent charge design
strategies have been put into practice. We begin with water and wastewater tariffs and then turn to
effluent charges.
2.1 Tariff Design Options
The fact that MWWUs are legal local or regional monopolies usually gives them considerable
flexibility in the design and setting of tariffs.5 For local water monopolies, pricing power is only
limited by the costs of self-service (which for drinking water and wastewater is often pricy and/or
inconvenient) and whatever additional economic regulation and oversight has been established in the
community and country. This pricing power is why, in considering tariff reforms, we are also
concerned with concurrent reforms in policies and institutions that provide economic oversight of the
local and regional MWWU monopolies.
2.1.1 Revenue Requirement Designs
Meeting "revenue requirements" collecting enough revenue to at least cover the cost of providing the
service dominates tariff design. This is quite reasonable given the fact that tariff studies are often
undertaken by managers who are also responsible for paying the bills of the MWWU. One common
design rule of thumb for meeting revenue requirements is "average cost pricing". This means that
commodity charges are established by dividing total cost of service by total water delivery. Of course,
there are other ways to set tariffs so as to raise enough revenue to cover costs. These often begin,
however, with average cost pricing as a point of departure.
2.1.1.1
Cross-Subsidization in Favor of Household Customers
A common practice in tariff design has been to shift much of the burden for paying for the municipal
water system to non-households. While this does not make good economic policy (see the discussion
of cost-based tariff designs below) it is popular with household customers and their representatives in
the municipal government. The design often involves reducing commodity charges for household or
residential customers below their average cost and raising them for other, especially industrial,
5 The strength of MWWU monopoly pricing power is important and sometimes critical to an assessment of tariff
and effluent charge reforms. This is the reason why, in the country reports, we develop discussions of the
features that affect this power e.g., the definition and durability of exclusive service areas, the possibilities for
self-supply of both drinking and wastewater services.
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customers above their average costs.6 Revenue requirements are met by raising non-household
commodity charge tariffs just enough to offset the loss in revenues from the reduction in household
customers' commodity charge tariffs. Of course, there are practical limits on such cross-subsidization.
In particular, if industrial or other large customers can creditably threaten to develop their own water
and wastewater service or move to a new community, cross subsidies to households will be
constrained.
2.1.1.2
Revenue Requirements and Cost Control
Cost control is an important issue with any regulated public monopoly, including MWWUs. With
inelastic demand (see below), tariffs can be raised to cover costs with little or no erosion in the
revenue stream. This reduces the pressure to control costs. As a public company, management is
especially loath to make un-popular decisions regarding employment or wages. It is, quite simply,
often easier to add employees and raise wages and pass these costs along to customers. These
pressures apply under all tariff designs, but other tariff designs usually require more information on
the source and nature of costs for different customers and different services than average cost tariff
designs. Under a simple "average cost" tariff rule, detailed cost center and cost accounting
information is not required, so it is usually easier to hide excess or excessive costs.
2.1.2 Cost-Based Designs
2.1.2.1
Full Cost Pricing
One principle of tariff setting usually endorsed by economist and, in qualified ways, by international
organizations such as the EU (Water Framework Directive) is "full cost pricing". They argue that,
generally speaking, service should not be cross-subsidized by transfers from other programs or
budgets so as to artificially reduce tariffs and increase resource consumption. Tariffs should equate
the cost of providing service with the willingness-to-pay (demand) of service users. To do otherwise
would result in "excessive" or inefficient water use. In keeping with this principle, the EU Water
Framework Directive encourages tariffs based on 'full cost recovery'.
This principle can be extended to assert that MWWUs should set tariffs based on the particular costs
associated with serving a particular customer or class of customers. For example, industrial customers
with wastewater that is rich with difficult to treat pollutants may be charges higher tariffs than the
average customer.7 Economists encourage setting rates based on the costs incurred in serving a
particular group of customers. Such differentiation in tariff setting promotes efficiency of resource
use and is simply application of the "full cost recovery" principle at a more refined level. In this
context, it means that one group of customers is not responsible for paying for, or "cross subsidizing",
the service provided to other customers.
Unfortunately, properly assigning costs to customers cannot always be done uniquely using a solid
economic rationale (Hall, 1973; Lau 1978). In particular, costs that are incurred independently of the
number of customers or water consumption, sometimes called "joint costs", makes assignment of costs
to particular customers difficult. Sometimes assignment of these costs have a veneer of plausibility,
but they ultimately lack a compelling economic justification. For example, overhead costs cannot be
assigned to customers exactly in proportion to the overhead costs they impose on the system because
6 It is not necessarily a case of cross-subsidization when household customers pay lower tariffs than industrial or
commercial customers. The difference may be due to differences in the cost of serving these different classes of
customers. See the discussion of cost-based rates.
7 Note that such tariffs, while perhaps based on effluent levels, are not effluent charges as discussed below.
They are charges for wastewater collection and treatment service.
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so much overhead activity is "joint" it is performed for all customers simultaneously. Some
suggestions for assigning overhead costs include setting them in proportion to 1) the number of
customers in the system (in a 100 customer system, each customer pays 1/100th of the overhead costs),
2) the length of time a customer has been served, or 3) the size of the service line that connects the
customer to the system. None of these criteria has a completely satisfactory economic justification for
assigning the joint costs i.e., none is clearly more economically efficient than the other although
assignment based on consumption may be clearly inefficient. We will return to this issue again as we
discuss tariff designs below.
2.1.2.2
Marginal and Average Cost Pricing
Another tariff design principle encouraged by economists and international organizations such as
OECD (2003b) is "marginal cost pricing". With some qualifications, such pricing is fully, socially
efficient. 8 This occurs when tariffs are set at the marginal cost (not the average cost) of providing
service to the each customer. Assuming that customers are purchasing service so as to maximize their
welfare, setting tariffs at marginal cost assures that customers purchase the efficient amount of the
service i.e., the amount that equates the marginal cost of producing that last unit of service with the
marginal benefit of consuming that same last unit. Unfortunately, setting tariffs for water and
wastewater service at marginal cost may pose some problems.
In a "natural" monopoly like a municipal water and wastewater utility we often have decreasing short
run average costs and constant (or rising) short run marginal costs of production up to the point of
current industry capacity. This is illustrated in Figure 5 below. The practical explanation for such a
short run cost structure is the high, lumpy fixed cost of infrastructure that supports production. In the
extreme, all infrastructure is installed before any water service is actually produced. The marginal
cost (MC) of service, after construction of the infrastructure, is the sum of operating costs, such as the
cost of energy, labor, and chemicals, used to produce each additional m3 of water. The MC line shows
that average cost of each unit of water produced is roughly constant. As more water is produced, the
average cost (AC) of production the line the decreases as production increases - declines because the
fixed cost of infrastructure can be spread over more units of service output. The marginal cost in this
setting, however, is lower than average cost at all service levels up to capacity.
8 The equivalence between efficiency in pricing and efficient use of resource generally is contingent on general
application of efficient pricing. If there are gross price distortions in other parts of the economic system, then we
cannot be as certain that full cost pricing in one market will result in higher efficiency for the economy in
general. This issue is discussed in the economics literature as the "theory of second best". Furthermore, this
validity of this result also depends upon having already established policies that "internalize" environmental and
other externalities.
Glenn Morris / Andrįs Kis
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Figure 5
Municipal Water Utility Short Run Costs: Decreasing Average Cost
Cost/Unit
of
Service
(m3)
AC
MC
Capacity
Service Level (m3)/ Unit of
Time
From the social efficiency perspective, using the infrastructure doesn't cost anything once it is
installed; all fixed infrastructure costs are sunk costs. The efficient level of service provision is that
which equates demand with marginal costs. Thus, efficient tariffs should be set at marginal cost and
customers should be allowed to purchase as much water as they are willing to buy up to the limit of
system capacity. Any other tariff design would, from a social efficiency perspective, "underutilize"
the water system.
This policy, however, can create financial problems for the MWWU if the commodity charge, set to
MC, is less than AC. In Figure 6, we show an example of a case where the demand (DD) for water
services intersects MC and AC at a level below current capacity.9 When commodity tariffs are set at
MC (TMC), the demand for service is Q0. This is the efficient marginal cost based level of service
provision under these circumstances.
9 Marginal cost pricing in the long run i.e., when demand at short run marginal costs exceeds capacity, involves a
extension of the analysis that we don't develop here. For the time being we simply note that marginal cost
pricing principles direct policy makers to allow tariffs to rise above short run marginal costs so as to just reduce
demand to a level consistent with current capacity. Such tariff setting should be practiced up to the point when
these tariffs rise to the level of long run marginal costs. In other words, the long run marginal costs that are used
as a reference for tariff setting are based on the marginal costs of building and operating the infrastructure
needed to add additional capacity. For an elaboration on the theory and practical application of marginal cost
pricing in the context of water utilities see Russell and Shin (1996a and 1996b).
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Figure 6
Municipal Water Utility Costs: Setting Tariff at Short Run Marginal Cost
Tariff or
Cost/ Unit of
Service
DD
(m3)
TCR
CR
AC
TAC
MC
TMC
Q1
Q0
Capacity
Service Level/ Unit of Time
One problem with this example of marginal cost pricing, however, is that the revenues collected (TMC
* Q0) are less that the costs of providing that level of service (TAC * Q0). Setting tariffs at MC results
in a short run budget deficit for the MWWU. Moreover, the short run can last for years if the MWWU
has built a large capacity system relative to demand.
This issue setting efficient tariffs when there is substantial excess capacity is a common problem
for the MWWUs of the ME DRB. Due to economic restructuring water demand of industrial
customers has dropped sharply, leaving substantial excess capacity. This has often resulted in
reductions in MWWU revenue. Efforts to compensate for this revenue loss from industry have
included raising the tariffs to residential customers. This has sometimes resulted in even further
reduction in demand for water. As Figure 7 illustrates, you have to move back along the demand
function to the point where DD intersects the AC before tariffs are once again high enough to cover
costs. This is the cost recovery tariff level TCR and service level Q0. Fortunately, Figure 6 probably
exaggerates the problem slightly relative to the ME DRB MWWUs. For one thing, much of the
excess capacity was built with Central Government grants, so the real AC function probably does not
lie so far above the MC function. Secondly, the demand for W&WWS is likely to be less elastic than
that depicted, especially as the tariffs rise and conservation become more difficult.
As noted above, many MWWU managers and water utility trade organizations argue that tariffs
should be set at average costs. This assures that total costs will be covered by total revenues. While
this would also result in inefficiently low levels of water use in the short run, they believe the
disadvantage of lost efficiency is small relative to the advantage of financial stability that average cost
pricing achieves.
Another tariff design strategy is to combine marginal cost pricing, in the form of a commodity charge
tied to operating costs, with a fixed charge per customer that is designed to make up for any shortfall
in the revenues. A fixed charge is a lump sum payment that will not significantly distort the efficiency
advantages of a commodity charge based on marginal costs. It also has the advantage that it may be
set and assigned to customers using virtually any criteria except the level of service used by the
customer. On the other hand, the fixed charge may be significant. In cases such as that illustrated in
Figure 6, it may be as large as the average commodity charge. Because of this, it may be difficult to
find a way of adopting MC pricing in combination with a fixed charge that will be acceptable to key
MWWU policy makers.
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2.1.3 Equity Designs
The equity criterion asks that tariff setting reflect the ability-to-pay of customers as well as their
willingness-to-pay. Ability-to-pay is not an observable criterion, so there are many operational
variants. One common variant is "two part pricing" in which two tariffs are set. Such a design is
illustrated in Figure 7 below. The first tariff, T0 is a commodity charge set at some value lower than
average price. It applies to some initial level of consumption Q0, for example the first 2 m3 of water
per month for a household customer.10 The second tariff, T1, is higher, sometimes much higher, than
average price and is a commodity charge that applies to all consumption above Q0 m3 per month.
Figure 7
A Two-Part Commodity Charge Tariff with the Second Part Applied after
Consumption of Q0
Tariff/Unit
of Service
T1
T0
Q0
Service Level/ Unit of Time
The two-part tariff is considered by many to be a compromise between efficiency and equity
objectives. The assumption is that customers with low ability to pay will also exhibit low willingness
to pay. They will consume at levels below Q0 and will expend relatively little on water services.
Other customers are assumed to have a high ability (and willingness) to pay and will consume at levels
well in excess of Q0 in Figure 7. If most customers consume above Q0, and the Second tariff is
roughly equal to marginal cost, then the two part tariff will both provide some expenditure relief to
low demand customers and provide the approximately correct social marginal cost signal to the high
demand customers.
As in the case of marginal cost pricing, however, two-part tariffs that provide significant relief for low
demand consumers and charge other customers marginal cost may not meet "revenue requirements".
There may still be a shortfall in revenue and, if revenue must cover cost, the two-part tariff designer
may find it necessary to compromise some or all of the equity and efficiency advantages of the
original design. Also, two part tariffs are not, efficient if some of the customers are paying tariffs that
are either less than or greater than their marginal cost of service. The more the tariffs deviate from
marginal cost, the greater the inefficiency.
10 The first commodity charge can, and often is, recast as a fixed charge. One does this simply by setting a fixed
charge equal to the first tariff rate, T0, times the amount of service (m3) to which this rate applies. The result
becomes a fixed charge and, when paid, is said to qualify the customer for up to Q0. For example, if the initial
tariff is set at .50 for 4 m3 of water per month, the fixed charge is 2 per month and qualifies the user for up to
4 m3 of water a month for "free". While motivated by entirely different considerations, such a tariff regime may
be the first step toward an often efficient two-component tariff system in which the fixed component is set to
cover fixed costs assigned to the customer, while the variable component is set at MC.
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2.2 Lessons on Tariff Reform from International Experience
Partly because of the many and sometimes conflicting objectives of tariff setting, it is difficult to
develop and successfully implement tariff reforms that, on balance, improve services at reasonable
costs. The problem is widely recognized and some experience with the process of tariff reform has
stimulated some useful observations regarding successful implementation of genuine reforms.
2.2.1 Leveraging Crisis
The reform process, including discussion of alternatives and resolution of conflicts, usually moves
faster if it is stimulated by some "crisis": a technical failure, a drought, the imminent end of an existing
supply contract, etc., cf. Hall (1996a). While we would never recommend "manufacturing" a crisis to
expedite reform, it is important to recognize that such circumstances can galvanize local citizens and
authorities to action, including adoption of tariff and investment reforms that make sense even after
the immediate crisis has been addressed. Recognizing such a relationship might be one basis for
deciding where and how hard to push for implementation of beneficial, long-term tariff and effluent
charges reforms.
Of course, we also recognize that the value of this observation may be slight in those countries and
communities of the ME DRB that have had a surfeit of crises over the past decade and a half. In a
political and economic environment in which change has been the common denominator and crises of
various sorts a daily fact of life, any impetus to reform sparked by such change may easily be offset by
the desire for stability.
2.2.2 Consideration of Compensation for "Losers"
Welfare economics is based on the notion of seeking policies that result in Pareto "improvements".
There is a net improvement in welfare if the benefits of the change exceed the costs. Another way of
saying this is that the beneficiaries of the change can make lump sum side payments that fully
compensate those who lose for their loss and still be better off. The difficulty with making such
improvements the basis for choosing a policy reform is that such compensation very rarely actually
takes place. In certain respects this is the result of a practical problem: it is so difficult to correctly
identify the winners and losers, calculate the extent of their loss, and arrange for compensating
payments from the winners that are neutral with respect to the merit of the original policy change.
In the case of the tariff reforms considered here, we doubt that the losers can be ignored. For the most
part, the losers are the customers who have to pay higher tariffs to support changes in the system.
Their roll as owners and indirect directors of many of the MWWUs, through their municipal
representatives, give them special influence on the adoption of reforms. They must see as least some
"compensation" for the tariff increase, perhaps in the form of improvements in service reliability, cost
savings in the long run, or some other benefit that is coincident with their experience. Some of these
benefits may be natural products of the reforms, but others may have to be designed into the reform
itself.
We cannot say, more generally, how a tariff reform should be done to accomplish this. We know that
trying to provide compensation through increasing block tariffs has problems in practice (see below).
The discussion of the design options described above may provide some ideas. Still, we want to
encourage those who are working on the details of implementation to think about the ancillary features
of a reform that can be used to attenuate the opposition of the clear losers without imposing costs that
exceed the benefits of the new policy.
Glenn Morris / Andrįs Kis
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2.2.3 Performance Audits
An approach used in the field of 'performance accountability' (regular reporting about the economy,
efficiency and effectiveness of public services) is that service providers or regulatory bodies identify a
set of performance indicators and performance targets for the public service, including possible cost
reduction targets. Service providers aim to reach those performance targets during the year, and in
their annual reports they publish their performance results. This is an approach mostly used in the
English speaking countries and Northern Europe, it is spreading in the world as it is seen a kind of
"best practice". Of course, the indicators have to be very carefully selected or created in light of the
specific nature of the given service, and they have to be 'objectively verifiable'. The performance
audits may be an effective way of promoting good management and cost control in a local public
monopoly.
2.2.4 Multipart, Increasing Block Tariffs
OECD (2003b) warns that trying to protect low income customers from tariff increases by adopting
increasing block tariffs (IBT) is not a well-targeted policy. Too many of poorest households are not
protected financially and more affluent households often are. Boland and Whittington (2000) devote a
article to the subject and note that IBTs:
1. Are not commonly used in industrialized countries.
2. Purported advantages income redistribution (several ways), economic efficiency, public
health, and conservation - each may be an illusion upon further analysis.
3. In practice: for six developing cities
a. Lowest, initial blocks tend to "spread" and bestow the lowest rate on many more
customers
b. MC at only a few blocks, so "30-75 percent of household pay artificially low first
block" tariffs
c. Break points in the blocks can result in large errors in revenue estimates for new tariff
levels.
d. Only an "optimal departure" from efficiency under special, technical conditions.
e. More complicated IBTs provide misleading or confusing price signals.
f. Counterproductive for unmetered household or household that share a connection.
Bolland and Whittington conclude by recommending a single, MC tariff with a rebate (negative fixed
charge). The technical condition for this type of tariff is MC>AC does not apply to the ME DRB
countries in the short or intermediate run, but their recommendation to use a combined fixed and
commodity charge is probably worth considering seriously.
2.2.5 Bundling of Tariff Reforms with Other System Reforms
One staple of the international literature on water pricing is the lament that the authorities have created
legal, contractual, or political constraints that effectively bar the most effective reforms. This is the
message of Cueva and Lauria (2000) for municipal water management in Dakar where past
privatization contracts and political agreements with commercial growers (a customer category)
severely limited the base for tariff reforms and made tariffs that stabilized the system much higher.
They demonstrate how the opportunity to improve the service of the water system dramatically with
only modest rate increases has been lost unless parallel reforms in the contracts and past agreements
can also be re-negotiated. This is a dramatic example to the need to "bundle" reforms if the potential
benefits of a tariff reform are to be realized.
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2.3 Effluent Charge Design Options
The effluent charge is an economic instrument that provides an incentive to reduce discharges or
polluting effluents from point sources. As described in Annex 2 it works through several links to
pollution reduction, interacting with tariffs and having possible significant affects through the revenue
use of the effluent charge revenue collected by a RU. As in the case of the tariff, the effluent charge
can also have impacts beyond pollution control; on behavior, budgets, and other dimensions of
service.
The effluent charge itself is usually set nationally, with the charge applied to any source in the nation.
It is exceptional to find effluent charges that are set to reflect local waterbody-specific conditions.
However, for some effluent charge designs there can be some local variation in the operation of the
effluent charge due to local permitting decisions.
The advantages of different effluent charge designs will depend on the objective of the effluent charge.
One objective may be to raise the effluent charges so high that MWWUs are "forced" to install tertiary
treatment on all wastewater discharges. Another objective might be to set an efficient effluent charge
by equating the charge with the marginal social damages of the effluent. Another objective may to
maximize the revenue of the RU(s) that receives the effluent charge payments as income. In the
following we discuss some design alternatives, but, to keep from getting overburdened and too
hypothetical, do not try to construct analyses that relate to each of these objectives or the various
institutional settings that might condition the results.
2.3.1 Effluent Charges: Fines or Taxes
Since most effluent emissions are subject to operating permits reflecting point or ambient emission
standards or regulations, a main feature of effluent charge design is whether the change should only be
levied for effluent discharges in excess of the permit or on all effluent discharges, even those within
"permitted" levels. In the former case, the effluent charge design operates more like a fine for
exceeding permitted effluent levels. As noted in Annex 2, this kind of design encourages effluent
control only up to the point of the permitted discharge. At the same time, the design limits the
financial burden the effluent charge places on an MWWU. The merit of this design its effectiveness,
proportionality, and feasibility - depends not only on the level of the charge relative to the cost of
abatement and the damage of the effluent but on the set-points established by the permit.
An effluent charge that applies to all effluent flows, whether within permitted levels or not, is more of
an effluent tax. It provides an incentive for effluent abatement below permitted levels and is a cost to
the MWWU regardless of the extent of treatment or care taken in operation. If a country wants to
design the effluent charge so that a charge is paid on all effluents, a legal or ethical issue may arise as
to the validity and meaning of the permits that had granted MWWUs the "right" to produce effluents
up to the permitted level. Such an effluent charge begins to look and behave more like a simple tax
than an incentive to reduce effluents to efficient levels, especially if there is no attempt to link the
effluent charge to the recreational, ecological or other damages caused by the effluent.
2.3.2 Effluent Charges Per Unit of Pollution
Most effluent charges are, in principle, levied per unit of pollution. Making them operational,
however, requires the identification and measurement of pollutants, selection of pollutants to assess
the charge on, and setting the charge level itself.
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2.3.2.1
Load or Concentration?
The measurement of the concentration of pollutants in a wastewater stream is difficult and often
costly. Combined with enough flow data, concentration data can be used to estimate the "load"
usually denominated in some weight of mass per unit of time - of a pollutant in a wastewater stream.
Both measures, however, may be important in estimating the damage associated with the release of the
pollutant in a water body. If one wants an effluent charge design that signals the severity of the threat
to the receiving water body, one probably needs to not only select effluent charges that vary with the
pollutant, but also ones that varies with both the concentration and load.
Indeed, it can even be the case that some effluents are beneficial up to a point. For example, a certain
level of nutrient load is necessary for a healthy ecosystem since many species depend on the small
animals that are nourished by the nutrients in the water column.
2.3.2.2
Selection of Pollutants
The selection of pollutants against which to apply an effluent charge can be all embracing or reflect a
few "criterion" pollutants that are indicators of others. The pollutants subject to effluent charges
might also be determined by their toxicity, the threat they pose to a given water body, and, perhaps
most importantly, the cost of measuring the concentrations and volumes accurately. For those
countries that have recently joined or wish to become part of the EU, the various water directives
provide some specific guidance as to the pollutants that would have to be monitored in any case and
these would, in principle, be good candidates for an effluent charge. The directives themselves,
however, establish or promote effluent and ambient water quality standards. They do not direct the
establishment of or set a level for an effluent charge.
2.4 Lessons from International Experience with Effluent Charges
Our first and perhaps most important observation regarding effluent charge experience is that there are
no instances that we are aware of in which the effluent charge is used strictly as an incentive tool for
pollution reduction. The effluent charge is almost invariably imposed in tandem with effluent
standards and often serves to supplement other penalties for non-compliance with these standards. As
noted in a recent study of environmental taxes and charges in EC countries (Ecotec Research and
Consulting, 2001) in Germany and Denmark the effluent charge designs are based on the "fine" design
and are sharply reduced on effluents that are within standards. In this sense they are designed like a
multipart tariff, with much lower charges applied on the "first" block of effluents. Ecotec's
elaboration regarding the German design is that, "emphasis ...is on the technical discharges... and the
tax (effluent charge) is a supplementary instrument used more or less as a penalty for non-
compliance".
As of 2001, seven of the then fifteen EU countries had effluent charges (Ecologic, 2001). In the
Netherlands, France, Spain, and Belgium the effluent charges are considered primarily as revenue
instruments and incentive effects are "unclear but probably low" (Barde and Smith, 1997). The
revenues are used for water pollution control measures. In England and Ireland, the effluent charges
are designed to collect revenues, but rates are set to cover the cost of operating the effluent standards
program (Ecotec Research and Consulting, 2001).
When it comes to the effects of effluent charges via the "cost side" i.e., the incentive to reduce costs, it
is almost impossible to untangle the effects of the effluent charges from the standards and their
enforcement. Most examinations, in fact, focus on the effects of effluent charges in general and not on
municipal wastewater sources. Since most sources are industrial point sources, the role effluent
charges have played in reducing municipal wastewater pollution is further obscured. A study of
Danish municipal sewerage treatment by Miljųstyrelsen (1999), however, found improved compliance
with standards coincident with the increase in the effluent charges but concluded that this was mainly
the result of improved enforcement and that the effluent charge per se played only a supplementary
38
UNDP/GEF Danube Regional Project
role in the improvement. In some instances, e.g., Denmark (Ecotec, 2001), the effluent charges
include special considerations for different affected sectors. This is probably a good design feature
but, again, one that makes it difficult to assess the effectiveness of the effluent charge in the municipal
setting.
Finally it is also difficult to assess the effluent charge experience of those countries whose designs
focus on the "revenue side" because, of course, the merit depends on the amount of revenue produced
and how that revenue is allocated. Some of the effluent charge programs e.g., France, Netherlands,
have been on-going for some time and appear to have passed the test of effectiveness at some very
basic level: they have generated revenues and have survived. At the same time, however, one doesn't
know whether the programs have been "proportionate" or how they would fare upon careful
comparison to a counterfactual.
Some European countries have some innovative features in their effluent charges. Denmark, for
example, designed its program as a "green tax" and revenues accrue to the general budget. It also
makes substantial distinctions in the effective effluent charge rate based on the sector and the amount
of household wastewater in the effluent stream. In Belgium, Italy, and Spain the effluent charge
system is not national but they differ by region.
A recent EU parliament workshop on effluent charges included summarization of a report on effluent
charges prepared by Ecologic (2001).11 The broad conclusion is that effluent charges have been "an
effective instrument for water pollution control". But this same report notes that the seven effluent
charge programs in the old EU "differ strongly in functions, calculation methods, pollution
parameters, level of charges, exemptions, and the use of revenues". There is no comparative analysis
that suggests what consequences these differences have and how this experience might be used by the
countries of the ME DRB.
11 Ecologic is affiliated with the Institute for European Environmental Policy (IEEP). IEEP was, in turn, a
collaborator with Ecotec Research & Consulting in its 2001 report on economic instruments for environmental
protection.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
39
3 Status of Municipal Systems in Danube River Basin Countries
There is a wide range in the size and extent of MWWU service systems in the countries examined in
this report. Some service areas are coincident with a municipality and its immediate environs. In this
instance it is often the case that the system elements are "technically dependent"; the system is well
interconnected to common sources, distribution lines, collection lines and discharge points. Other
MWWUs cover a "district" comprised of a core municipality and a few other larger towns in the
vicinity as well as suburbs and villages in between. In this case, some parts of the system may be
technically independent elements: independent well fields and distribution systems. Finally, in some
countries one of the main forms of organization is the "regional" water utility. There may still be a
central city that anchors this regional organization, but the utility can cover a large area, embrace some
large industrial communities as well as significant cities, towns, and villages. Such a "regional"
MWWU often has separate system elements: water sources, distribution networks, sewerage collection
systems, WWT plants, and discharge points. All are within the scope of our study.
In this chapter the structure and operation of MWWUs of the study countries will be assessed through
a variety of features. Our goal, besides providing a basic classification of W&WW utilities of the
region, is to highlight those issues and problem areas, the handling of which is key to improved and
more efficient water related services, to reduced release of toxics and nutrients into the Danube
tributaries. The assessment of MWWU conditions in this chapter, together with the discussion of
tariff and effluent charge purpose and design in Chapter 2 and the discussion of links between tariffs
and effluent reductions (in Annex 1) and effluent charges and tariff reductions (in Annex 2), provides
the basis for tariff, effluent charge, and supporting institutional reforms developed in succeeding
chapters.
3.1 Organization of Water and Wastewater Utilities
Table 2 reviews the number of MWWUs of different size in the study countries of the DRB. In most
of the countries there used to be a limited number of large W&WW utilities before economic and
political transition in the early 1990s. These companies were closely managed by central authorities.
In the beginning of the 1990s in some of the countries the obligation to supply W&WW services, as
well as the ownership and management rights of the utilities were transferred to local levels, most
often to municipal councils.12 For a variety of reasons, such as demand for autonomy or cost
differences in supplying water to participating municipalities, some of the regional companies were
split into smaller units, corresponding to the geographical layout of the involved municipalities, and
eventually resulting, in some cases, in a large number of relatively small MUs of great diversity. This
process took place, most of all, in the Czech Republic and Hungary and it is discussed in detail in the
National Profiles contained by Volume 2 of the present report.
A large number of MWWUs in any given country does not, however, mean that each of the individual
utilities are small in size. Urban areas usually have one MWWU each13, therefore the overwhelming
majority of population in these countries is served by just a few dozens of MWWUs. Furthermore,
while the small utilities are legally independent entities, they are not always technically independent of
each other. They often purchase water from, and release wastewater to, the networks of neighboring
MWWUs.
12 Romania is an exception in that local ownership and management, still with extensive central budget support,
was the rule before 1990. Only in two cases were these roughly county-level management units further sub-
divided in the 90s.
13 Three exemptions from this observation are Prague, Budapest, and Zagreb where water service and wastewater
service are separated and provided by two independent companies.
40
UNDP/GEF Danube Regional Project
In some of the countries, such as Slovakia and Bulgaria, large regional companies dominate water
services even today. Some of these companies were transformed into municipal ownership, but then
stayed together as one unit, as separation was prohibited by regulation, or the potential advantages of
breaking up the large MWWUs was either not compelling or overlooked for the time being.
As depicted in Table 3, devolution of central government ownership is either complete or well
advanced and municipal ownership of MWWU fixed infrastructure is commonplace in the region.
Some of the larger regional utilities in Bulgaria and Hungary are fully or partially owned by the
central government, but most MWWUs in Hungary, and a significant number of MWWUs in Bulgaria
are owned exclusively by municipalities. Moldova is the only country where the state is the
predominant owner of water infrastructure, and prospects of near-future decentralization are uncertain.
According to our information, private ownership of majority stakes in MWWUs is not allowed by
regulation in any of the study countries, while minority private ownership is made possible by law in
the Czech Republic, Hungary, Croatia, and Slovakia. In Slovakia there is only one instance of a
private co-owner, in the Czech Republic only a few cases, while in Hungary private investors bought
minority stakes in a number of medium and large MWWUs. In Croatia we are not aware of any
private investment, other than some shares held by employees of MWWUs.
Private operation, as opposed to private ownership, is more frequent in the region. Central
government-owned MWWUs, as far as we know, do not have concessions contracts for private
operation, although such plans have been discussed in Bulgaria. Concessions are negotiated between
municipalities and private operators, coupled with minority private ownership in some instances.
Examples of private operation of municipal infrastructure can be found in part of the region, and these
arrangements are more widespread in the Czech Republic, Hungary and Slovakia, than in the other
countries. We are not aware of private concessions in Moldova and Bosnia. The lack of these
arrangements is due partly to regulation, and partly to lack of interest in operating companies which
are financially unstable with badly deteriorated or damaged infrastructure.
In the case of most concessions the role of concessionaires is limited to operation and management
under policies established during concession negotiations. The concessionaire may recommend or
propose a policy change or investment program but the authority to make strategic decisions is usually
retained by the municipal boards.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
41
Table 2. Number and Size of Municipal Water and Wastewater Utilities in Study Countries of the DRB
Municipal
Water and
Distribution by Size
Wastewater
Country
Utilities
Comments
Large
Medium
Small
Number of
(> 100,000
(25,000 - 100,000
(< 25,000
utilities
inhabitants)
inhabitants)
inhabitants)
Bosnia-
Bosnia has 134 municipalities (as administrative units,
106 No
data
many times comprising of several settlements), served by
Herzegovina
106 MWWUs. Data is from 1999.
29 "regional" and 21 "municipal" companies. Some of the
Bulgaria
50 2
7
1
2
1
1
municipal companies are also large (e.g. Sofia) but most are
quite small
Croatia
3; only Zagreb is in the
8 above 35,000; 5 in
130
About 120
DRB
DRB
Czech Republic
1 600
20
100
1 480
2001 data. The number of the smallest utilities may have
Hungary
377 2
4
35
3
changed since then. The largest 24 companies serve 75%
of the population.
Moldova
51
2
about 40
about 10
Romania
Estimated data. Not every single utility provides W&WW
565 2
3
~6
0
~48
0
services, but the overwhelming majority does.
Not recorded. These
5 regional and 6 municipal companies servicing virtually
are small municipal
all municipalities in Slovakia.
water companies that
Some small municipalities are not yet part of the regional
Slovak Republic
11 1
1
usually provide a
companies, but they will be joining them in 2004
single service (e.g.
drinking water supply)
to their communities
42
UNDP/GEF Danube Regional Project
Table 3. Ownership and Management of MWWUs in Study Countries of the DRB
Ownership of the Fixed
Strategic Management of the
Policies and Day-to-Day
Country
Ownership Comment
Infrastructure
MWWU
Management of the MWWU
FB&H (Federation of Bosnia and
FB&H:
FB&H:
FB&H:
Herzegovina):
·
Ownership of W&WW utilities is
·
Federation-owned wholesale water ·
The utilities are allowed to be
·
Utilities are owned by the
mostly regulated at level of the cantons
supply facilities are managed by the
operated by a variety of entities,
municipalities.
(the Federation consists of 10 cantons). two Public Companies for Watershed
including both public and private
Bosnia-
·
Water supply facilities are the
Areas. These companies are also
companies, according to federal
responsible for management of
legislation. To our knowledge, most or
Herzegovina
property of the cantons, unless
otherwise defined by the cantonal water concession matters (although we are
all MWWUs are operated as municipal
law.
not aware of any concessions at this
companies.
time).
·
Most of the smaller municipalities
·
Strategic planning at the MWWUs operate a number of municipal services
is carried out by the municipalities.
together with W&WW services.
RS (Republika Srpska):
RS:
RS:
RS:
·
W&WW utilities are owned by
·
Certain MWWUs are "of state
·
In companies of municipal
·
W&WW utilities are operated by
either the republic or the municipalities. interest", while others are "of
interest, the Municipal Assembly elects
public companies. Private operation is
municipal interest", depending on the
the members of the governing bodies.
not allowed by regulation.
amount of company capital, and the
·
No data on how companies of
·
A few of the smaller
field and geographical territory of
state interest are managed.
municipalities operate a number of
company activities. Private ownership
municipal services together with
is not allowed by regulation.
W&WW services.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
43
Ownership of the Fixed
Strategic Management of the
Policies and Day-to-Day
Country
Ownership Comment
Infrastructure
MWWU
Management of the MWWU
·
29 Regional Water Supply and
·
Private ownership is not a legal
·
Strategic decisions are made by
·
MWWU operations are managed
Sewerage Companies. 13 of these are
option at the moment.
the owners (state Ministry of
by the owners (in most cases) and/or
100% central government owned and
Regional Development and Public
the concessionaire (infrequently)
16 jointly owned (51% by the central
Works and/or municipalities)..
·
A growing number of concessions
government and 49% by the
are expected, though the process of
municipality).21 municipally owned
establishing concessions has so far
water and sewerage companies serving
Bulgaria
been slow.
only small areas and populations.
·
In 2000 the concessionaire
"international Water" and the
municipality of Sofia registered the
joint stock company "Sofiyska Voda
AD" to operate the water supply and
sewerage services of Sofia
·
99% owned by limited liability
·
Sometimes employees have a
·
Strategic management is usually
·
Many of the smaller municipalities
companies controlled by one or more
minority stake in the MWWU. No
delegated by local governments (and
have the same limited liability
local governments.
known instances of professional private the concessionaire, if there is any) to
company also operating other public
investors in MWWUs, even though
supervising committees. Sometimes it
services e.g., waste management.
they could legally have a minority stake is assigned to one of the partner local
in MWWUs.
governments.
Croatia
·
Concessions (without ownership
of infrastructure) are becoming more
common, but municipalities, due to
lack of such experience and fear of
losing control, are very cautious in this
process.
·
Mostly owned by municipalities
·
Strategic decisions are generally
·
The joint stock companies operate
through joint stock companies.
made by join-stock companies, in
the systems.
Czech
Occasionally minority ownership by
which both operators and owners of
Republic
private investors.
infrastructure are represented. The real
power depends on their mutual position
in a particular MWWU.
44
UNDP/GEF Danube Regional Project
Ownership of the Fixed
Strategic Management of the
Policies and Day-to-Day
Country
Ownership Comment
Infrastructure
MWWU
Management of the MWWU
·
60% local governments
·
Percentage distribution provided
·
Investment decisions (including
·
The operating company usually
·
20% central government
at the left is based on asset values.
savings for investments) usually rest
represents the interests of the owners
·
By regulation private investors are
with the municipalities. Strategic
(and concessionaires, if there is a
Hungary
·
20% joint ownership of
managers are appointed by the owners
concession agreement).
municipalities and private investors
allowed to have only a minority stake
in a MWWU (up to 50% minus one
(and concessionaires, if there are any).
·
Often the concessionaire pays a
share).
rent to the municipality for use of the
infrastructure.
·
Central government ownership
·
Apa Canal Chisinau was
·
Appointed by the municipal board
·
Takes place at the municipal level.
(through the Ministry of Economy and
transferred to the municipality in order
with a veto right of the Ministry of
Moldova
Reforms), except for Apa Canal
to qualify for an EBRD loan. The loan, Economy and Reforms.
Chisinau, which is owned by the
however, is guaranteed by the central
municipality.
government.
·
All infrastructure is owned by
·
According to ownership of the
·
There are concessions to operate
Romania
municipalities
operating company
the infrastructure in two big cities. In
these cases operation is carried out by
the concession company.
Slovak
·
100% municipal ownership,
·
Ownership opened for private
·
Strategic decisions, including
·
Municipal boards delegate day-to-
except for Trencin, in which there is
shares by new regulation, but not tested appointment of strategic manager, are
day management to Ltd. Companies
Republic
49% private stake.
yet.
made by municipal boards.
(municipal and/or private)
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
45
3.2 Status of System Infrastructure
In general the conditions of infrastructure and the quality of service are better in the North Western
part of the region than in the South East. Daily disruptions of water service are ordinarily related to
the poor conditions of infrastructure (e.g. fracture of pipelines, break-down of pumps) or financial
problems of the MWWU (e.g. disrupted electricity supply due to non-payment of energy bills).
Occasionally an inadequate supply of water resources also has a role in daily restrictions of water
provision. Restrictions on service are more frequent and their duration is longer during arid periods,
especially during the summer.
Estimated average distribution or leakage loss by country is provided in Figure 8. In the case of
Bosnia-Herzegovina and Moldova it is uncertain if the water loss data include any unmetered
consumption and illegal connections. Within some of the countries, especially the ones with higher
national average loss, like Bulgaria, there is substantial variation of leakage among MWWUs,
depending on the conditions of the distribution network. Water loss in some countries is on slow
decline (e.g. Croatia), in other countries it is slowly increasing as the network degrades due to
inadequate maintenance (e.g. Czech Republic). At MWWUs with high ratios of leakage the loss of
water, and related increased operational costs notably contribute to the financial difficulties. Some of
the MU scenarios in ASTEC, as described in the Case Study Documents of Volume 2 of the present
report, examine the effectiveness of investments into leakage reduction. According to the results,
there is room for improving the financial performance of MWWUs in the region through appropriately
selected leakage reduction investments, which very often have short repayment periods.
Figure 8
Average National Distribution Loss in Study Countries of
the DRB
80%
70%
60%
50%
40%
30%
20%
10%
0%
Bosnia-
Bulgaria
Croatia
Czech
Republic
Hungary
Moldova
Romania
Slovakia
Herzegovina
In most countries of the region around 50% of the population is connected to the wastewater collection
network ( Figure 9). Exceptions from this observation are the Czech Republic and Bulgaria (with
higher sewerage connection rates) and Bosnia-Herzegovina (with lower sewerage connection rates).
Connection ratios in the cities are higher than in rural areas. In Bulgaria and Croatia settlements closer
46
UNDP/GEF Danube Regional Project
to the sea also have higher sewerage connection ratios than farther away towns. In some of the
countries of the region (e.g. Croatia, Hungary) programs for expansion and construction/upgrade of
the wastewater infrastructure are being implemented, therefore statistical data on connection rates and
treatment levels is quickly getting outdated.
Figure 9
Percentage of Population Connected to the Sewer in Study Countries of the DRB
80%
70%
60%
50%
40%
30%
20%
10%
0%
Czech
Bosnia-
Bulgaria
Croatia
Republic
Hungary
Moldova
(estimate)
Romania
Slovakia
Herzegovina
(DRB only)
While connection ratios of wastewater do not show extraordinary variation within the region, the same
is not true for treatment of effluent ( Figure 10). A substantial portion of wastewater is treated
biologically or chemically only in the Czech Republic, Hungary, Bulgaria, and Slovakia. In the rest of
the countries most wastewater is either not treated, or only mechanically, with very low portions of
secondary and tertiary treatment. Low levels of treatment are mostly explained by lack of WWTPs
and lack of advanced technologies at existing WWTPs. In some cases, like in a number of MWWUs
in Moldova, WWTPs do exist, but their operation is impeded by financial difficulties of the utilities.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
47
Figure 10 Treatment of Effluent Collected by Wastewater Systems in Municipal Water and
Wastewater Utilities in the Study Countries of the DRB
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
a
ry
ia
ani
ria
R.
ate)
ak
govina
ga
B only)
im
Rom
Hun
Bulga
Czech
est
Slov
(DR
ia-Herze
tia
ldova (
Bosn
Croa
Mo
U
P
P+S
P+S+T
Notation: U = untreated; P = primary treatment only; P+S = primary and secondary treatment; P+S+T = primary, secondary
and tertiary treatment.
48
UNDP/GEF Danube Regional Project
Table 4.
Service Reliability and Distribution Efficiency of MWWUs in Study Countries of the DRB
Reliability Distribution
Losses
Country
Extent
Daily Monthly
Seasonally
(Severity
Comment
Index *)
There is a low reliability of
water services in general.
Reported water losses are between 50 and 70 percent,
Bosnia-
The condition of the
but a large share of this is due to unrecorded and
network is poor, the pumps
Serious (4)
Herzegovina
unbilled consumption. Actual leakage is estimated to be
do not always operate,
at around 30%, but this figure is rather uncertain.
therefore interruptions of
service are common.
In some locations (where water supply is
not sufficient to cover demand at present
prices) water is not provided all day long.
Restrictions on supply of water to the
During dry periods water supply is more
population usually apply outside of peak
Bulgaria
restricted than otherwise. Hours of the day
Average loss was 68% in 2002, with a range of 20% to
hours (during the night, and mid-day), and
Serious (4)
when water will not be available are usually
80% in the case of regional water companies.
more frequently in villages than in towns.
announced in advance.
This is most common in communities that
use a surface water resource but where there
is no dam or major impoundment to provide
adequate storage.
No system-specific data available.
Average leakage is 46% of produced water.
Croatia
Moderate to
Generally reliable
Generally reliable
Generally reliable
serious (3-4)
Some modest reductions in losses in the last few years.
The situation is worst in areas which were directly hit by
the mid-90s war
The service provider guarantees an un-disturbed supply 24 hours a day. Any supply
About 23% of produced water.
Czech
disturbance (e.g. in a case of a repair) has to be announced ahead and a provisional supply
Low (2)
Republic
There has been a slow increase of losses in pipelines
has to be provided, if there is a longer break in a supply.
during the past decade.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
49
Reliability Distribution
Losses
Country
Extent
Daily Monthly
Seasonally
(Severity
Comment
Index *)
There are infrequent and usually short (a
In case of shortage of water supply (mainly
few hours) disruptions of the service, e.g. if
in the summer) occasionally there may be
Hungary
a pipeline ruptures or is damaged. In
administrative restrictions on water use e.g.
Low (2)
The national average in 2001 was 18%
general, water supply is reliable.
prohibiting watering of the garden. The
supply of the water, however, is continuous.
All municipalities, except for the largest cities, regularly (often daily) experience disruptions
In some locations water loss reaches 70%. This figure
Moldova
in water service. The smaller a town is, the more frequent and longer the disruptions are.
Serious to high
may include illegal connections and unmetered
The main reasons for the breakdown of the service are financial problems (e.g. the MWWUs
(4-5)
consumption. No data on the national average water
do not receive electricity at all times due to problems with debts to the grid operator)
loss.
National average 36%. Regional variation: 21-49%
Romania
Moderate to
Water supply is in general reliable. Occasional rationing in dry periods.
Highest in the Bucharest region. In some settlements
serious (3-4)
there is virtually no leakage, while in the case of one
settlement it is above 80%
Slovak
At a few locations water loss is at 40%, the national
Reliable service in general
Low (2)
Republic
average is 23%
* High (5), Serious (4), Moderate (3), Low (2), Not a Problem (1)
50
UNDP/GEF Danube Regional Project
Table 5.
Effluent Collection and Treatment in MWWUs in the Study Countries of the DRB
Treatment of Collected Wastewater
Primary,
Primary and
Primary
Secondary
Country Wastewater
Collection
Untreated
Secondary
Comment
Treatment
and Tertiary
Treatment
Treatment
(Percent of all collected wastewater)
35% of households are connected
The sewers of the country are
Bosnia-
to the sewer.
generally in bad condition. Usually
97% 3%
Herzegovina
sewage and storm water is collected in
combined systems
Very common in cities, rarely in
villages. More common closer to
Estimation based on National
Bulgaria
the Black Sea than in other parts of
31% 13.5% 55.5% 0%
Statistical Institute information for
the country. Wastewater from
2002
about 68% of the population is
collected.
In the DRB, roughly 50% of
Croatia
inhabitants are connected to a
88%
3%
9%
Data are for the DRB basins in 1999.
public sewer system
Czech
Common in towns above 5,000
Estimate: about
inhabitants. About 75% of total
8-10% 60-70% <10%
Republic
20%
population connected into networks
53% of the population is connected
There are currently several on-going
to the sewer. Large settlements
investments into both sewerage
have higher connection rates than
networks and into WWTPs, partly
Hungary
small ones. E.g. villages between 2
40% 4% 35% 21%
financed by ISPA grants, therefore the
and 10 thousand inhabitants have a
figures supplied here are likely to
rate of 26%, while towns between
improve within the next few years.
50 and 150 thousand have a rate of
The data is from 2001.
77%.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
51
Treatment of Collected Wastewater
Primary,
Primary and
Primary
Secondary
Country Wastewater
Collection
Untreated
Secondary
Comment
Treatment
and Tertiary
Treatment
Treatment
(Percent of all collected wastewater)
Sewerage networks are present in
The technological potential to increase
the towns; but rare in villages.
WW from towns
biological treatment levels exists.
While most facilities are equipped for
Between 60 and 90% of
is generally
treated
biological treatment, in practice the
Moldova
wastewater is collected from towns
More than 90%
Less than 10%
0%
majority of wastewater is only
(the larger a settlement, the higher
WW from villages
mechanically treated due to financial
the collection rate).
is generally
difficulties (e.g. disrupted power
Only 10% of wastewater generated
untreated
supply because of irregular payment to
in villages is collected.
the grid operator).
Very common in cities, occasional
82% (out of which
Romania
in villages. 51% of the population
4% does not
9% 5% 4%
Estimated values
has wastewater service (out of 65% require any
receiving piped water)
treatment)
Slovak
Very common in cities, occasional
Very low volumes
Statistical data about treatment levels
in villages. 54% of population
0% ~10
%
~90
%
Republic
(maybe 1-2%)
is not entirely coherent.
connected to sewage system
52
UNDP/GEF Danube Regional Project
3.3 Financial Status of Water and Wastewater Utilities in the DRB Study
Countries
3.3.1 Financial Status: Country-Wide
The financial status of MWWUs in the study countries is described in Table 6. In two of the
countries, Bosnia-Herzegovina and Moldova, current account losses predominate among MWWUs. In
the rest of the region the W&WW sector as a whole either has a slight negative current account
balance or just breaks even. While the water sector of a particular country may just balance out, there
is great variation among individual MWWUs, including some with attractive, and others with troubled
financial performance.
In Hungary, for example, the sector as a whole made modest profits according to a survey in 1998.
While the current account balances in general were at acceptable levels, contributing to the
maintenance of service quality, the situation of individual Hungarian MWWUs was rather mixed;.
Some of them had substantial surplus revenues, while others accrued significant losses. Provision of
water on the whole was a loss-making activity for the 90 biggest MWWUs, while wastewater
collection and treatment was profitable. However, there were also examples of considerable surplus in
water service, and loss in wastewater service.
Another good example for the variation among the financial status of MWWUs is Bulgaria. The
accounting profit for all Regional Water Companies (RWCs) is about 1.5% of all revenues. Two
RWCs, out of 29, make huge losses. Fourteen companies report current account net revenues
equivalent to between 0 and 2% of revenues, while current account net revenues for eleven companies
is between 2 and 5%, and for two companies over 15%.
While the current account balance is a key indicator of MWWU performance, this figure alone does
not tell the whole story. There are companies with zero balance that, by properly and regularly
maintaining the infrastructure, are on a sustainable path of operation. Some other companies also
report they are breaking even financially, but they do not fully maintain their infrastructure and
therefore experience a deterioration of system assets and quality of service. A large number of
MWWUs in the ME DRB appear to belong to the latter category. Their operation should probably not
be considered as financially stable in the longer term. In order to better understand this situation, the
claim of a current account balance has been tested in a number of the project case studies. In
particular, attention was given to possible "over depreciation" of assets to keep the system in short run
current balance or crediting revenues that have not actually been collected to keep the current accounts
looking healthy. This approach sets the foundation for big increases in costs in the future as
infrastructure deteriorates and no financial allowance is usually being made for this condition.
Detailed results of case study scenarios are in Volume 2 of the Final Report, while the results are
summarized in Chapter 4 of the present report.
Financial difficulties of ME DRB MWWUs can be traced back to a number of factors. A major cause,
particularly in less affluent areas, is insufficient collection of bills (see Table 6). For some MWWUs
(e.g. in Bulgaria and Moldova) increased ratios of payment would help to go from a financial break-
even or loss to a positive net revenue status at least with regards to short run costs. Companies,
however, do not in general have effective strategies to increase collection rates, partly because their
state and municipal owners do not have real expectations of cash balances. In fact, many times,
municipal decision makers would rather buy popularity at the expense of losing water revenues, as
they decide not to pursue disconnection of non-payers. Disconnection is also often made more
difficult or impossible by legislation (e.g. obligation to provide service for sanitary reasons) or
technical reasons (e.g. several apartments are linked with one water pipeline). Let us note that
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
53
increased collection of bills is an important step towards sustainable operations and extension of
service, but in itself may not provide enough relief for financially strained MWWUs of the region.
Another problem on the revenue side of company accounts is insufficient W&WW tariffs. The level
of tariffs is often deliberately kept at an artificially low level in order to avoid conflicts which may
result in political costs to decision makers.
On the cost side, many MWWUs in the region have low operating efficiency, as they have no real
incentives to reduce costs or do not have the means to do so. Poor conditions of the infrastructure
contribute to this problem, the most dramatic manifestation of which is leakage (see Table 4). In
Bulgaria, for instance, the two companies with the most serious financial imbalance also have
particularly high distribution loss, around 80%. High levels of costs can sometimes be associated with
low penetration of metering, too, as households without meters lack the incentive to reduce water use,
contributing to increased operating costs of the MWWU. Outdated machinery with high energy
consumption and costly maintenance, and redundant and sometimes under trained workforce also
contribute to financial difficulties.
MWWUs in bad financial positions follow different "strategies" to deal with current account
problems. Cutting back on or reducing the quality of service is one way of reducing costs. Very often
maintenance is neglected or it is carried out from government or foreign grants and preferential loans,
and own resources are dedicated only to emergency repairs. State subsidies for operating purposes are
rare. Development of infrastructure is usually out of question. While the MWWUs may wish to take
on loans, actual commercial loans are rarely available for these companies, their options are limited to
taking on unwelcome debts in the form of delayed payments for materials, energy and labor, or
pursuing assistance from the state budget. In order to raise revenue, tariff increase is often targeted at
politically less sensitive service users, especially legal entities, eventually resulting in cross-subsidies
seriously distorting the price of the W&WW services.
54
UNDP/GEF Danube Regional Project
Table 6.
Financial Condition of MWWUs in the Study Countries of the DRB: Current Balances and Payment of Invoices by Service Users
Current Account Balances
Non-Payment of Invoices
Country
Description
Comment
Extent (Severity Index *)
Comment
Average national non-payment ratio is
Bosnia-
Most companies would not break even,
60%. The worst payers are the military
Most companies make a significant loss
Serious to high (4-5)
Herzegovina
even if all bills were paid.
and hospitals, but there are problems
with payment in each SU category.
2 companies make a significant surplus,
Bulgaria
Most companies break even or have a
Average national non-payment ratio is
while 2 other companies make huge
Moderate to serious (3-4)
mild surplus.
22%
loss
Around 10% nationally. A portion of
Croatia
Most companies appear to be in
Companies have difficulty saving for
actual payments, however, arrives only
Low (2)
current financial balance
future investments
with delay, increasing the level of costs
at MWWUs.
Czech
Most of the companies are in a balance.
Not a problem (1)
Republic
In general, the short and mid term
Hungary
There are profit making companies as
operations of the companies are not
Not a problem (1)
well as loss making companies.
threatened by negative current account
balances.
Companies face financial difficulties
Moldova
Most companies have a negative
constantly. They have difficulty paying
Non-payment ratio is around 50% on
Serious to high (4-5)
balance
for their inputs, such as energy and
average
labor.
The majority of companies have
Non-payment is a location specific
Romania
moderate profits (close to zero). A
matter. Delayed payment used to be an
Moderate to serious (3-4)
portion of companies (20-40%) incur
important concern in periods of high
losses.
inflation rates.
No problem for households, but
problematic for some loss-making
The sector as a whole has a slight
Slovak
The service level in the short run is not
industries and public entities. Some of
negative balance, with some individual
threatened by the financial situation of
Low (2)
these industries provide "basic
Republic
companies making loss, and others
the companies.
services", and it may therefore be
making low profits.
politically risky to disconnect them
from the water service
* High (5), Serious (4), Moderate (3), Low (2), Not a Problem (1)
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55
3.3.2 Financial Status: Case Studies
Table 7 reviews the current account balance and data on non-payment of the case study MWWUs.
Our intention in the beginning of the project was to select case study sites, which would be
representative of the study countries. Based on the financial status information of the case study
MWWUs we think that this criterion was fulfilled for most countries.
The Doboj, Chisinau, and Duga Resa MWWUs, in Bosnia-Herzegovina, Moldova, and Croatia,
respectively, incur substantial losses. These companies also experience high levels of non-payment,
which are partly responsible for the negative current account balance. All other case study utilities are
close to breaking even or have considerable revenue surplus (see Figure 11 below). Some of these
MWWUs do not have difficulty collecting bills. Other companies (e.g. Pleven in Bulgaria) have some
problems with non-payment, but nonetheless operate without major financial difficulties, at least in the
short run.
Figure 11 Current Account Balance as a Ratio of Revenues According to ASTEC Baseline
Scenarios
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
.
:
R
au
in
r
ad
is
l.: Pleven
zech
WR
C
Vyskov
Slov. R.:
Pop
un.: EDV-
B&H: Doboj
Bu
H
Rom.: Pitesti
Cro.: Karlovac
Cro.: Duga R.
Mol.: Ch
For a number of the case study MWWUs there is substantial difference between the actual reported
current account balance and the one computed with ASTEC. The main reason for this is that ASTEC
is used to "normalize" the case study conditions, especially with regards to accounting conventions.
For example, some of the costs in the books are for repayment of debt that has little to do with the
current operations of the MWWU. These costs, nevertheless, erode reported current account balances.
In other cases the accounting depreciation distorts the books in comparison with actual cash flows.
Sometimes the MWWU carries out a mix of activities or has a larger geographical scope than what is
actually modeled (e.g. Poprad, Slovakia), resulting in a difference of modeled and reported account
balances. A difference in base year, data problems and non-recurring financial items can also explain
(some of) the difference between the reported and the computed financial balance.
56
UNDP/GEF Danube Regional Project
Table 7.
Financial Condition of Case Study MWWUs: Current Balances and Payment of Invoices by Service Users
Country and
Currant Account Balances
Case Study
Rate of Non-Payment of Invoices
Comments
(approximate figures in /year)
MWWU
Interestingly the ratio of non-payment is lower than
Bosnia-
·
ASTEC: 160,000 /year of LOSS (equivalent to
average for multi-apartment buildings and higher than
19% of revenues)
Herzegovina:
average for individual homes. This may reflect
About 25% for households, and 15% for industry.
particular circumstances (e.g. difference in the level of
Doboj
·
Reported: 70,000 /year of LOSS in 2002
(equivalent to 13% of revenues)
welfare of different consumers) or problems with data
consistency.
·
ASTEC: 113,000 /year of SURPLUS
Bulgaria:
(equivalent to 1.4% of revenues)
About 18% according to official reports, and 8%
18% is the rate of receivables to revenue. In the
according to ASTEC computations. Non-payment is
ASTEC we assume that more than a half of these are
Pleven
·
Reported: 120,000 /year of SURPLUS
greatest among households.
eventually collected within a year
(equivalent to 1.5% of revenues)
In addition to 15% of non-payment, there are also bills,
·
ASTEC: 215,000 /year of SURPLUS
which are paid with several weeks or months of delay.
Croatia:
(equivalent to 6% of revenues)
About 15%
The difference between the actual and the computed
Karlovac
·
Reported: 99,000 /year of LOSS in 1999
balance can be due to the different base year, non-
(equivalent to 2.6% of revenues)
recurring items, problems with the reliability of the
data supplied, and high depreciation in the books.
In addition to 15% of non-payment, there are also bills,
·
ASTEC: 121,000 /year of LOSS (equivalent to
which are paid with several weeks or months of delay.
Croatia:
45% of revenues)
About 15%
The difference between the actual and the computed
Duga Resa
·
Reported: 15,000 /year of SURPLUS in 1999
balance can be due to the different base year, non-
(equivalent to 1.5% of revenues)
recurring items and problems with the reliability of the
data supplied.
Czech
·
ASTEC: 70,000 /year of LOSS (equivalent to
Operational cost completely covered by current
Republic:
1.8% of revenues)
payments. Within the reported costs a capital cost of
Close to zero - not a problem
about 10% of the capital invested (however
Vyskov
·
Reported: Approximately in balance
established) is included.
·
ASTEC: 400,000 /year of SURPLUS
The surplus is mostly related to water services, while
(equivalent to 11% of revenues)
wastewater services just break even. There is
Hungary:
·
Reported balance is not available for the case
considerable cross-financing going on among SUs and
Close to zero - not a problem
services: from industry to households, from larger
EDV-WR
study area, which is a subsystem of a regional
waterworks company, in addition to a few local
towns to villages, and from water service to
sewage service providers. EDV, the regional company
wastewater service. Sustainable operation for short to
has close to zero financial balance.
medium run.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
57
Country and
Currant Account Balances
Case Study
Rate of Non-Payment of Invoices
Comments
(approximate figures in /year)
MWWU
·
Moldova:
ASTEC: 3,300,000 /year of LOSS (equivalent
to 19% of revenues)
About 50-55% for households, 40% for industry, and
Chisinau
10% for public units.
·
Reported: Information not available
·
ASTEC: 330,000 /year of SURPLUS
Romania:
(equivalent to 6% of revenues)
Water service is cross-subsidized by net revenues of
Close to zero - not a problem
Pitesti
·
Reported: 0 /year of SURPLUS (equivalent to
the wastewater service in the short run.
0% of revenues)
Slovak
·
ASTEC: 1,250,000 /year of SURPLUS
The loss reported by the Poprad MWWU also credits
(equivalent to 27% of revenues)
About 3 million in 2002. This comprises mainly
Republic:
unpaid claims and the losses of the two neighboring
non-payment of industrial customers. Negligible
units, which are under the same organization as the
Poprad
·
Reported: 1,250,000 /year of SURPLUS
portion belongs to households.
(equivalent to 23% of revenues)
case study community of Poprad.
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UNDP/GEF Danube Regional Project
3.4 Water and Wastewater Tariffs
3.4.1 Tariffs: Country-Wide
In the study countries of the DRB most power for setting tariffs rests with the municipalities.
Municipalities have a role in either setting tariffs, proposing tariffs or accepting/rejecting proposed
tariffs. One exemption is Bulgaria, where the role of municipalities is limited to appealing against
tariffs proposed by the management unit and approved by the public utility regulator. Why legally this
situation is distinct from the rest, there is not much difference in practice, since municipalities have
much influence on tariff setting as they appoint the management of the utilities.
Management units in most cases also have a role in the tariff setting procedure, but their actual power
is much more limited than that of municipalities. They may propose tariffs, simply compute tariffs
based on predetermined formulas and/or regulatory requirements or just provide data for tariff setting
to the municipality.
State regulators have varying degrees of control over tariff setting. In some countries they do not have
any major influence on tariff setting or at least we are not aware of such a role (e.g. in Bosnia-
Herzegovina). In some countries the state provides anti-monopoly/competition overview of the water
sector, either on a case-by-case basis (e.g. after a request is submitted) or by examining each and every
tariff proposal. The state only has a direct tariff setting role when it is the majority owner of a given
MWWU. This is the case for some of the Hungarian and Bulgarian MWWUs. Furthermore, by
setting water use/ water management fees, effluent charges, and other taxes, the state has a significant
indirect influence on tariff setting. Occasionally the state provides operating subsidies for selected
MWWUs (e.g. in Hungary) and has an option to review tariffs before distributing subsidies.
The detailed rules of different parties on tariff setting are included in Table 8. Municipalities certainly
have a difficult task when it comes to determining tariffs, as they would like to go along with several
contradicting interests. On the one hand, they are in most cases majority owners of the infrastructure,
and would be interested in realizing a return after their assets, upgrade and develop the service, or at
the minimum they would like to maintain the infrastructure. All this needs cost-covering tariffs. On
the other hand, they have service users, especially households, as their political constituency, with
elections usually being held every four years. This appears as an obstacle to raising tariffs.
Concerning tariff designs the dominant tariff structure is quite simple in the ME DRB: one component
variable tariff for provision of water and another one component variable tariff for provision of
wastewater service (see Table 9). Application of a fixed charge is allowed by regulation in some of
the countries, but this option is not widely used in most countries. Other charges, such as connect
charges and service fees for repair also exist for some of the MWWUs, but not for the majority of
utilities.
The tariffs within one MWWU are almost always uniform for all household consumers. In some of
the countries there are several tariff designs for industrial users and other legal users, sometimes there
are individually negotiated tariff schemes set in unique contracts between the MWWU and the largest
consumers. Tariffs are frequently set at a lower level for households than for industrial consumers and
other legal entities.
While in most study countries there is a variable tariff for every cubic meter of consumption, at some
of the household consumers water meters are not installed, therefore instead of a metered amount, they
need to pay based on an estimated lump sum consumption. These estimates are often based on
metered amounts for a group of users together (e.g. all apartments within a large building, the water
consumption of which is metered at the entry of the pipeline into the building), and then shared among
the individual users through some commonly accepted or regulated method. Less frequently, the
consumption of unmetered households is estimated by the MWWU uniformly across the service area.
Glenn Morris / Andrįs Kis
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59
In this case there is a risk that some of the costs related to distribution loss will also be charged onto
unmetered households. This is the case, for instance, in Chisinau, Moldova.
Figure 12 illustrates the ranges of water and wastewater tariffs in the countries of the region. Tariffs
set by major MWWUs in each of the countries would fit into the respective ranges in the figure
while a few small MWWUs with unusual conditions may fall outside of these ranges. In case of
multipart tariffs, which are occasionally applied in the region, a unit tariff was computed by dividing
all payments with all consumption, in order to ensure comparability of tariffs.
The diagram clearly indicates that there is great variation of tariffs not only across, but also within
countries. The difference between the lowest and highest tariffs within any particular country is 3-10
times, but in Moldova and Bosnia-Herzegovina it is up to 30-40 times. The variation in tariffs is
especially large for wastewater services, which are provided at close to zero price in many locations
without a WWTP.
In Hungary there are a few small and medium sized settlements with extremely high water tariffs, up
to 8 /m3 (these tariffs are not displayed in the diagram below). Such high level tariffs, however, are
only paid by non-household consumers, as there is a state subsidy system in place for those
municipalities in which the cost of supplying water and wastewater services to households is
excessive; if the justified costs of water and wastewater supply are above the limit published by the
authorities each year, then the respective municipality can apply for a subsidy from the central budget
to cover the difference between actual costs and the regulated price limit. The subsidy is only
available for household services, non-household users must pay the full price.
Figure 12 Range of Water and Wastewater Tariffs in Study Countries of the DRB (/m3)
2,50
2,00
1,50
1,00
0,50
0,00
Bulgaria -W
Croatia -W
Hungary -W
Moldova -W
Romania -W
Slovakia -W
Bulgaria -WW
Croatia -WW
Hungary -WW
Moldova -WW
Romania -WW
Slovakia -WW
Czech Republic -W
Czech Republic -WW
Bosnia-Herzegovina -W
Bosnia-Herzegovina -WW
Tariffs often include transfers to the government in the form of water extraction charges, value added
tax (VAT) or effluent charges. Effluent charges will be described later at section 3.5. VAT in the
study countries is in general paid on water and wastewater; an exception is Bosnia and Herzegovina
where there is not VAT on these services. In Moldova households do not have to pay VAT after their
water and wastewater consumption. In all the other countries, both household and non-household
60
UNDP/GEF Danube Regional Project
users pay VAT, but there is a preferential rate in Hungary and the Czech Republic compared to other
goods and services although in the Czech Republic the preference will likely phase out from 2005.
VAT payments are revenues of the general state budget. The highest VAT rate in the examined
countries is in Croatia, with 22%, although not all components of the tariff are subject to VAT, the
water use charge, water protection charge and the development component (for investment purposes)
are exempt from the VAT base.
There is great variation within the region in terms of the water extraction charge (WEC) - sometimes
also called water management fee or water use charge. The WEC is usually proportionate with water
use, but in Bulgaria it only applies to consumption above a certain limit. The level of the WEC very
often depends on a range of factors, including purpose of use, origin of water (e.g. ground water,
surface water), and location, but these factors are not always designed in consistency with the value of
specific water resources. In Slovakia, for instance, extraction of ground water at present has a lower
WEC, than use of surface water, even though ground water generally replenishes slower than surface
water. The level of the WEC is low compared to water tariffs in some countries (e.g. Bulgaria,
Romania, Hungary), and serves mainly as an instrument to collect revenue, while it is larger and may
provide an incentive for reduced water use in other countries (e.g. Slovakia, Czech Republic, Croatia).
Ideally the WEC is levied on water extraction at the source, providing an incentive to reduce not only
consumption, but also leakage. In some locations, however, extraction at the source is not measured,
and consequently the WEC is paid after consumed and billed quantities. WEC revenues either go to
the state budget, or they are collected by a water fund, from which they will be disbursed for water
related activities.
Glenn Morris / Andrįs Kis
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61
Table 8.
Tariff Setting Process for MWWUs in Study Countries of the DRB
Role of Regulatory Units
Role of the
Country
Role of the Municipality
Management Unit
Public Utility
Water Regulators
Other Regulators
Regulators
Bosnia-
Determines tariffs based on the
Determines the tariff setting
procedure determined by the
procedure, formulas and
Herzegovina municipality
approves the tariffs
Makes tariff proposals based
on the notion of cost recovery.
Costs related to water loss in
excess of 25% cannot be used
From 2004 a commission
as a basis for setting cost-
The Competition Committee
within the Ministry of Regional
recovering tariffs. In practice
The municipality may appeal
may accept or reject a tariff
Bulgaria
Development and Public
up to 10% of the collected
against tariff decisions at the
proposal, if an appeal is
Works is in charge of
tariffs creates the basis partly
"Competition Committee"
submitted from municipalities
approving tariffs proposed by
for net current revenue that
or customers of the MU.
the MU
could be used for future
investments or to cover errors
in cost estimates, revenue
generation etc.
The central government sets
Has wide latitude to set tariffs
Croatia
additional, earmarked fees and
for water and wastewater
taxes that must be added to the
service
local tariffs.
State audit office can perform
As owners of the property,
audit on request (and upon cost
Czech
Makes tariff calculations
Ministry of Finance monitors if
municipalities can push service
reimbursement) of the
according to formulas given by
No direct influence..
the tariff formulas given by
Republic
providers to lower the cost of
municipalities or the regional
regulation.
regulation have been met.
services.
office if there is suspicion of
application of improper tariffs.
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UNDP/GEF Danube Regional Project
Role of Regulatory Units
Role of the
Country
Role of the Municipality
Management Unit
Public Utility
Water Regulators
Other Regulators
Regulators
The Ministry of Environment
and Water sets the tariffs for
the 6 state owned regional
water companies.
There are plans for a Water
Sector Authority (the duties of
Furthermore, if household
which are considered similar to
tariffs justified by the costs of
existing authorities in other
any utility reach a threshold
fields, like the Financial sector
Sets tariffs for municipal
Appeals against tariffs can be
value, a central budget subsidy
Authority or the
utilities. In case of
submitted to the Office of
can be requested by the utility
Telecommunications
Hungary
concessions, the tariff setting
Competition. Until now,
to be able to provide service to
Authority). The tasks would be
formulas are usually included
however, there have been no
households at the threshold
to overview the operations of
in the concession contract.
such appeals.
value without accruing related
water utilities, making sure,
losses. The total nominal
among other things, that no
amount of subsidy available for monopoly power is exercised
distribution is more or less
and that current practices are
constant through the years,
financially sustainable in the
while the cost of W&WW
long run.
services increase, therefore the
tariff ceiling rises year after
year.
Moldova
Accepts or rejects proposed
Makes tariff proposals
tariffs
The approval of the National
Authority for Public Services is
required in normal cases i.e.,
Makes the tariff proposal upon
Approves or rejects the tariff;
without concession. The
changes in costs;
approval of the Ministry of
In case of a concession,
Romania
In case of a concession,
Finance must be obtained for
A governmental ordinance sets
reviews that the tariffs is set
formulas for regular tariff
the update of the tariffs
the major rules for tariff setting
according to the formulas and
changes are included in the
according to the formula set in
based on proper information
contract
the concession contract. (Up to
2004 the now-eliminated
Office of Competition held this
responsibility).
Slovak
Accepts or rejects proposed
Issues decision on tariffs: may
Makes tariff proposals
Republic
tariffs
accept or reject them.
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63
Table 9.
Tariff Designs in MWWUs in the Study Countries of the DRB in 2003
What is the
What are the Tariff Designs?
What is the Range
Median Water
of Tariffs for
Tariff? Median
Different
Varies by
Water? For
Commodity
Country
Wastewater
Tariffs for
Cost of
Other features and comments
Wastewater?
charge
Tariff?
Households
Service to
Fixed tariff
(e.g. connect charge, special
(Local Currency,
(variable
and
Customer
(Local Currency,
fees)
)
tariff)
)
Industry
Groups
·
HH water tariff:
·
HH water tariff:
0.5 KM/m3
0.1-1.0 KM/m3
0.26 /m3
0.05-0.51 /m3
·
Industry water
·
Industry water
Tariff data is from 2001.
tariff:
tariff:
Increasing block tariffs in some
Bosnia-
1.19 KM/m3
0.3-4.16 KM/m3
municipalities for household customers.
0.61 /m3
0.15-2.13 /m3
Yes - in some
Yes - in some
Yes
Yes
Herzegovina
cases
cases
·
Connect charges usually apply.
HH WW tariff:
·
HH WW tariff:
HH 0.15 KM/m3
HH 0.02-0.36 KM/m3
Other specific fees: turn on/off fees, late
0.08 /m3
0.01-0.18 /m3
payment charges.
·
Industry WW tariff: ·
Industry WW tariff:
0.37 KM/m3
0.1-0.85 KM/m3
0.19 /m3
0.05-0.44 /m3
·
Based on average tariff of regional water
Water tariff:
·
Water tariff:
companies only, as data for municipal
0.68 BGN/m3
0.16-1.41 BGN/m3
companies was not available.
0.35 /m3
0.08-0.72 /m3
Bulgaria
Yes Ye
s
*
N
o
Ye
s
·
* Tariff designs are not always
WW tariff:
·
WW tariff:
consistent with costs of service
0.12 BGN/m3
0.04-0.38 BGN/m3
sometimes SUs with lower costs face
0.06/m3
0.02-0.19 /m3
higher tariffs
For a Sample of Seven
Larger Cities.
For a Sample of Seven
Larger Cities.
·
Water tariff:
·
3.5 HRK/m3
Water tariff:
Connect charges do exist in some cases.
Croatia
0.47 /m3
2.58-5.78 HRK/m3
The municipal owners have substantial
No N
o
N
o
Ye
s
0.34-0.77 /m3
discretion in design and level of the basic
·
WW tariff:
tariffs and assessment of other charges.
1.69 HRK/m3
·
WW tariff:
0.23 /m3
1.27-2.76 HRK/m3
0.17-0.37 /m3
64
UNDP/GEF Danube Regional Project
What is the
What are the Tariff Designs?
What is the Range
Median Water
of Tariffs for
Tariff? Median
Different
Varies by
Water? For
Commodity
Country
Wastewater
Tariffs for
Cost of
Other features and comments
Wastewater?
charge
Tariff?
Households
Service to
Fixed tariff
(e.g. connect charge, special
(Local Currency,
(variable
and
Customer
(Local Currency,
fees)
)
tariff)
Industry
Groups
)
·
Water tariff:
·
Water tariff:
17.20 CZK/m3
7.80 28.00 CZK/m3
Czech
0.53 /m3
0.24-0.86 /m3
Yes - in some
* MWWUs have the option of applying a
No N
o
Mostly
Republic
·
WW tariff:
·
WW tariff:
cases *
2-composit system of pricing
14.50 CZK/m3
6.10 26.00 CZK/m3
0.45 /m3
0.19-0.80 /m3
For some MWWUs a fixed tariff
supplements the variable tariff. The data
·
Water tariff:
·
Water tariff:
is from 2001. The extreme high tariffs
163 HUF/m3
31-2058 HUF/m3
apply to non-household consumers, since
0.68 /m3
0.13-8.58 /m3
household prices do not generally go
Hungary
No (with some
Yes/No
Yes/No Ye
s
above the threshold value at which
·
WW tariff:
·
WW tariff:
exceptions)
subsidies can be requested (see text
148 HUF/m3
24-1146 HUF/m3
above table). Instead of mean charges,
0.62 /m3
0.10-4.78 /m3
weighted average of tariffs is supplied.
Connection charge for services usually
applies.
·
Water tariff (for a
·
Water tariff (for a
sample of three cities):
sample of three cities):
3.4 MDL/m3
2.23-8.76 MDL/m3
0.22 /m3
0.14-0.56 /m3
Moldova
Yes
No *
No
Yes
* Tariffs do vary, but unrelated to costs
·
WW tariff (for a
·
WW tariff (for a
sample of seven cities):
sample of seven cities):
4.15 MDL/m3
0.07-20.0 MDL/m3
0.26 /m3
0.04-1.27 /m3
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
65
What is the
What are the Tariff Designs?
What is the Range
Median Water
of Tariffs for
Tariff? Median
Different
Varies by
Water? For
Commodity
Country
Wastewater
Tariffs for
Cost of
Other features and comments
Wastewater?
charge
Tariff?
Households
Service to
Fixed tariff
(e.g. connect charge, special
(Local Currency,
(variable
and
Customer
(Local Currency,
fees)
)
tariff)
Industry
Groups
)
·
Tariff data is from 2001. Since then,
Water tariff:
·
Water tariff:
most tariffs increased by 30 to 40%,
6200 Lei/m3
2,400-16,300 Lei/m3
mainly due to general inflation in the
0.15 /m3
0.06-0.41 /m3
Romania
No N
o
N
o
*
Ye
s
economy.
·
WW tariff:
·
WW tariff:
* The fixed tariff is a legally recognized
1600 Lei/m3
500-5,300 Lei/m3
option, but there is no evidence that it is
0.04 /m3
0.01-0.13 /m3
used in practice.
·
HH water tariff:
·
HH water tariff:
14.10 Sk/m3
7-16 Sk/m3
0.35 /m3
0.2-0.4 /m3
Use of a fixed charge is made possible
·
Industry water
·
Industry water
by regulation. A number of companies
tariff:
tariff:
have proposed a fixed charge for 2004,
Yes
Slovak
24 SKK/m3
12-30 SKK/m3
but they have not yet been approved by
0.6 /m3
0.3-0.75 /m3
Yes N
o
Yes
the public utility regulator. Moreover,
Republic
Legal, but
·
HH WW tariff:
·
HH WW tariff:
uncommon
one company applies a decreasing block
HH 8.90 SKK/m3
7-10 SKK/m3
tariff structure, in which large consumers
0.22 /m3
0.18-0.25 /m3
have to pay a lower than average
·
commodity charge.
Industry WW tariff: ·
Industry WW tariff:
22 SKK/m3
15-27 Sk/m3
0.55 /m3
0.38-0.70 /m3
66
UNDP/GEF Danube Regional Project
Table 10.
Fees and Surcharges on Municipal Water Services in Study Countries of the DRB
Water Use and Management Fees
Country
Fee and Rationale
Fee Level or Computation
Distribution of Fee Payments
Comments
FB&H:
FB&H:
FB&H:
·
Fee for water use
·
0.10 KM/m3 (0.05 /m3)
·
10% for the federal budget and
Bosnia-
earmarked for water management
Herzegovina
·
20% for the canton budgets
·
70% for the public company in
charge of water supply and
management in the drainage area
RS:
RS:
RS:
·
Two types of water management
·
General fee: 1.5% of gross salary
·
General fee: 80% goes to the
fee: general and specific.
and/or gross earnings from copyright
budget of RS (20% of that is earmarked
and patent rights.
for investment in water development),
·
Specific fee: 0.035 KM/m3 (0.018
20% goes to the municipal budgets
/m3) paid by municipal water utilities.
·
The specific fee is the revenue of
Most other water users pay a different
the Ministry of Agriculture, Forestry
fee level.
and Water Management, and used by
·
If water abstraction is not metered
the Directorate for Waters.
(and it is not metered for half of the
utilities) then it is estimated by the
utility.
Extraction charge above certain small
The level of the fee depends on a
The charge is received by the
user allowances. Most MWWUs are
number of factors, such as use of water,
Enterprise for Management of
Bulgaria
subject to the extraction charge.
and category of the water source.
Environmental Protection Activities,
Withdrawal of drinking water has a fee
which is the successor of the National
of 0.006-0.02 BGN/m3 (0.003-0.01
Environmental Protection Fund.
/m3)
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
67
Water Use and Management Fees
Country
Fee and Rationale
Fee Level or Computation
Distribution of Fee Payments
Comments
Water User Charge to cover the
0.80 HRK/m3 (0.11 / m3)
All the fee goes to the Water
The Water Management Fund is partly
development of water resources
Management Fund administered by
used to provide preferential loans to
Croatia Water
MWWU investments. In the future, a
shift in focus towards preservation of
Croatia
water resources, river basin planning,
coverage of central water administration
expenses is expected.
Water Use Concession Charge
For municipal use 0.08 HRK/m3. (0.01
A concession charge on water and
uncertain, most likely revenue
/m3)
wastewater services goes to the State
generation.
Water Directorate. Only paid by
companies, which are in concession
contract. Its level depends on the field
of the concession, the volume of the
good/service, and the concession
investment. The state budget is the
recipient of this charge
Czech
Payments to Cover Watercourse and
2.60 CZK/ m3 (0.08 / m3 )
River Board Morava (administrator)
Republic
River Basin Administration
Charges for the Withdrawing
2 CZK/ m3 (0.06 / m3 )
Half of the payment belongs to the
Groundwater
Czech State Environmental Fund and
the second half to the State Budget
Water extraction charge for use of water The basic charge is 1.8 HUF/m3 (0.0075 Central budget. In 2000 revenues of
The charge varies according to a
resources. The purpose is to conserve
/m3), equivalent to about 1% of the
HUF 5.7 billion ( 23.8 million).
number of factors, in order to provide
water resources, to generate revenues,
average cost of drinking water supply.
more incentive to conserve sensitive or
and to restrict (make more expensive)
The basic charge is modified through
scarce water resources, and increase the
Hungary
certain uses of water in specific areas of multiplication with a number of
costs of certain uses. The factors
the country. Some uses are exempted
different factors (see comments)
include type of water resource, purpose
from payment of the charge, but it is
of use, volume of water, and water
paid for a large majority of water use,
management in the region. There are
including water extraction by utilities.
disputes about the logic of the internal
design of the charge.
Moldova
68
UNDP/GEF Danube Regional Project
Water Use and Management Fees
Country
Fee and Rationale
Fee Level or Computation
Distribution of Fee Payments
Comments
Water extraction charge. Varies with
71.2 ROL/m3 0.00178 /m3 (for
Paid to the National Authority
Romania
source of water and user.
municipal water supply to 153.6
"Romanian Waters"
ROL/m3 0.00383 /m3) for industrial
abstraction from ground water.
Water extraction charge
1 SKK/m3 (0.02 /m3) ground water
Passed to state budget
The extraction charge for surface water
Slovak
and 2 SKK/m3 (0.05 /m3) surface
was increased recently. There are plans
Republic
water
to increase the extraction charge for
ground water, too.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
69
Table 11.
Taxes on Municipal Water Services in Study Countries of the DRB
Value Added Taxes
Other Taxes
Country
Level Comment
10% tax on wastewater
Bosnia-
collection, the basis is the
Herzegovina
wastewater tariff (both in
FB&H and RS)
Bulgaria
Uniform for all goods and
20%
services.
On basic service tariffs (before
fees)
Croatia
22%
The tax must be paid even on
None
uncollected bills but VAT
payments after bad debts can be
reclaimed.
Czech Republic
VAT will be 19%, probably
5%
from 2005
There are two VAT rates. 25%
for most goods and services,
Hungary
15%
and a preferential 15% for
certain goods and services,
including W&WW services.
Moldova
VAT only applies to non-HH
20%
users
Uniform for all services and
Romania
19%
goods, with some exceptions
(9% rate)
Slovak Republic
Uniform for all services and
19%
goods.
3.4.2 Tariffs: Case Studies
The dominant tariff design in case study MWWUs is a one component variable tariff (consumption
charge) for water, and another simple variable tariff for sewage. A fixed tariff is applied only in the
case of Doboj MWWU in Bosnia and Herzegovina; water users pay a "water meter charge" regardless
of their consumption. The charge is based on the size (diameter) of the water meter, thus there is some
tentative relation between the fixed cost generated by a given consumer and the fixed tariff paid by it
the presently applied fixed tariffs, however, are substantially below the fixed costs (for more
information see the Bosnia Case Study document).
In part of the cases households pay less for the same service than non-household consumers (Bosnia,
Croatia, Moldova, and the Slovak Republic), in the other cases (Czech Republic, Hungary, Bulgaria,
Romania) the tariff for all consumers is about the same for each cubic meter of water, or wastewater.
Most methods of cost allocation suggest that cross-subsidies are present even in the case of uniform
tariffs, since large consumers can be served at a lower unit cost than small consumers like households.
For any given user the tariff paid for water is higher than the tariff paid for sewage, with the exception
of some of the users in the Hungarian study, who live in isolated locations where wastewater service
provision is rather expensive.
70
UNDP/GEF Danube Regional Project
Table 12.
Tariff Designs in the Case Study MWWUs in 2003
Water and
What are the Tariff Designs?
Household Water
and Wastewater
Wastewater
Tariffs for Non-
Varies by Cost
Other features
Tariffs
Different Tariffs
Household Users
of Service to
Commodity
for Households
Fixed charge
(e.g. connect
Country
(Local Currency,
Customer
(Local Currency,
Charge
charge, special
)
and Industry
Groups
)
fees)
·
Water tariff:
·
Water tariff:
0.29 KM/m3
1.07 KM/m3
0.15 /m3
0.55 /m3
and a fixed charge of
and a fixed charge
The tariffs include
Yes, to some degree
Bosnia-
about 14 KM/year (7.1
which depends on the
the water
/year)
capacity of the water
(the fixed charge is
Herzegovina:
management fee,
meter average of 198
Yes
based upon the
Yes Ye
s
effluent charge and
Doboj
·
WW tariff:
capacity of the water
0.13 KM/m3
KM/year (101.5 /year)
the tax on wastewater
meter)
0.07 /m3
was used in ASTEC.
release.
·
WW tariff:
0.5 KM/m3
0.25 /m3
·
Water tariff:
·
Water tariff:
Industrial users pay
0.75 BGN/m3
0.76 BGN/m3
different (three)
Bulgaria:
0.38 /m3
0.39 /m3
Yes (but not always
levels of wastewater
Yes
No Ye
s
Pleven
·
WW tariff:
·
WW tariff:
and not coherently)
tariffs based on
0.07-0.12 BGN/m3
0.07-0.52 BGN/m3
BOD5 and other
0.04-0.06 /m3
0.04-0.27 /m3
pollutants content.
·
Water tariff:
·
Water tariff:
2.00 HRK/m3
6.5 HRK/m3
0.26 /m3
0.87 /m3
·
WW tariff:
·
WW tariff:
Croatia:
0.95 HRK/m3
1.75 HRK/m3
Yes No
N
o
Ye
s
Karlovac
0.13 /m3
0.23 /m3
·
Total Tariff After
·
Total Tariff After
Taxes and Fees:
Taxes and Fees:
5.30 HRK/m3
11.77 HRK/m3
0.71 /m3
1.57 /m3
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
71
Water and
What are the Tariff Designs?
Household Water
and Wastewater
Wastewater
Tariffs for Non-
Varies by Cost
Other features
Tariffs
Different Tariffs
Household Users
of Service to
Commodity
for Households
Fixed charge
(e.g. connect
Country
(Local Currency,
Customer
Charge
charge, special
)
(Local Currency,
and Industry
Groups
)
fees)
·
Water tariff:
·
Water tariff:
2.00 HRK/m3
5.3 HRK/m3
0.26 /m3
0.71 /m3
·
WW tariff:
·
WW tariff:
Croatia:
0.30 HRK/m3
0.30 HRK/m3
Yes N
o
N
o
Ye
s
Duga Resa
0.04 /m3
0.04 /m3
·
Total Tariff After
·
Total Tariff After
Taxes and Fees:
Taxes and Fees:
4.32 HRK/m3
8.63 HRK/m3
0.58 /m3
1.15 /m3
·
Water tariff:
·
same as for
Czech
22.80 CZK/m3
households
0.71 /m3
Republic:
No N
o
N
o
Ye
s
·
Vyskov
WW tariff:
14.40 CZK/m3
0.45 /m3
·
Water tariff:
·
Water tariff:
190 HUF/m3
190 HUF/m3
Yes/No
Yes/No
Hungary:
0.73 /m3
0.73 /m3
(different tariffs in
(for wastewater tariff
Connect charge for
No Ye
s
EDV-WR
·
WW tariff:
·
WW tariff:
one group of
there is some
new connections
122-378 HUF/m3
122-390 HUF/m3
settlements only)
variation)
0.47-1.45 /m3
0.47-1.50 /m3
·
Water tariff:
·
Water tariff:
1.96 MDL/m3
9.82-11.3 MDL/m3
No
Moldova:
0.15 /m3
0.77-0.88 /m3
Yes
(the tariffs do vary,
No Ye
s
Chisinau
·
WW tariff:
·
WW tariff:
but unrelated to
0.66 MDL/m3
2.95-3.6 MDL/m3
costs)
0.05 /m3
0.23-0.28 /m3
72
UNDP/GEF Danube Regional Project
Water and
What are the Tariff Designs?
Household Water
and Wastewater
Wastewater
Tariffs for Non-
Varies by Cost
Other features
Tariffs
Different Tariffs
Household Users
of Service to
Commodity
for Households
Fixed charge
(e.g. connect
Country
(Local Currency,
Customer
Charge
charge, special
)
(Local Currency,
and Industry
Groups
)
fees)
·
Water tariff:
·
same as for
7,020 ROL/m3
households
Romania:
0.18 /m3
No N
o
N
o
Ye
s
N
o
Pitesti
·
WW tariff:
5,752 ROL/m3
0.14 /m3
·
Water tariff:
·
Water tariff:
Slovak
10.45 SKK/m3
23 Sk/m3
Recently, a
0.26 /m3
0.60 /m3
Republic:
connection charge is
Yes N
o
N
o
Ye
s
·
·
being applied for
Poprad
WW tariff:
WW tariff:
6.80 SKK/m3
17 SKK/m3
new costumers
0.17 /m3
0.42 /m3
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
73
3.5 Effluent Charges
3.5.1 Effluent Charges: Country-Wide
There is a lot of variation in effluent charge designs across the region. In Slovakia and Hungary the
charge needs to be paid on the entire effluent discharge. In the Czech Republic polluters must pay the
charge only when effluent discharges are above a certain limit in terms of effluent volumes or
concentrations. Once they are subject to the charge, however, they must pay based on their entire
effluent discharge, and not only on discharges above the limit. In Romania there is a mixed system of
an effluent charge and a fine. Polluters must pay a basic charge on the entire effluent discharge, while
they are subject to fine payments only after discharge above permitted levels. In Croatia MWWUs
pay based upon the volume of wastewater they discharge and the level of wastewater treatment they
apply. The actual quantity of discharged pollutants is not used in computing the assessment of an
effluent charge payment. In Bosnia and Herzegovina even the level of treatment does not influence
effluent charge payments. The effluent charge regime is basically a tax on wastewater discharge, paid
based on each population-equivalent of discharge. Large settlements have a lower unit charge per
population-equivalent, while small settlements must pay a higher charge.
The incentive for pollution reduction also greatly varies among and within countries. When the
payment of the charge only applies to above-limit emissions, then MWWUs do not have an interest to
reduce pollution below limit values. If the charge relates to treatment levels, as in Croatia, then once a
WWTP investment has been carried out, there is no further incentive to use the technology effectively.
In Bosnia and Herzegovina the charge provides literally no incentive for emission abatement.
From the perspective of incentives, the level of the charge is just as important as the design. In fact,
even the best designs will not attain pollution reduction targets, if the charges are too low in
comparison with abatement costs. Our observation is that in most ME DRB countries effluent charge
systems only marginally influence wastewater treatment investment decisions. Availability of external
financing, especially grants and preferential loans, is the major driver of water pollution investments
for most MWWUs. The only exception may be Hungary, where charges are high enough to speed up
the construction of wastewater treatment facilities. The same may stand for Slovakia after the planned
redesign of effluent charges will take place.
In Hungary and Bulgaria specific further incentives are provided by a design feature that allows use of
a share of the effluent charge payments towards pollution abatement investments. In Bulgaria 10% of
the charge payments may be used towards investments. In Hungary 50% of effluent charge payments
can be reclaimed towards investment expenditures, if the investment reduces the quantity of
discharged pollutants. The rate of reclaim has, however, no connection with the rate of decrease of the
given discharged material. Furthermore, according to analysis carried out at MAKK (2003) the
structure of the reclaim system, together with the gradual introduction of the full effluent charge levels
between 2004 and 2008, will provide an incentive for MWWUs to delay the completion of their
wastewater investments in order to take full advantage of the reclaim potential. The balance of the
different design elements of the Hungarian effluent charge regime on incentive power is not clear.
In addition to incentives, revenue generation is another purpose of the effluent charges. In fact, our
assessment is that in most countries revenue generation is the main goal of the charges, and pollution
abatement is only a secondary target. With the exception of Slovakia and Hungary, effluent charge
revenues arrive at and are collected by funds dedicated to protection of the environment or water
management. In Slovakia and Hungary the charges are revenues of the state budget. In Bosnia and
Herzegovina 70% of charge payments are made towards water management, while 30% arrive to two
separate state budgets.
74
UNDP/GEF Danube Regional Project
Table 13.
Establishing and Enforcing Effluent Charges on MWWUs in the Study
Countries of the DRB
Role of Regulatory Units
Country
Environmental Agency
Health Agency
Other Agencies
Bosnia-
Herzegovina
Bulgaria
Croatian Waters helps set the
Croatia
Helps set the permitted levels; Helps set the permitted levels fee levels applied directly to
monitors the effluent levels
the customer's bill.
Czech Republic
Controls permitted discharge.
The effluent charge is
Verifies emissions data, if
collected by the Tax
Hungary
suspect, directly monitors
Authority, as they have the
emissions
most experience in
enforcement of tax payments.
Moldova
Together with River Basin
Measures the quality for
Romania
Directorate sets the permitted
drinking water and observes
levels and monitors the
the quality parameters
emissions
Interested parties (such as
Slovak Republic
Issues the decision on effluent
monitoring agency,
charges
inspectorate) have
commenting role
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
75
Table 14.
Design and Level of Effluent Charges for MWWUs in the Study Countries of the DRB
Country
Design
Effluent Charge Levels
Additional Information
FB&H:
FB&H:
FB&H:
·
The pollution charge is
·
The charge is 2 KM per p.e. ·
Revenues distributed
determined based on wastewater
pollution per month.
similarly to water extraction
discharge per population
charges:
Bosnia-
equivalent (p.e.). The charge is
·
10% for the federal budget
Herzegovina
unrelated to actual pollution loads
and earmarked for water
and treatment levels. It does not
management
provide an incentive for
treatment.
·
20% for the canton budgets
·
70% for the public company
in charge of the water area
RS:
RS:
·
The pollution charge is
·
The charge is higher for
determined based on wastewater
settlements with low discharge (1
discharge per population
KM/month/ p.e.) than for
equivalent (p.e.). The charge is
settlements with large discharge
unrelated to actual pollution loads (may be even lower than 0.01
and treatment levels, it does not
KM/month/p.e.).
provide an incentive for
treatment.
There are effluent fines when the
There are 27 substances on which Most effluent fine revenues are
quality of water is substandard as
the effluent fine is collected. E.g. paid by industries that directly
a result of effluent discharge into
the fine for BOD5 or COD is 0.45 discharge, and only a small
surface water. The fine depends
BGN/kg (0.23 /kg).
portion by MWWUs.
on exceedance of concentration
Bulgaria
10% discount from effluent fines
limits, wastewater quantity and
applies when pollution abatement
duration of pollution. It has to be
investments are carried out in
paid only after excess, above-
accord with the Ministry of
limit emissions.
Environment and Water
investment programs.
Assigned as a Water Protection
For MWWU customers:
The water pollution charge
Charge to be paid by customers
N = T*V*K
revenues go to the Water
as a commodity charge on
1*K2
Management Fund. The Fund is
wastewater services.
·
N is the Water Protection
partly used to provide preferential
Charge
loans to MWWU investments. In
·
T is the basic charge (0.90
the future, a shift in focus
HRK/m3)
towards preservation of water
·
resources, river basin planning,
V is the annual quantity of
coverage of central water
discharged wastewater (m3/year)
administration expenses is
·
K1 is a factor that relates to
expected.
exceedance of permitted emission
limits
·
K2 is a factor related to the
level of treatment.
Croatia
Since wastewater from MWWUs
is not subject to wastewater
permits, the value of K1 is 1 for
all MWWUs. The unit charge
therefore depends solely on the
level of treatment, as follows:
·
None 0.90 HRK/m3 (0.12
/m3)
·
1st Stage - 0.63 HRK/m3
(0.08 /m3)
·
2nd Stage - 0.27 HRK/m3
(0.04 /m3)
·
Tertiary - 0.18 HRK/m3
(0.02 /m3)
76
UNDP/GEF Danube Regional Project
Country
Design
Effluent Charge Levels
Additional Information
The effluent charges are
The volumetric charge is 0.1
The effluent charge is a revenue
calculated based on the following
CZK/m3 (0.003 /m3)
of the Czech State Environmental
two components:
The pollution charge varies with
Fund.
·
charges for the volume of
pollutants. A few examples:
wastewater if its volume from
·
COD: 8 or 16 CZK/kg (0.25
any given source exceeds 30,000
or 0.5 /kg)
Czech
m3/year
·
Phosphorus: 70 CZK/kg
Republic
·
charges on the quantity of
(2.19 /kg)
pollution, if the concentration or
the quantity exceeds certain
·
Cadmium: 4,000 CZK/kg
levels.
(125 /kg)
Essentially, the effluent charge
An average payment in 2002 was
regime only applies to large
about 0.48 CZK/m3 (0.015 /m3)
polluters.
The effluent charge, called water
A few examples of the level of
The introduction of the fee is
load fee, is paid after discharged
the effluent charge:
gradual. It starts from 30% of the
amounts of specified materials,
·
COD 90 HUF/kg (0.36 /kg) defined level in 2004 and reaches
and it is set in HUF/kg. The level
its full value in 2008. During this
of payment is modified by two
·
Phosphorus 1500 HUF/kg (6 period, 50% of the fee payments
factors: the sensibility of the
/kg)
can be reclaimed, if the MWWU
recipient water body and the
·
Inorganic nitrogen 180
reduces its effluent discharge
sludge disposal multiplier. The
HUF/kg (0.72 /kg)
through abatement investments.
Hungary
more sensitive the water body,
·
Cadmium 44000 HUF/kg
The rate of reclaim has no
the higher the charge is. The
(176 /kg)
connection with the rate of
sludge disposal multiplier
decrease of the given discharged
penalizes temporary and single-
material. The charge is a general
sludge-deposit disposal, and
state budget revenue.
reduces the charge payment if the
sludge is utilized (agriculture,
recultivation and compost
activities)
Moldova
No information
No information
No information
Charges on the entire effluent
Regularly updated to keep up
Revenues go to the National
discharge and fines on above
with inflation. The average
Administration of Romanian
limit emissions.
charge in 2003 was about 1900
Waters. The funds are then used
ROL/m3 (0.05 /m3) in Bucuresti
for improvements in water
Romania
(where wastewater is not treated)
quality, river bed stabilization,
flood control, efficient water use,
and to cover water management
units' expenses in critical periods
(droughts and floods).
Five pollutants are subject to the
Charge levels:
The revenue from these effluent
charge. The amount of charge
·
BOD
charges used to be the income of
depends upon the quantity of
5: 21.5*Z0.8265 (in
thous. SKK, Z is pollution in
the Environmental Fund. This
pollutants in the wastewater and
ton/year)
Fund was eliminated in 2001.
on the quantity of the receiving
From that time, the revenue is
waters. Additional effluent
·
Insoluble substances:
income of the state budget and
charge penalties of up to 200% of 2.34*Z0.7514 (in thous. SKK, Z is
reports on this specific income
the base rate may be levied to
pollution in ton/year)
stream are not available. An
Slovak
reflect a high level of damage to
·
Crude oil substances: 1.00
additional problem is
receiving waters. According to
3.00 SKK/m3 (0.025 0.074
enforcement; once the
Republic
the law, these additional charges
/m3)
Environmental Fund was
must be paid from after-tax
·
Alkalinity or acidity: 135
cancelled, no agency vigorously
profits. The charge rates are not
SKK/kmolle (3.33 /kmolle)
enforces effluent charge payment.
adjusted to inflation.
·
Dissolved inorganic salts:
The regulation is considered to be
120 600 SKK/t (2.96-14.79 /t) outdated and is planned to be
amended in the near future. The
Annual revenues have lately been charge levels are expected to
around 200 million SKK (4.93
become considerably higher.
million )
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
77
3.5.2 Effluent Charges: Case Studies
Effluent charge payments are a significant burden for some of the case study MWWUs. Croatia has
the highest burden related to wastewater discharge. Here effluent charge payments make up 7-11% of
all costs, and more than one-third of all wastewater related costs. The Slovak and Bosnia case study
utilities also face relatively high charge payments, at around 5% of all costs. The rest of the MWWUs
either do not pay an effluent charge, or the charges make up less than 1.5% of their total expenditures.
The Hungarian case study utility will pay a charge in 2004, but estimates on its level have not been
available at the time the study was prepared.
For most of the examined MWWUs a scenario was constructed in which wastewater effluents were
reduced through construction and operation of a new or upgraded WWTP. The resulting reduction in
effluent charge payments were much too low to justify the investment and increased operating costs
related to improved treatment of sewage on financial ground.
Table 15.
Effluent Charges in the Case Study MWWUs: Payments and Pollutants
Country Payments
of
Payment of
Pollutants
Comment
Charge
Charge
Covered by
(Local
(Percentage of all
the Charge
currency/year
MU costs;
and /year)
percentage of
wastewater
related costs)
Bosnia-
89,000 KM/year
4.6% of all costs, 30%
The charge is
of wastewater related
unrelated to
Herzegovina: Doboj 45,600 /year
costs
pollutants
Bulgaria: Pleven
None
2.92 mln HRK/year
11% of all costs, 42%
The charge is based
390,000 /year
of wastewater related
on the level of
Croatia: Karlovac
costs
treatment and
volume of
wastewater
discharge
200,000 HRK/year
7% of all costs, 33% of
The charge is based
wastewater related
on the level of
Croatia:
27,000 /year
costs
treatment and
Duga Resa
volume of
wastewater
discharge
Around 1.6 million
Appr. 1.3% of all costs
No data
Czech Republic:
CZK/year, or 50,000
/year (expert
Vyskov
judgment, not actual
data)
Hungary: EDV-WR No relevant experience yet, as the charge was introduced only on 1 January, 2004
2.6 million MDL/year
1.2% of all costs, 5.4%
BOD, Suspended
Chisinau has some
Moldova: Chisinau
200,000 /year
of wastewater related
materials
secondary treatment.
costs
Most other MUs only
have primary treatment
Romania: Pitesti
Negligible
9 million SKK/year
4.9% of all costs
Volume, BOD,
After introduction of
(225 000 /y)
(including water
COD, SS
the new effluent charge
Slovak Republic:
service)
regulation, payments by
Poprad
the company will
increase to about 20%
of all costs.
78
UNDP/GEF Danube Regional Project
4 Tariff and Effluent Charge Reform Proposals
The previous chapter summarized the conditions that characterize the legal, organizational, and
economic features of MWWUs in the ME DRB. In this chapter we will begin identification and
examination of some reform proposals associated with tariffs levied by the MWWUs and effluent
charges levied upon them. We divide this discussion of reform proposals that ultimately may affect
pollution control by MWWUs into two parts: tariff and effluent charge proposals per se in this chapter
and reforms in other public policies, institutions, and management that support or utilize tariffs and
effluent charges to reduce water pollution from municipalities in Chapter 5.
Before we begin with direct consideration of specific tariff and effluent charge reforms, however, we
now explore some of the other overarching issues that condition any discussion of "reforms" in the
tariff and effluent charge systems that are presently in place in the study countries' MWWUs.
4.1 The Background for Successful Implementation of Tariff and Charge
Reforms
We have chosen to evaluate possible tariff and effluent charge reforms using three criteria: are the
reforms "effective, proportionate, and practical". While quantitative measurement of these criteria is
difficult, we begin this enumeration of possible reforms by noting that the following background
conditions weigh heavily on whether even the best-designed tariff revision in the abstract will be
implemented at all and, if it is, will it be implemented in a manner that allows full realization of its
"effectiveness". Indeed, these background considerations directly bear on all three evaluation criteria.
4.1.1 The Role of Good Governance
There has been a movement in the study countries toward de-centralization. This is partly a result of
democratization and partly a reaction to the problems associated with the highly centralized systems of
the recent past. In the case of MWWUs, this change is double-edged. Localities now can make
decisions affecting local water services etc., but they are also required to be responsible for providing
the service and setting the tariffs and fees that support those services. Furthermore, the devolution of
municipal water supply and wastewater collection assets and responsibilities to local governments and
the rise of joint stock companies controlled by the same municipalities does not entirely solve the
governance problem associated with a public monopoly. Even if controlled at the local level, a public
monopoly still offers extraordinary economic power to suppliers relative to markets in which
competition protects the interests of buyers and sellers alike.
For example, local governance of public water utilities in the lower DRB is sometimes said to be
biased toward keeping tariffs (especially household tariffs) low and/or costs high relative to efficient
levels. Low tariffs may, in the short run, win the approval of customers, especially households. High
costs, in the course of providing political favors e.g., jobs and business to political allies, puts pressure
on the utility budget and may move resources away from their most valuable applications. Thus,
devolution may be better than central planning of budgets and price regulation, but devolution of a
monopoly enterprise still retains the governance challenges of a public monopoly.
There is also the concern that short sighted and/or self-serving (or inexperienced) local authorities will
negotiate and sign a long term contract with a system manager (especially a private system manager)
that will not be in the best interests of the service users of the community. If one promotes local
monopolies, one still needs to assure proper local governance. This means assuring oversight and
training that encourages newly empowered owners, managers, and local policy makers to provide
cost-effective service and reasonable budgetary support.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
79
4.1.2 The Importance of Customer Satisfaction with Local Service Levels
There is deep suspicion on the part of MWWU customers in the region that the additional resources
attainable by MWWUs with higher tariffs will be wasted due to poor management or governance on
the part of MWWU administration, its ownership, or both. In the case of locally controlled MWWUs,
most customers are not only served by the MWWU, they also influence its management through a
variety of processes but most importantly through election of local representatives. While under most
circumstances, a customer of a monopoly has limited alternatives, most of which are probably
prohibitively expensive in this instance, customers are able to respond to tariff changes through both
the commodity and political marketplace.
Local accountability is seen as one of the key advantages of a locally controlled MWWU. This
feature also makes maintenance and/or up-grade of local service a key consideration in any tariff
reform proposal. The acceptability of higher tariffs or new tariff designs, usually depends on the
customers' belief that they are getting some benefit from the increased tariffs. This "benefit" can take
many forms: reliability of service, better water quality, better water pressure, etc. In considering tariff
reforms, it is very important that they be aligned with provision of local service.
4.1.3 The Complex Role of External Financial Assistance
Current or prospective external financing for the development of water utilities, especially advanced
wastewater treatment, can create a set of perverse incentives for local authorities. What local authority
will take responsibility forcing customer sacrifices to upgrade or improve the MWWU system if there
is widespread belief that future transfers (grants) are going to be proportional to the "gap" between
current status and some target level of infrastructure and service. If this view is accurate, any sacrifice
today will be rewarded with lower levels of assistance in the future. This creates the "perverse"
incentive to underperform in the present.
In such circumstances, it is only important to appear to be making a good faith effort to make progress.
The lofty legal and institutional principles, laws and regulations may, by design, not be fully reflected
in the reality of water production, distribution, use, disposal, treatment, and discharge (and the
corresponding stream of revenues and costs associated with each step in the process). While poor
performance may be the result of the hardships of rebuilding or adjusting to a new set of institutional
conditions, it may also be the product of an institutional design in which legal loopholes; weaknesses
in monitoring; poor, arbitrary or selective enforcement; and outright evasion have been anticipated.
4.2 Tariff Reforms
MWWU tariffs are usually designed to recover costs and promote economic efficiency while
considering social equity. Any discussion of tariff reforms aimed at pollution reduction from
municipal water systems must necessarily also consider the implications of these reforms for these
other objects. In the following text and tables we review some of the tariff and effluent charge issues
that were identified and discussed in our Tariffs and Charges Project and the reform proposals that
have been offered to address these issues. In the process we begin commenting upon some features of
these proposals, including any links between the proposal, its immediate consequences, and pollution
reduction.
4.2.1 Tariff Levels
Table 16 contains summary information on some suggested, country-specific tariff level and design
reforms. Most of these either originated with, or were developed in consultation with, the various
country consultants listed in the Preface of this document. The tariff reforms suggested have been
80
UNDP/GEF Danube Regional Project
grouped according to the certain features of the reform e.g., tariff increase, cost-based tariffs, and two-
part tariffs. We will discuss the features and issues connected with these general categories of tariff
reform in a systematic way below. Table 17 presents proposed reforms derived by the project staff
from examination of the conditions and experience of the case study MWWUs. These, too, have been
grouped into general categories of reform. The proposals are often similar to those in Table 16, but
they sometimes have detail or features that reflect special conditions of the case study MWWU and the
associated municipality.
We order the discussion by first beginning with the most straightforward "reform": a simple increase
in the tariff level. Whether this makes sense as a "reform" measure depends on both the circumstances
and size of the tariff increase. In some of the countries the current tariff level is sometimes
characterized simply as being set "too low". As noted in the discussion in Chapter 3, revenue shortfall
is a problem of serious proportions in many MWWUs of the ME DRB, even occasionally in countries
where it is definitely not the norm. In other cases, the motivation for higher tariffs is associated with
the need to support a new repair and maintenance plan or to make a significant investment in
infrastructure. In discussing the circumstances of tariff increases, we make use of the distinctions used
in the development of case study scenarios: tariff increases to 1) balance the current budget, 2) achieve
a sustainable level of current service, and 3) expand or upgrade the system (most usually wastewater
treatment facilities). What distinguishes these scenarios is the motivation for the tariff increase:
· Current Budget Balance the purpose of the tariff increase is to raise tariffs enough to cover
current, immediate financial obligations or costs.
· Sustainability Service the purpose of the tariff increase is to cover not only current costs but also
to make provision for the depreciation of plant and equipment. If done properly, the tariffs will be
high enough to support the indefinite continuation of the current service level.14
· Expanded/Upgraded Service the purpose of this tariff increase is to cover the costs of expanded
service, such as adding more customers or capacity, or up-grade the service, such as adding new
levels of pollution control or improving the quality of the produced water.
We sometimes refer to these different motivations for tariff increases as the "scenario progression".
Obviously, a single tariff increase can meet some combination of these purposes. It is our view,
however, that it is only sensible to address tariff increases for expansion/upgrade after or in
combination with those increases that balance the current budget and put the MWWU on a stable,
sustainable financial footing.
In this discussion of tariff levels we take as a point of departure the tariff design used in most of the
municipalities throughout the region. The water and wastewater tariff is a commodity charge per m3
of water based on the amount of water an account consumes (or imputed to the account if it is not
metered).15 Special wastewater charges may apply to industrial facilities that produce difficult-to-treat
14 This sustainable financial condition could be obtained by setting aside part of the revenue stream each period
that is equal to the rate of depreciation of the system. Making appropriate adjustments for any discounting, the
resulting fund created by these set-asides would be just large enough to support the continuing purchase of new
equipment and infrastructure as it reached the end of its economic life. Even if the MWWU has received its
current infrastructure as "gift" from the central government and can operate without making set-asides now,
eventually it will have to replace this infrastructure. The sustainable scenario estimates the tariffs required when
the MWWU has fully exhausted the infrastructure included in its gift.
15 Wastewater charges are usually based on the amount of drinking water a household consumes. This is usually
a pretty good surrogate for the amount of wastewater the account produces and errors it might introduce are not
usually so great as to justify the transactions costs associated with actual metering of individual account
wastewater flows. At some MWWUs, however, the customers have the option to separately meter water used
specifically for gardening purposes, and only the difference of total water use and gardening use will be subject
to the wastewater charge. In Hungary a regulation requires that MWWUs provide this option to their customers
from 1 January 2004.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
81
or high concentration wastes. These wastewater customers usually impose extraordinary wastewater
treatment costs on the MWWU. Such customers usually have their wastewater flows metered and
monitored (or at least sampled regularly) and are billed based upon their actual pollutant loads as well
as the volume of wastewater. The MWWU usually negotiates special wastewater service rates for
such customers.
4.2.1.1
Current Budget Balance
In a few study countries, especially Moldova, and B&H (Bosnia and Herzegovina), the proposed tariff
increases are motivated primarily by the need to produce enough revenue to balance the current
accounts. In others, notably Bulgaria, Croatia, the Czech Republic, Hungary, Romania, and Slovakia,
most of the MWWUs are in current budget balance but there are still some MWWUs that are
exceptions to that rule. Consequently, we introduce the following tariff reform: a change in tariff level
based on the need to cover current costs.
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UNDP/GEF Danube Regional Project
Table 16.
Tariff Level and Design Reform Proposals Affecting MWWUs in Study Countries of the DRB
Country
Changes in Current Tariffs
Set Tariffs Based on Local Costs
Test Two Part Tariff
Reform Rationale Refor
m
Rationale Refor
m
Rationale
·
Set tariffs for
·
Current tariffs are
·
Support and
·
Current tariff designs ·
Set tariffs using
·
Through two part
different customer classes
not set at a realistic level
encourage new tariff
and levels don't reflect
"Base-Extra Capacity"
tariffs with fixed and
based on the real cost of
a level high enough to
design models that fully
current costs.
method which
variable components all
service. This will result
cover either the current
and realistically reflect
·
Municipalities,
distinguishes a tariff for
consumers contribute
in an increase of tariffs,
costs of the system or
local conditions and
which have the most
base service and one for
towards fixed costs. This
especially household
maintain the system in the circumstances
power in determining
peak service. This is a
system is more equitable
tariffs.
long run.
·
Prepare a "Water and tariffs, often lack the
two part tariff with two,
and more efficient than
·
Tariffs should be
·
This is especially
Wastewater Tariff
skills and knowledge to
increasing "commodity
the simple commodity
raised gradually over
true for household water
Manual" to assist
introduce cost-covering
charge" blocks.
charge, especially since a
some period of time
and wastewater tariffs.
municipalities in
tariff designs
·
Introduce tariffs with large share of water and
Household tariffs are
developing and evaluating
fixed and variable
wastewater service costs
heavily cross-subsidized
new tariff levels and
components, or increase
are fixed costs when there
Bosnia-
by the tariffs of other
designs.
the fixed tariff at
is excess capacity.
Herzegovina
service users.
·
Applies to both
MWWUs where two part
·
Through two part
·
An abrupt increase in FB&H and RS
tariffs already exist.
tariffs with fixed and
tariffs may further
·
The fixed tariff
variable components
escalate the problem of
component should be
increase the dependability
non-payment.
increased gradually, and
of the revenue stream, as
not abruptly.
a portion of the revenues
do not depend directly on
consumption levels.
·
A sudden increase of
the fixed tariff may result
in increased avoidance of
payment at households
with financial problems.
·
Increase the level of
·
Most current tariffs
·
Increase economic
·
At present there are
·
Introduce a two part
· To ensure cash flows
tariffs
do not ensure medium and efficiency through more
uniform tariffs within
tariff, with a fixed charge
for long term
long run sustainability, or
closely adjusting tariffs to
many MWWUs,
to cover current fixed and
sustainability of the
Bulgaria
upgrade of service.
reflect local costs
regardless of differences
joint costs and a
utilities, and to enhance
in cost
commodity charge to
economic efficiency
approximate marginal
through a more direct
costs
connection between tariffs
and costs.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
83
Country
Changes in Current Tariffs
Set Tariffs Based on Local Costs
Test Two Part Tariff
Reform Rationale Refor
m
Rationale Refor
m
Rationale
·
Increase the level of
·
In the short run
·
Increase economic
·
The cost of services
·
Introduce a two part
· To ensure cash flows
tariffs
MWWUs in general are in efficiency through more
and tariffs are not closely
tariff, with a fixed charge
for long term
·
Tariff increases
a financially stable
closely adjusting tariffs to
related at most MWWUs.
to cover current fixed and
sustainability of the
should primarily take
situation. The
reflect long term local
joint costs and a
utilities, and to enhance
place for household
infrastructure, however, is costs
commodity charge to
economic efficiency
customers
being depreciated not only
approximate marginal
through a more direct
in terms of accounting,
costs
connection between tariffs
but also physically, and
and local costs.
major investments will be
Croatia
needed to maintain and/or
replace pieces of it.
Tariffs will need to be
increased in order to
generate appropriate
revenues for this purpose
·
Households are most
often cross-subsidized by
other consumers, e.g.
industry
·
Increase of tariffs is
·
Current tariffs at
·
Introduce a two part
·
For long term
needed at many (but not
many MWWUs do not
tariff, with a fixed charge
sustainability. Water
Czech
all) MWWUs
ensure sustainable
to cover current fixed
losses are rising as the
operations
costs and a commodity
systems age. Current
Republic
charge to cover variables
tariffs are not sufficient to
costs
maintain and replace the
current infrastructure.
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UNDP/GEF Danube Regional Project
Country
Changes in Current Tariffs
Set Tariffs Based on Local Costs
Test Two Part Tariff
Reform Rationale Refor
m
Rationale Refor
m
Rationale
·
Stop cross-
·
This will help ensure
·
Set tariffs based on
·
The consolidation of
·
More widespread use ·
To ensure cash flows
subsidization from
sustainable tariffs and
local costs, but at the
the Hungarian W&WW
of two part tariffs it is
for long term
industry to households,
economic efficiency.
same time keep in mind
industry in the 1990s was
already used by some of
sustainability of the
i.e. household tariffs
However, there are some
the risk of prohibitively
fuelled by separation of
the utilities.
utilities, and to enhance
should increase more than
vulnerable consumer
high tariffs for some
MUs based on differences
·
Make sure that
economic efficiency
industrial tariffs (some
groups, where a dramatic
isolated communities
in local costs of service
revenues collected for
through a more direct
industrial tariffs may even increase in tariffs can
often inhabited by poor
provision. The final result future investments
connection between tariffs
be lowered)
create problems this
people.
is a fragmented system of
through the fixed tariff are and costs.
·
Many MWWUs,
needs to be considered
utilities, some of which
accumulated.
Hungary
however, are on a
when devising the tariff
face extremely high costs,
sustainable path of
design.
and the state needs to
operation, and there is no
provide subsidies to
need for uniform increase
ensure equity.
in tariffs. Some
MWWUs, nonetheless,
will need to introduce
substantial tariff increases
in order to be able to
satisfy EU requirements.
·
Gradually phase out
·
Industrial users pay
·
Stop the practice of
·
Metered households
·
Introduce a two part
·
Many households
cross-subsidization of
about 5 times more for the dumping the costs
pay according to their
tariff with a low initial
face difficulty paying
household tariffs by
same water and sewage
associated with leakage
actual consumption, while fixed tariff, which can be
their W&WW bills, an
industrial users
services than households.
onto households that do
unmetered households
raised to the level of fixed
"equity feature" in the
Increase of household
not have meters. The
pay based on an estimate,
costs in the future.
design of a two-part tariff
tariffs, should, however
costs associated with
which, however also
·
The variable
makes the tariff more
be implemented
leakage should be
contains part of the leaked component could initially acceptable among
Moldova
cautiously, and possibly
recovered by all SUs, and
water. This practice is not consist of an increasing
consumers, and may also
together with some other
the MU should establish a
only unjust, but also
block tariff.
contribute to improved
measures (e.g.
strategy to reduce leakage
ineffective due to high
collection of bills. A
introduction of metering
through cost effective
ratios of non-payment on
prerequisite for this
in order to provide an
measures.
part of households,
proposal is metering of
opportunity for reduced
especially unmetered
water use at households.
payments through reduced
households.
consumption)
Glenn Morris / Andrįs Kis
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85
Country
Changes in Current Tariffs
Set Tariffs Based on Local Costs
Test Two Part Tariff
Reform Rationale Refor
m
Rationale Refor
m
Rationale
·
Initially increase
·
Improving service
·
Revise the system of
·
MWWU revenues
·
Introduce a two part
·
To ensure cash flows
tariffs with the proceeds
reliability will increase
tariff adjustment to allow
fell way behind costs in
tariff, with a fixed charge
for long term
earmarked to reduce
the willingness-to-pay for
it to quickly pass along
the last decade due to
to cover current fixed and
sustainability of the
system losses and
water service. Shift up
new energy costs or,
inflation and, especially,
joint costs and a
utilities, and to enhance
improve reliability
and more inelastic
during an inflationary
energy price increases.
commodity charge to
economic efficiency
demand. This will raise
period, costs in general.
approximately cover
through a more direct
revenues at the new tariffs
marginal costs
connection between tariffs
and make future tariff
and costs.
Romania
increases both more
acceptable and revenue
producing.
·
Reduced losses will
also reduce some costs
and this will enhance net
revenue.
·
Increase in tariffs
·
More efficient
·
Abandon national
·
More efficient
·
Introduce a two part
·
To ensure cash flows
should be based on actual
(reduces cross
tariff calculations for
(reduces cross
tariff, with a fixed charge
for long term
production cost of
subsidization across
households based upon
subsidization across
to cover current fixed
sustainability of the
operator rather than
communities and
the coefficients of an
communities and
costs and a commodity
utilities, and to enhance
national "flat" regulation
customer classes)
increase and let local
customer classes)
charge to cover variables
economic efficiency
·
More protective of
MWWU to set tariffs
·
More protective of
costs
through a more direct
based on local conditions
connection between tariffs
Slovak
the financial integrity of
the financial integrity of
those communities that
those communities that
and costs.
Republic
have inherently high costs
have inherently high costs
of water and wastewater
of water and wastewater
service.
service.
·
Get National
Regulatory Office out of
the tariff business and into
rate of return regulation
86
UNDP/GEF Danube Regional Project
REFORM: Tariffs for Covering Current Costs
Issue Summary: Revenues do not cover current, short run variable costs and financial obligations
Possible Reform Strategy: Increase in existing tariff with earmarking of revenues
Strategy Description
Comment/Concerns
Raise tariffs just enough to cover current budget
Helps stabilize the current budget condition, therefore a
deficits
step toward good management and future development.
May be counter-productive if there is high price
elasticity and/or high tariff increases
Earmark the revenues so that they are only spent to
Helps address the concern that the customers will really
cover current activities and associated costs
benefit from the higher tariffs. Earmarking may be
difficult to enforce without good book keeping and
accounting practices.
May only be a short-term solution to the budget
problem.
Addresses pollution control only indirectly: through any
"demand side" effects and creating a more stable
foundation for utility planning and management.
This "reform" proposal is often conditioned by a need for prioritization in spending the additional
revenues hopefully produced by the higher tariffs. This would place highest priority on the need to
balance current MWWU books.
At the same time, our study team commonly observes a strong resistance to a MWWU tariff increase
for any reason, even the occurrence of operating losses at the local MWWU. As noted in our
discussion of background issues, most municipal authorities are extremely hesitant to support and, in
some cases, even hostile to any proposal to increase tariffs. The customers (the municipal authorities
constituency) are often not convinced that the tariff increase is either necessary or that any increased
revenues will really be used to maintain their service.
A common argument against any tariff increases in ME DRB countries with weak economies is that 1)
many residents of the municipality are unemployed and/or have low incomes and 2) these residents
cannot afford any increase. One can argue about the merit of this argument (see data relevant to this
issue under "burden indices" in section 6.6) or whether it should be the MWWU's responsibility to
provide social support isn't that task of the central government? However, the high sensitivity to this
problem suggests that any tariff increases must be seen as "fair" to these low income households. In
many cases, a tariff increase may have to have, either by design or as a supporting program, a feature
that will help insulate lower income households from excessive tariff increases. Some possibilities for
such protection are discussed under "revenue recovery" reforms discussed in Chapter 5.4.1. In many
cases it appears that any tariff increase would have to be proposed in combination with other reforms
that are designed to protect the interests of the poorest customers.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
87
Table 17.
Tariff Levels and Design Reform Proposals for Case Study MWWUs *
Country
Increases in Current Tariffs to Cover
Fixed and Variable Component Tariff
Increase Tariff to Cover Upgrades
Current Costs
to Cover Current Costs
(Usually a New Wastewater Treatment
Plant)
Reform
Ration
ale/Result
Reform
Ration
ale/Result Reform Rationale/Result
·
Tariffs on average
·
Tariffs at present
·
Keeping a two part ·
This structure will
·
Tariffs, especially
·
A high fixed tariff
need to be increased by
barely cover costs, and
tariff, and increasing
result in a potentially
household tariffs, need
in the sustainable and
10-20%, and cost
there are no resources
both the fixed and the
more efficient tariff
to be increased 4-8
upgrade scenarios,
savings measures need
for systematic
variable component,
regime, than if cost
times in order to ensure
however, may cause
to be implemented in
maintenance of the
rather than only the
recovery was achieved
adequate revenues to
payment problems,
order to achieve
infrastructure.
variable component, to
only through an
cover the costs of
increasing the level of
financial balance in the
·
Household tariffs
cost recovering levels.
increase of the variable
upgrade. The increase
outstanding bills.
short run, while better
are cross-subsidized by
tariff
may be offset if outside
Graduality is therefore
maintaining the
industrial and other
grants are available.
important, and the role
infrastructure. Tariffs
tariffs, therefore tariff
·
Both the fixed and
of investment grants is
of the households will
increase need to be
the variable
crucial for large
need to increase at a
selective in order align
components of the tariff developments,
higher rate, than the
revenues with costs for
would need to be
especially for the
Bosnia-
tariffs of other
each service user group.
raised.
WWTP
consumer groups. In
Herzegovina:
fact, the tariffs of some
·
The fund for
Doboj
of the other service user wastewater investments
groups may stay
will find opposition
constant or may even be from the municipality,
reduced
since wastewater
revenues benefit the
·
Wastewater tariffs
municipal budget under
at present are higher
current arrangements
than needed to cover
costs. Instead of
lowering these tariffs, it
is advisable to start
creating a fund that will
be used for future
wastewater
investments.
88
UNDP/GEF Danube Regional Project
Country
Increases in Current Tariffs to Cover
Fixed and Variable Component Tariff
Increase Tariff to Cover Upgrades
Current Costs
to Cover Current Costs
(Usually a New Wastewater Treatment
Plant)
Reform
Rationale/Result
Reform
Rationale/Result Reform Rationale/Result
·
Significant
·
The company was
·
Introduce a two
·
Possibly more
·
Invest in leakage
·
Improve effluent
increase of tariffs not
overcharging and the
part tariff, with an
efficient than the
reduction, new sewage
reduction and lower
justified.
increase could only be
initially low but
present simple
connections with
production costs as well
·
More transparency
used to cover the
gradually increasing
commodity charge
treatment and improve
as water consumption
of tariff setting and
uncollected receivables. fixed component
·
Assures a
the efficiency of the
by SU with excessive
better measures for
·
Improve the image
dependable revenue
existing WWTP while
debt outstanding.
collection of
of the company and
stream, independent of
increasing tariffs.
Reduce leakage by
receivables
willingness of the users
changes in service use
·
Increase household better water supplied
measurements and
·
Allow for tariff
to pay thus increasing
and budget entity
cutting illegal
setting that will be
revenues and
tariffs. Lower industry
connections.
based on long-term,
decreasing debt
users' tariffs.
sustainable
outstanding.
·
Avoid cross-
development of the
·
If service prices
subsidizing and give
unit.
are deliberately kept
stimuli for industry to
develop, thus increasing
Bulgaria:
·
Adjust tariffs to
low, management will
not have incentive and
the chances for
Pleven
reflect actual costs
investment in pollution
incurred by each SU
possibility to invest in
reduction. Address the
category. Find
up-grades or
need to create better
alternative ways to
improvements of the
incentives for SU to pay
support budget entities.
system.
their bills.
·
Additional study
·
Stop cross-
needed to estimate the
subsidizing among SUs.
resulting changes on the At present most of debt
demand side.
outstanding is due to
households.
·
The positive
effects could be offset
by increased
consumption, which
could overburden the
system.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
89
Country
Increases in Current Tariffs to Cover
Fixed and Variable Component Tariff
Increase Tariff to Cover Upgrades
Current Costs
to Cover Current Costs
(Usually a New Wastewater Treatment
Plant)
Reform
Rationale/Result
Reform
Rationale/Result Reform Rationale/Result
·
Increase tariffs to
·
In the short run the ·
Introduce a two
·
Potentially more
·
Increase household ·
Upgrade of the
generate revenues for
two case study
part tariff, with an
efficient than the
water tariffs 1.5-2
wastewater network and
replacement of existing
MWWUs are in a
initially low but
present simple
times, household
construction of the
infrastructure in the
financially stable
gradually increasing
commodity charge
wastewater tariffs 4-7
WWTP may not be
medium term
situation. The
fixed component
·
Assures a
times to generate
feasible entirely from
·
Increase should
infrastructure, however,
dependable revenue
enough revenue to
revenues, as tariffs
primarily take place at
is being depreciated not
stream, independent of
cover the investment
would grow
households
only in terms of
changes in service use
and operating costs
excessively. Outside
accounting, but also
related to upgrade
help, in the form of
physically, and major
·
There is no need to grants or preferential
investments will be
increase industrial
loans, is needed, or the
needed to maintain
water tariffs, while
investments need to be
Croatia:
and/or replace pieces of
industrial wastewater
delayed until the
Karlovac,
it.
tariffs need to increase
economic status of
Duga Resa
·
Households are at
2-4 times.
consumers considerably
present cross-
improves.
·
Try to secure EU
subsidized by other
grants to cover part of
·
New connections
users.
the investment costs
will lower the pressure
to increase the fixed
·
Develop the
tariffs related to
sewerage in order to
wastewater service of
connect new customers
existing connections, as
the costs of constructing
the WWTP will be
shared by a higher
number of service
users.
90
UNDP/GEF Danube Regional Project
Country
Increases in Current Tariffs to Cover
Fixed and Variable Component Tariff
Increase Tariff to Cover Upgrades
Current Costs
to Cover Current Costs
(Usually a New Wastewater Treatment
Plant)
Reform
Rationale/Result
Reform
Rationale/Result Reform Rationale/Result
·
Introduce tariff
·
Reduction in water ·
Introduce two part
·
Possibly reduces
·
20% co-finance a
·
Reduces effluent
increase to cover costs
consumption.
tariff with a fixed
the share of water
new WWTP on a part
by treatment and lower
including real system
·
Possible reduction
charge to cover fixed
losses due to demand
of the system that has
water use
depreciation into the
in water losses due to
costs and a commodity
side effects.
no WWTP at present
·
Making all
cost basis for full cost
demand side effects.
charge to cover variable · Prospective
households pay
tariff setting
costs.
·
Prospective
reduction in
increased wastewater
reduction in
deterioration due to
tariffs by 200%
Czech
deterioration due to
supply side effects
·
Cross subsidy to
Republic:
supply side effects.
·
Relative to straight
household served by the
Vyskov
·
Result 30% rise
commodity charge:
new WWTP
in water tariff, 50% rise
increase water use,
·
Substantial burden
in wastewater tariff
lower residential
increase from 1.4% to
expenditures if fixed
2.4% for average
costs are allocated by
income household, 6%
customer class.
to 11% for household in
lowest decile of
income.
·
Increase tariffs for
·
This way cross-
·
Introduce a two
·
Potentially more
·
2-2.5 times
·
Household tariffs
households and
subsidization would
part tariff, with an
efficient than the
increase in tariffs,
should increase at a
decrease tariffs for large end. Increased
initially low but
present simple
unless investment
higher rate than
industrial consumers.
wastewater tariffs,
gradually increasing
commodity charge
grants are available.
industrial tariffs.
however, have a risk of
fixed component
·
Assures a
Hungary:
disconnection (or
dependable revenue
slower rate of
EDV-WR
stream, independent of
connection) to the
changes in service use
existing wastewater
collection network by
households, especially
in rural areas of the
case study region.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
91
Country
Increases in Current Tariffs to Cover
Fixed and Variable Component Tariff
Increase Tariff to Cover Upgrades
Current Costs
to Cover Current Costs
(Usually a New Wastewater Treatment
Plant)
Reform
Rationale/Result
Reform
Rationale/Result Reform Rationale/Result
·
Approximately 2.5
·
The tariffs of
·
Introduce a two
·
Graduality is
·
Gradually increase
·
No major
times higher water
industrial consumers
part tariff with a low
important due to the
tariffs in order to start
upgrades, financed from
tariffs and 3 times
and public entities can
initial fixed tariff,
poor economic status of building up a reserve
tariffs, are feasible
higher wastewater
be lowered by about
which can be raised to
service users. A fixed
for future upgrade
within a few years time
tariffs for households in one-half for both water
the level of fixed costs
tariff component can
investments.
due to economic
order to cover current
and wastewater.
in the future.
help in stabilizing
hardships in Moldova.
costs.
·
If the presently
revenues, which would
·
A combination of
Moldova:
poor collection of bills
be essential for
increased tariffs,
Chisinau
cannot be improved
MWWU Chisinau.
improved collection of
substantially, then the
bills, and investment
tariffs of households
grants may be feasible
need to be increased
for upgrade
further, while the tariffs
investments.
of industry and public
entities cannot be
lowered.
92
UNDP/GEF Danube Regional Project
Country
Increases in Current Tariffs to Cover
Fixed and Variable Component Tariff
Increase Tariff to Cover Upgrades
Current Costs
to Cover Current Costs
(Usually a New Wastewater Treatment
Plant)
Reform
Rationale/Result
Reform
Rationale/Result Reform Rationale/Result
·
Place priority on
·
Improving service
·
Introduce a two
·
Potentially more
·
Not tested due to
investments from
reliability will increase
part tariff, with an
efficient than the
lack of data
increased revenues to
the willingness-to-pay
initially low but
present simple
rehabilitate the water
for water service.
gradually increasing
commodity charge
supply
Shift up and more
fixed component
·
Assures a
·
Allow the
inelastic demand. This
dependable revenue
automatic revision of
will raise revenues at
stream, independent of
water tariffs based on
the new tariffs and
changes in service use
electricity costs and
make future tariff
general inflation
increases both more
acceptable and revenue
Romania:
producing.
Pitesti
·
Reduced losses
will also reduce some
costs and this will
enhance net revenue.
·
The current
process takes too long.
Agree to formulas for
interim updates and
review after the fact to
see if some adjustment
is in order.
·
·
Allow for the
·
More efficient
·
Appr. 50%
Slovak
increase/decrease of
(reduces cross
increase is needed in
Republic:
tariffs based upon
subsidization across
wastewater tariffs.
Poprad
production costs
communities and
customer classes)
* Results are elaborated in Section 4.2.1.4 for tariff increases under "current", "sustainable", and "expansion/upgrade" scenarios.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
93
4.2.1.2
Sustainable Service
The MWWUs of the ME of the DRB are commonly characterized by decaying and/or oversized
infrastructure. Unless steps are taken to provide preventive maintenance and/or replacement of this
infrastructure, MWWUs will be forced to address the problems created by broken pipes and broken
equipment as a continuing, and ever-more-frequent, series of emergencies. Reducing budgets by
postponing maintenance and replacement results not only in the loss of infrastructure services but also
the loss in skilled and knowledgeable staff. If the maintenance and replacement program is well-
designed to begin with, any short run costs associated with maintenance and replacement will be more
than offset by higher long term savings.
The program of investments for a sustainable system may require much higher tariffs than suggested
by the cost of a well-designed maintenance program. Even a good program can't extend the life of
some equipment and material indefinitely. Some provision must be made for replacing the structural
elements and durable equipment of the current water and wastewater system. The municipalities, as
noted above, often inherited infrastructure without debt.16 This "gift" allows the municipalities the
luxury of not having any debt burden associated with most of their infrastructure. Ultimately, water
and sewer lines, mains, valves, water tanks, etc., have to be replaced. The municipality must decide
whether to finance these systems in advance or to put off making any provision for the future until the
replacement investment must be made and then borrowing the capital to finance the investment and
repay principal and interest on the loan. The former choice means a small increase in tariffs today; the
latter means a higher increase in tariffs in the future. In making this decision availability of
commercial loans is a key factor for consideration. In either case, due to the age and rapid
deterioration of much of the infrastructure, this choice and the tariff difference between them may
not be very great.
With this as an impending future choice, one can understand how important it is to the managers,
owners, and customers of the MWWU to establish clear priorities regarding various investments in the
system. An advanced WWTP may be "affordable" now, but that doesn't mean it should be the highest
investment priority. Provision for long-term replacement of the water and sewerage network
(including separation of storm and wastewater sewers) may not yet have been factored into the tariff
calculations. If network replacement is a higher priority than the WWTP, then we can only assess its
"affordability" after the tariff implications of network replacement have been factored into tariffs.17
In examining the design and financing of a sustainable system, it may come to the attention of decision
makers that elements of the current system do not make economic sense. These elements may have
been added to the system during a period of distorted prices or under different planning policies.
Determining a financially sustainable level of service also means rationalizing service levels so that
those services that are disproportionately expensive may be scaled back or eliminated. This may
complicate the development of this tariff reform and push tariff reform toward other designs (see
Section 4.2.2 below).
Increasing tariffs to support a cost-effective program of long run sustainable service is an alternative to
reducing budgets. This tariff reform is summarized below. Like other tariff reforms, it may need to
be bundled with other features, especially consideration of and protection to low income households.
16 This isn't really as generous as it may at first appear. All infrastructure bestowed by the central government
was in fact paid for by the citizens of the country through past taxes or transfer of other assets. Any remaining
debt will, likewise, be paid of by the citizens in future taxes or assets transfers.
17 The proper "ordering" of options is a common feature of good policy analysis, whether examining cost-
effectiveness or "affordability".
94
UNDP/GEF Danube Regional Project
REFORM: Tariffs Covering Sustainable Service
Issue Summary: Budgets may be too small to support sustainable service levels
Possible Reform Strategy: Raise tariffs to cover current service levels in the long run.
Strategy Description
Comment/Concerns
Raise tariffs enough to cover budgets that support
Cost-effective in the long run. Need to allow for any
sustainable service levels
"demand side" response that loses revenue. A multi-tariff
scheme including a fix tariff component can limit the loss of
revenues.
Demonstrate that this strategy is cost-effective in advance
Use engineering/economic model to support demonstration.
Show that these tariffs today are an alternative to higher
tariffs and/or declining service in the long run.
Earmark new revenues to maintain and replace existing
Customers will experience more reliable service; a tangible
infrastructure in a durable fashion.
quid pro quo for the tariff increase.
Puts the utility on the road to long-term solvency.
Establishes it as reliable and far-sighted, and this can enhance
its access to capital and lower the cost of capital.
Addresses pollution control only indirectly: through any
"demand side" effects and creating a more stable foundation
for utility planning and management. Lower volumes of
wastewater may still contain the same amount of pollution
4.2.1.3
Expanded/Upgraded Service
Many MWWUs hope to expand and/or upgrade their service in the coming years. These aspirations
will have to be financed in some way. If by "expansion" we mean the addition of new customers
connected to the water or wastewater system, connect charges or fees can be assessed to cover the
fixed costs of this service. On the other hand, an upgrade in service such as development of a more
reliable water supply, better treatment of drinking water, or new or more complete wastewater
treatment, will often require an increase in water and wastewater tariffs. In this discussion, we have in
mind the case of an up-grade in wastewater treatment; the case that most directly relates to pollution
reduction, particularly nutrient and toxics reduction.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
95
REFORM: Tariff increases covering up-grade of wastewater treatment
Issue Summary: Need to finance new or up-graded wastewater treatment required or encouraged by
regulation or fees.
Possible Reform Strategy: Raise tariffs to cover the cost of capital (principle and interest) and
operating cost of the WWTP
Strategy Description
Comment/Concerns
Increase tariffs to cover the costs of the WWTP
Compliance with regulations; avoidance or reduction of high
effluent charges. Revenues from higher tariffs may be offset
by reductions in water demand.
Pollution reduced from the supply side if the WWTP is built
and properly operated. Possible reduction from the demand
side if reduced sewerage flows are not offset by increase in
pollution loads.
If the MWWU is not on a stable financial footing, capital to
finance the WWTP may not be available or available only at
high interest rates.
Political and economic resistance may be very high: non-
payment may increase and new local authorities may be
elected with a mandate to roll back the tariff increases; cross-
subsidy by other communities not using the WWTP may be
especially high and stimulate changes in tariff policy or sub-
division of the MWWU.
To ease the increase in tariffs, other investments may be
canceled or deferred, perhaps even threatening investments
aimed toward sustainability of operations, introduction of
wastewater treatment at an uncontrolled discharge point,
expansion of wastewater collection, etc.
Resistance to this tariff increases to support wastewater treatment upgrades reform may be very high
because of the size of the tariff increase and the fact that the customers do not see much, if any,
increase in their service levels. As noted earlier, we have computed some burden indices for WWTP
upgrades in case study communities in Chapter 6.6. These results illustrate that upgrade of the
infrastructure is likely to be excessively burdensome in most cases given the current levels of
economic development. Substantial external assistance may be required for the burden to be
acceptable even in some of the more developed countries of the ME DRB.
Another concern, specifically related to nutrient and toxics reduction, is the fact that serious reductions
in these particular pollutants require the most extensive wastewater technology (tertiary treatment).
This level of treatment is very expensive, both in itself and because the two earlier stages of treatment
are a necessary pre-requisite. In addition, costly technological changes will be required for sludge
management. This means that tariff increases necessary to address these particular pollutants will
need to be especially large. The corollary is that tariff and charge reforms that effectively reduce these
pollutants may need to be fairly dramatic. The many problem areas noted with the succession of tariff
increase reforms just discussed suggest the need for further consideration of tariff designs. We now
turn to some other aspects of tariff design and their possible role in tariff reforms.
96
UNDP/GEF Danube Regional Project
4.2.1.4
Scenario Progression in the Case Study Utilities
To provide more concrete insight into tariff increase reforms introduced within this chapter, in this
section the tariff consequences of progressing from present operating conditions to sustainable service,
and to expanded/upgraded service are discussed.
4.2.1.4.1
Drinking Water Tariff Consequences
Table 18 depicts, and subsequent figures illustrate how household and industrial "drinking" water
(excluding wastewater) tariffs and wastewater (excluding drinking water) tariffs change through
progression from the baseline to the "upgrade" scenario. In order to be able to make a comparison
across modelling results, we tried to create roughly uniform scenarios for the modeled MWWUs. We
tried to construct comparable data across MWWUs and scenarios but that was strictly impossible.
Some of the key features and assumptions of the scenarios are shown in the footnotes of Table 18
below.
Table 18.
Water Tariffs (Excluding Wastewater Tariffs) in Case Study Utilities under
Different Scenario Assumptions (/m3 incl. VAT)
Household Water Tariffs
Industrial Water Tariffs
Country/MWWU
Baseline Sustainable Upgrade
Baseline Sustainable Upgrade
scenario
scenario
scenario
scenario
scenario
scenario
Bosnia-Herzegovina:
0.19 0.82 1.02 0.67 0.49 0.64
Doboj
Bulgaria: Pleven
0.38 0.40 0.40 0.39 0.41 0.41
Croatia: Karlovac
0.37 0.72 0.74 0.96 0.73 0.74
Croatia:
0.38 0.67 0.74 0.81 0.67 0.68
Duga Resa
Czech Republic:
0.70 0.75 1.02 0.70 0.75 1.02
Vyskov
Hungary:
0.74 0.66 0.84 0.74 0.45 0.51
EDV-WR
Moldova: Chisinau
0.13 0.35 0.35 0.72 0.35 0.35
Romania: Pitesti
0.16 - - 0.16 - -
Slovak Republic:
0.11 - 0.29
0.11 - 0.29
Poprad
Scenario Assumptions:
1. Baseline Scenario tariffs are usually 2003 tariffs of the case study utilities. With these tariffs
most of the companies break even only in the short run or have mild short run profits or
losses. We adjusted the 2003 Slovak case study (Poprad) tariff to a level at which the case
study company would have zero profits.
2. In the Upgrade Scenario no grants or subsidies associated with infrastructural development
were included in the model. The costs of the service are covered entirely by tariff increases.
3. In the case of Bulgaria, Bosnia and Hungary case study MWWUs, cost-based tariffs were
applied for the sustainable and upgrade scenarios for each service user category, eliminating
cross-subsidization among service user categories. For the baseline scenario and the other
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
97
case studies, however, it was not possible to separate the costs related to service users and
cost-based tariffs were not computed for each service user category.
4. It was assumed that each case study community had successfully launched a zero-cost
program that eliminated non-payment.
5. Data for specific scenarios for some of the countries was not available at this time, therefore
the tables and figures below are not completely filled up.
6. Average tariff was applied in case of a range tariffs, such as for Bulgaria, for instance.
Some of the MWWUs in the scenarios actually face financial difficulties in the short run. In contrast,
the Slovak case study utility, however, would be highly profitable with the tariffs that they currently
collect. From these profits the losses of other parts of the regional company are financed (the regional
company consists of three main parts, including Poprad, which was the case study site). This is the
reason for the special, Slovak baseline tariff adjustment.
Based on the results of the other countries, as well as economic concepts such as economies of scale,
one would expect that truly cost-based tariff setting in Slovakia, the Czech Republic, Moldova and
Croatia would also result in lower tariffs for industrial, and higher tariffs for household users as it had
in Bulgaria (for wastewater), Bosnia and Hungary.
As collection of revenues is problematic in some of the ME DRB countries, especially the ones with
low per capita disposable income and GDP (most importantly Moldova and Bosnia), sustainable
W&WW services would be very difficult to reach for these countries if an effective, low cost revenue
recovery program is not feasible.
Due to radically different circumstances among some of the case study communities in Table 18, it is
very difficult to implement identical modelling assumptions for each of them. Therefore the exact
tariff levels may not be fully comparable with each other. At the same time, the general trends and
magnitudes are considered to be valid.
Differences in baseline household water tariffs reflect different levels of service, baseline
sustainability as well as input costs across the countries. An exception may be Slovakia, where a high
quality and sustainable water service is coupled with a low unit cost, partly due to favorable
geographical conditions. Baseline industrial water tariffs are, without exception, equal to or higher
than household water tariffs, as they cross-subsidize household consumers. This phenomenon is very
well depicted by the fact that in the sustainable scenario (where cost recovery is required) most of the
industrial tariffs decline (see Figure 14) compared to the baseline (in which cost recovery is not
required), while most household tariffs increase ( Figure 13). For most utilities within the sustainable
scenario the water supply infrastructure is already in an advanced state, there is not much to upgrade
on it, therefore tariffs do not increase further significantly. There are three exceptions. In the case of
the Hungarian and the Czech utility there was no clear-cut upgrade scenario for water service. Rather,
this scenario should be interpreted as long-term sustainability, as opposed to mid-term sustainability.
In the case of Bosnia a water softening plant is constructed and operated as part of the upgrade
scenario.
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Figure 13 Household Water (Excluding Wastewater) Tariffs in Case Study Utilities in Three
Main Scenarios (/m3 incl. VAT)
1,20
1,00
Bosnia-Hercegovina
Bulgaria
0,80
Croatia Karlovac
Croatia Duga Resa
0,60
Czech Republic
EUR/m3
Hungary
Moldova
0,40
Romania
Slovakia
0,20
0,00
Baseline
Sustainable Upgrade
Figure 14 Industrial Water Tariffs in Case Study Utilities in Three Main Scenarios (/m3 incl.
VAT)
1,20
1,00
Bosnia-Hercegovina
Bulgaria
0,80
Croatia Karlovac
3
Croatia Duga Resa
m
Czech Republic
0,60
UR/
Hungary
E
Moldova
0,40
Romania
Slovakia
0,20
0,00
Baseline
Sustainable Upgrade
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99
4.2.1.4.2
Wastewater Tariff Consequences
With the exception of the Slovak case study community, baseline wastewater tariffs are 20-90 percent
lower than water tariffs. This is partly due to low costs due to levels of treatment (mostly mechanical,
sometimes biological treatment, in some places complete lack of treatment), and low level or lack of
effluent charges, while in some communities water services also cross-subsidize wastewater services
(especially in Bulgaria and Hungary). In Slovakia higher wastewater tariffs appear to be primarily due
to low costs of water supply in the short run.
Similarly to water services, industrial users (and other legal entities) pay as much or more for
wastewater services as households. We have not investigated the extent to which higher industrial
tariffs are justified by industrial pollution loads, but the change in tariff levels from the baseline to the
sustainable scenarios suggests that industrial users cross-subsidize household users. This point is
addressed again when we consider cost-based tariff reforms later in this chapter. Upgrading
wastewater services, usually by means of constructing new or modernizing existing wastewater
treatment plants, considerably raises the wastewater tariffs in most cases. The countries with higher
per capita GDP (Croatia, Czech R., Slovakia and Hungary) will experience tariffs in excess of 0.5
/m3.
Table 19.
Wastewater Tariffs in Case Study Utilities under Different Scenario
Assumptions (/m3 incl. VAT)
Household tariffs
Industrial tariffs
Country
Baseline Sustainable Upgrade
Baseline Sustainable Upgrade
scenario
scenario
scenario
scenario
scenario
scenario
Bosnia-Herzegovina:
0.07 0.40 1.05 0.24 0.37 0.92
Doboj
Bulgaria: Pleven
0.04 0.06
0.10 0.14
0.17 0.20
0.04 0.27
0.10 0.19
0.17 0.21
Croatia: Karlovac
0.24 0.42 1.09 0.35 0.42 0.77
Croatia:
0.16 0.58 1.09 0.16 0.36 0.71
Duga Resa
Czech Republic:
0.44 0.53 0.91 0.44 0.53 0.99
Vyskov
Hungary:
0.47 0.77 1.14 0.47 0.58 0.83
EDV-WR
Moldova: Chisinau
0.04 0.13 0.14 0.23 0.13 0.14
Romania: Pitesti
0.13 - - 0.13 - -
Slovak Republic:
0.42 - 0.67
0.42 - 0.67
Poprad
Scenario Assumptions:
1. Baseline Scenario tariffs are usually 2003 tariffs of the case study utilities. With these tariffs
most of the companies operate sustainable only in the short run: they just break even, or have
mild profits or losses. We adjusted the 2003 Slovak tariff to a level at which the case study
company would have zero profits.
2. In the Upgrade Scenario no grants or subsidies associated with infrastructural development
were included in the model. The costs of the service are covered entirely by tariff increases.
3. In the case of Bulgaria, Bosnia and Hungary case study MWWUs, cost-based tariffs were
applied for the sustainable and upgrade scenarios for each service user category, eliminating
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UNDP/GEF Danube Regional Project
cross-subsidization among service user categories. For the baseline scenario and the other
case studies, however, it was not possible to separate the costs related to service users and
cost-based tariffs were not computed for each service user category.
4. It was assumed that each case study community had successfully launched a zero-cost
program that eliminated non-payment.
5. Data for specific scenarios for some of the countries was not available at this time, therefore
the tables and figures below are not completely filled up.
Figure 15 Household Wastewater Tariffs in Case Study Utilities in Three Main Scenarios
(/m3 incl. VAT)
1,20
1,00
Bosnia-Hercegovina
Bulgaria
0,80
Croatia Karlovac
3
Croatia Duga Resa
m
Czech Republic
0,60
UR/
Hungary
E
Moldova
0,40
Romania
Slovakia
0,20
0,00
Baseline
Sustainable Upgrade
Figure 16 Industrial Wastewater Tariffs in Case Study Utilities in Three Main Scenarios
(/m3 incl. VAT)
1,20
1,00
Bosnia-Hercegovina
0,80
Bulgaria
Croatia Karlovac
Croatia Duga Resa
0,60
Czech Republic
EUR/m3
Hungary
0,40
Moldova
Romania
Slovakia
0,20
0,00
Baseline
Sustainable Upgrade
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4.2.2 Cost-Based Tariffs vs Cross-Subsidies
The countries and municipalities of the ME DRB are, for the most part, moving away from a variety of
preferential tariff practices in which one group of customers pays higher tariffs than another group,
even though their cost of service is roughly the same. Moving beyond this principle of "equal tariffs
for equal service", however, there is also a move toward "cost-based" tariff setting; tariffs are
different, reflecting different costs of service. As noted above, such a design is supported on
efficiency grounds. In the following we look at three types of "cost-based" tariff reforms.
4.2.2.1
Customer Category
When MWWUs (or the central government) were setting tariffs based on operating costs, household
customers were typically "cross-subsidized" by industrial customers. When municipalities took
control of the MWWUs, they also took upon themselves the obligation of paying for both the
operating and capital requirements of the system. In some countries these capital costs were "real" in
that the MWWU really did have to make some capital investment. In other cases the capital cost were
an accounting device an allowed amortization that could legally be recovered by the MWWU.18 To
cover these additional costs the tariff decision makers often raised household tariffs to be more in line
with the tariffs charged to "other" and "industry" customers. Even so, there is still plenty of evidence
that "industrial" and "other" customers currently pay higher commodity charges than household
customers.
At the same time, "industry" and "other" customer classes were often being privatized and were much
more sensitive to costs. They pressured MWWU to reduce the tariff disparity or face the loss of their
business. There is evidence in both the Czech Republic and Slovak Republic that the threat of
industrial users to "self supply" their water and wastewater service influence the trend toward a re-
design of tariffs for both water and wastewater. In those countries, however, which have not yet gone
far enough in economic transition, including privatization of industrial facilities, strong competition in
domestic markets, and deregulation of water utilities, the degree for "overcharging" industrial
consumers is larger. Table 20 below indicates the ratio between water and wastewater tariffs of
industry and households in case study communities. Interestingly, there is not a single utility in which
industrial consumers would pay less for W&WW services than households, while, certainly in the case
of water supply, provision of service to industry is almost always less costly than to households.
18 The problem of accounting amortization was discussed previously and will be revisited again when we discuss
financial reforms. We raise it here simply as a feature of the cost structure that puts pressure on municipalities to
reduce or abandon the practice of cross-subsidizing households.
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Table 20.
Ratio of Industrial to Household Water and Wastewater Tariffs in Case Study
Communities
Water Wastewater
Bosnia-Herzegovina: Doboj
3.57 3.54
Bulgaria: Pleven
1.03 3.10
Croatia: Karlovac
2.61 1.43
Croatia: Duga Resa
2.15 1.00
Czech Republic: Vyskov
1.00 1.00
Hungary: EDV-WR
1.00 1.00
Moldova: Chisinau
5.77 5.45
Romania: Pitesti
1.00 1.00
Slovak Republic: Poprad*
2.20 2.50
* Authorities are planning to equate household and industrial tariffs in 2005.
REFORM: Tariffs based on costs of service for different classes of customers
Issue Summary: Continued cross-subsidy of households by other customers is untenable given
increased capital costs and the threat of industrial self-supply
Possible Reform Strategy: Set tariffs based on costs of service for the different customer groups
Strategy Description
Comment/Concerns
Cost-of-service tariffs for households, industry, and other
Likely increase in economic efficiency but possible hardship
customer classes
for low-income households.
There will be some "arbitrary" assignment of joint and fixed
costs if the decision is made to set tariffs that generate
MWWU keeps industrial customers.
revenues that will cover all costs.
Higher industrial wastewater costs may reflect the higher
concentrations of pollutants in these wastewaters
Increased tariff revenues from households with possible
reductions in water use by households that partially offset the
tariff increases.
Figure 17 illustrates the change in tariffs in those case studies in which cost recovery from different
groups of SUs was possible to model. The figures clearly show that in the baseline water tariffs are
significantly higher than wastewater tariffs for households as well as industrial users. This difference
decreases through progression with the scenarios, wastewater tariffs outgrow water tariffs with the
upgrade scenarios in Bosnia, Croatia and Hungary. It can also be observed that the household water
and wastewater tariffs in each of the localities increase at a faster rate than industrial water tariffs.19
19 "Increase" is relative, since sometimes tariffs decrease or stay constant, but progression is less
disadvantageous for industrial users than household users as long as tariffs are based on costs.
Glenn Morris / Andrįs Kis
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103
Figure 17 Commodity Charges in the Bosnian, Bulgarian, Croatian and Hungarian Case
Study Utilities in Three Main Scenarios
Bosnia and Herzegovina
Bulgaria
0,45
1,20
0,40
1,00
0,35
0,30
0,80
3
3
0,25
m
m
R/ 0,60
UR/ 0,20
E
EU
0,15
0,40
0,10
0,20
0,05
0,00
0,00
Baseline
Sustainable Upgrade
Baseline
Sustainable Upgrade
HH water
HH WW
Ind. water
Ind. WW
HH water
HH WW
Ind. water
Ind. WW
Croatia: Duga Resa
Hungary
1,20
1,20
1,00
1,00
0,80
0,80
3
/
m
m3
0,60
0,60
EUR
UR/
E
0,40
0,40
0,20
0,20
0,00
0,00
Baseline
Sustainable Upgrade
Baseline
Sustainable Upgrade
HH water
HH WW
Ind. water
Ind. WW
HH water
HH WW
Ind. water
Ind. WW
4.2.2.2
Type of Service
Some communities use wastewater tariffs to cross subsidize water service and vice versa. While this
is mostly important in situations when some customers use one and not the other service, cost-of-
service tariffs can be used to correct this source of inefficiency.
4.2.2.3
Geography
Geography, both physical and political, can influence the cost of serving particular customers. As
MWWU service areas increase in size, especially as they become more regional in character,
substantial differences in the cost incurred by the Utility to serve customers in different areas are likely
to emerge. Often these differences simply reflect geography: higher, more remote areas are usually
more costly to serve. A number of country or case study reform proposals of Table 16 and Table 17
emphasize linking tariffs more closely to local costs.
These differences can also, however, reflect the amount of capital and other infrastructure that
components of the system "inherit" from the old regimes. These may not be "fairly" or uniformly
distributed and efforts to devolve ownership and cost may not be equitable in this regard i.e., those
communities favored by centrally financed infrastructure under the old system have higher service
levels or lower prospective costs (in the near term) than communities that have to finance comparable
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systems themselves.20 This condition could also cut the other way: the operating costs of over-
designed systems will burden the "blessed" communities. They may actually be at a disadvantage
e.g., very small communities with large and expensive sewerages systems and treatment. In Hungary,
one small community, whose water system is regarded by some as "compensation" for forced
collectivization, depends on cost-subsidies from urban areas to keep its very expensive system
operating.
REFORM: Tariffs based on costs of service for different geographic areas
Issue Summary: Continued cross-subsidy of one geographic area by another creates tension within
the MWWU.
Possible Reform Strategy: Set tariffs based on costs of service for the different geographic areas
Strategy Description
Comment/Concerns
Likely increase in economic efficiency but possible hardship
Cost-of-service tariffs for each geographic entity
for high cost areas.
There will be some "arbitrary" assignment of joint and fixed
MWWU keeps industrial customers and other customers in
costs if the geographic areas share some infrastructure
the low cost areas; possibly loses them in the high cost areas.
Instituting this reform may mean that higher levels of
wastewater treatment or expansion of the sewerage system
are "unaffordable".
Failure to institute this reform may result in further
devolution into smaller, independent utilities.
The current organization of MWWU systems in many of the ME DRB countries is somewhat unstable
in part because of the cost differences across communities. In Slovakia and Hungary, in particular,
there has been continued sub-division of MWWU systems, as communities want to have more local
autonomy with respect to service and tariff policy. This is, in some measure, motivated by a desire to
shed high-cost elements (and communities) from the system.
A group of communities that are part of a MWWU can, of course, develop some middle ground on
this question of cross subsidies across communities. Part of the reason for striking a compromise may
be economic: economies of scale in administration and production. This compromise might include
some continued sharing of costs up to some reasonable level as well as lower service levels and/or
abandoning overly expensive infrastructure at the high cost communities. In the Czech case study, it
is clear that the WWTP considered would never be financed by the served community alone and, that
while arguably "affordable" for MWWUs as a whole, it is not a cost-effective means of nutrient
reduction (see Table 17).
4.2.3 Tariff Designs
4.2.3.1
Multipart Tariffs
Responsibility for setting tariffs is devolving from the central government to local authorities, owners
(sometimes the local authorities), and operators (at least initial recommendations). These local
20 The "inherited" infrastructure is sometimes technologically or otherwise unsuited for upgrade. In such cases,
the Utility must replace most of the infrastructure. In these cases, the endowment of infrastructure is really
worth very little when the current system, especially a wastewater treatment system, must be upgraded.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
105
authorities and operators might prefer alternatives to simple commodity charges, such as "two part"
tariffs and connect charges to more effectively cover costs and more efficiently deliver service. Here
we describe some of the main options regarding simple two part tariffs, some of which are proposed in
Table 16 and Table 17. Of course, there are many variations and permutations of these options,
including extension to multipart tariff schemes with commodity charge both increasing and decreasing
in a number of steps with the amount of water consumed. With regard to these latter designs, we share
the concerns of Boland and Whittington (2000) and the OECD (2003b) that these more elaborate
designs can become counterproductive, actually undermining efficiency and transparency objectives.
4.2.3.1.1
Fixed and Variable Costs
This tariff structure splits costs into fixed and variable (commodity charge) components. This
distinction is fundamental to the proper application of marginal cost pricing with a revenue
requirement, but the tariff design is of general interest as well. As illustrated in Figure 18 below, the
first part of the tariff is a fixed charge per period that is paid by the customer regardless of the amount
of water consumed or wastewater produced.21 In principle, this covers the fixed costs the MWWU
incurs regardless of the amount of water produced or treated. The commodity charge component is
the second part of the tariff and is set on the basis of variable costs necessary to produce a unit of
water in the period. In regions where the water supply is seasonal, the commodity charge may change
as the costs of production change.
21 The terminology of tariff design is not firmly fixed in the literature. Some would say that the term "two part
tariff" only applies to a situation in which there are two distinct commodity charges. Here, because one can
blend into the other, we offer the fixed and variable design as a type of two part tariff.
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UNDP/GEF Danube Regional Project
Figure 18 A Multipart Tariff with a Fixed Charge and a Commodity Charge
Fixed
Charge/Unit
of
Time
Commodity
Charge/Unit
of Service
+
Commodity
Charge
Q
Fixed
0
Charge
Service Level/ Unit of Time
REFORM: Two-part tariff design with fixed and variable components
Issue Summary: Setting commodity charge levels so that revenues cover costs is difficult to do since
fixed costs must be covered regardless of the amount of water sold.
Possible Reform Strategy: Create a two part tariff, with a fixed charge and commodity charge
Strategy Description
Comment/Concerns
Choose a two part tariff design: fixed charge to cover fixed
Almost by definition, this is a cost recovery strategy.
costs and commodity charge to cover variable costs
Allocation of fixed costs is arbitrary. To maintain efficiency Efficient if, at the particular commodity charge, the demand
property it must not be allocated in any way to the amount
for water is less than capacity.
of water actually consumed.
The impact on low income customers depends to a large
extent on how fixed costs are allocated.
Additional pollution control will impact both fixed and
variable cost. Expenditures, rather than tariffs per se, are the
key to "affordability".
Marginal cost pricing with a revenue requirement can be pursued as a special application of the fixed
and variable cost two-part tariff. In such an application when the system is operating at less than full
capacity, variable costs are, in fact, marginal costs and fixed charges are used to cover any fixed
capital costs. As the system reaches capacity, the commodity charge is allowed to rise in excess of
variable cost. Any excess revenues (revenues in excess of costs) collected from the commodity charge
may be used to reduce the fixed charge. At some point the commodity charge gets so high that it is
equivalent to "long run" marginal costs. These long run marginal costs are usually defined as the
average capital cost of the new capacity plus the variable cost at the new capacity. At that point, the
new capacity is built, and the cost of that new capacity becomes a fixed cost and the commodity
charge drops back to the variable costs of operating with the new capacity. For further discussion and
an illustration see Hall (1996) and Hall and Hanemann (1996).
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Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
107
REFORM: Marginal cost tariff setting
Issue Summary: Current tariffs are not economically efficient.
Possible Reform Strategy: Create a two part tariff with the commodity charge equal to either short
or long run marginal cost, depending upon excess capacity.
Strategy Description
Comment/Concerns
Choose a two part tariff design with the commodity charge
The most efficient pricing strategy; static and dynamic
equal to marginal cost
efficiency.
Commodity charge is equal to variable cost with excess
Can also be a cost recovery design through the use of the
capacity; long run marginal costs when the system is
fixed charge..
capacity constrained.
Customers, operators, and owners must be highly tolerant of,
and responsive to, possible large changes in tariffs over
relatively short intervals.
The efficiency property depends, in large part, on low
transactions costs associated with customer adjustment to
new tariffs.
The design will automatically make efficient choices
regarding pollution reduction if the effluent charge levels are
themselves based on an accurate social damage function.
4.2.3.1.2
Multipart Tariffs Low Initial Commodity Charge
Another two-part tariff design is motivated by an attempt to improve the "equity" characteristics of the
tariff without badly compromising the efficiency and cost-recovery features. This tariff design assigns
artificially "low" commodity charges to the first portion "block" of the two part tariff and higher
charges to succeeding blocks. Such a design is illustrated in Figure 7 on page 33 and often referred to
as an increasing block tariff design.
REFORM: Two-part tariff with low first block, high second block
Issue Summary: Prospective tariff increases are particularly threatening to low income households.
Possible Reform Strategy: Create a two part tariff with a low commodity charge for the first few
units of water use.
Strategy Description
Comment/Concerns
Choose a two part tariff design: low commodity charge in
Reduces expenditures of low water use customers. If low-
the first block and high commodity charge in the second
income customers are also low water users, then it is more
block
"equitable".
Efficiency and cost recovery may be compromised. The
former if the second block tariff is too high, the later if the
second block tariff is too low.
May allow the MWWU to generate more revenue to support
pollution reduction without hitting the affordability barrier of
low-income households.
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As already suggested, there are many variations in both the application and rationale of a two-part
tariff with two commodity charges. One alternative, discussed in Table 16 as a possibility for B&H, is
designation of a "base" level of consumption and any level of water or wastewater consumption above
that as "peak" level of consumption. The commodity charge of the "base" level would reflect the
costs of both infrastructure and operation that are necessary to meet these lower levels of demand.
The "peak" commodity charge would be higher, reflecting the higher costs of building and operating
capacity needed to meet this "peak" consumption. While there is no inherent economic merit to this
distinction, the operational effect is still the same as the increasing block tariff reform described
above: low expenditures for customers that use lower amounts of water and disproportionately higher
expenditures for customers that use larger amounts of water. As noted above, however, the experience
with such tariff structures is that they do not allow one to really effectively target those customers (and
only those customers) one would like to protect (OECD, 2003b).
4.3 Effluent Charges
Effluent charges currently seem to provide little incentive on "the costs side" for MWWUs to invest in
wastewater treatment. This could be because the effluent charges are too low relative to the costs of
control. In some of the countries, the effluent charge is designed as a "fine"; it only applies to
effluents levels or concentrations in excess of some levels set in the operating permit. Also, it could
be poor design: as discussed above. Croatia and B&H have high "effluent charges" but impose them
in a way that does not provide much "cost side" incentive: those that pay the charge have no control
over the variables the will reduce it. Alternatively, effluent charges might be high enough "on paper"
but in practice the system may be easily manipulated so as to result in a much lower effective rate. As
a related consideration, strict enforcement may result in such a burden to the MWWU or its customers
that the service itself, or valued components of it, may be threatened. Hence, MWWUs in Bulgaria
pay very little effluent charge.
Of course, lack of WWTP construction does not necessarily mean the effluent charge is "too low". In
principle, we could stimulate some increase in WWTP construction if we simple raise the effluent
charge high enough and made sure that it was enforced.22 Furthermore, the absence of current
construction does not mean the "revenue" side of an effluent charge is inconsequential. It would
appear that in countries like Croatia the effluent charge, in the form of an environmental protection
fee, has a significant revenue effect. The extent to which, under the current system, this translates into
actual pollution reduction needs to be more carefully examined in each country. In general, however,
when effluent charge revenues are recycled through third parties (such as environmental funds) before
being returned to MWWU to subsidize pollution reducing investments, additional transactions costs
and opportunities for resource misallocation arise.
There may be a special role for effluent charges even when they aren't high enough to induce
investment in the most advanced WWTP technology. However a WWTP is financed, even if the
whole plant is built with grants, it still requires funds to operate. The effluent charge might be set high
enough that it provides a financial incentive to the MWWU to operate the WWTP as effectively as
possible e.g., minimize by-passes, keep up residence times, refresh filters, etc. This feature is
especially relevant for the MWWUs in those countries that have recently joined, or will in this decade
likely join, the European Union. Here strict command and control requirements on effluent discharge
are set by EU legislation, and there is limited room for effluent charges to trigger further effluent
reduction investments. Effluent charges, however, can provide incentives for effective operation of
WWTPs.
22 Also in principle, the efficient level of the effluent charge is that which is set to cover the marginal cost to
society of an additional unit of effluent. An effluent charge set higher than this might stimulate more WWTP
construction and increase effluent treatment, but it would not be "efficient" to do so since the marginal cost to
society would be greater than the marginal benefit.
Glenn Morris / Andrįs Kis
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109
4.3.1 Effluent Charge Level
We begin this discussion of effluent charge reforms, like that of the discussion of tariff reforms, by
considering an increase in the effluent charge level. While the design of effluent charges differs
substantially from country to country, we begin with the assumption that the increase in the level of
the effluent charges occurs with an effluent charge designed as a "fine" i.e., it only applies to excess
levels of effluent discharged.
Table 21 lists some proposals for effluent charge reform based on country reports. In general, there
seems to be support for an increase in the effluent charge in those countries where they are relatively
low. In fact, several countries (Hungary, Slovakia) report that increases have already been set or are
under consideration (Czech Republic).
REFORM: Increase in the volume (flow) or concentration (load) effluent charges
Issue Summary: Current charges were set too low or have been eroded by inflation.
Possible Reform Strategy: Raise the effluent charge.
Strategy Description
Comment/Concerns
Increase the effluent charge assessed by volume
Encourages MWWU to reduce effluents in order to reduce costs.
and/or concentration.
Extent of the reaction is uncertain.
Increases the cost of operation. These will have to be passed on to
customers as higher tariffs or absorbed by the MWWU as it reduces
service or allowances for future investment.
May increase payments for effluent charges. Whether it does or not
depends on the size of the effluent charge increase and the elasticity of
substitution for pollution reduction in production of wastewater
services.
If effluents are reduced, it is likely that solid waste production by
treatment facilities will increase.
Once the command and control requirements of the EU environmental
acquis, especially Directive 91/271/EEC concerning Urban Water and
Wastewater Treatment have been met, further pollution abatement
becomes very expensive, and it would be triggered only by extremely
high effluent charges. There is even a risk that a dual burden (cost of
WWTP investment and effluent charge together) would cause delays in
the construction of treatment plants.
A cost minimizing Utility will respond to the increased effluent charge by reducing pollution to the
point where the marginal cost of abatement is equal to the new effluent charge. As shown in Annex 2,
the reaction depends on both the new charge level and the cost of abatement. As noted in the
comments to the reform above, the predicted impact of the increased effluent charge, assuming it is
effectively implemented, will depend on the specific technical and economic conditions of the
MWWU and its customers. Beyond the immediate effects on MWWU behavior, the "revenue" effects
and their ultimate impact on investment in pollution reduction are also uncertain. All this suggests
that effluent charge tariffs should not be increased without careful examination and consideration of
both 1) the technical and institutional context into which it is introduced and 2) the objectives that
wish to be achieved.
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Table 21.
Effluent Charge Reform Proposals Affecting MWWUs in Study Countries of the
DRB
Country
Revise the Effluent Charge
Reform
Rationale
Bosnia-
Make a connection between effluent loads
At present "effluent charge" is based on
and effluent charge payments.
population equivalent, providing no incentive
Herzegovina
to reduce pollution.
Review the distribution of effluent charge
Most effluent charge revenues from MWWUs
revenues with the intent of using them more
are channeled to municipal governments.
directly to support MWWU water protection
The current effluent charge raises little revenue
programs, including water resource use.
from MWWUs and, apparently, provides little
Bulgaria
Improve scope and enforcement of existing
incentive for MWWUs to reduce effluents.
effluent charges.
Directing the proceeds of effluent charges more
Consider raising effluent charges for
effectively to MWWU projects, including water
discharges in excess of permitted levels in
resource use, may make it easier to increase the
order to provide more support for "revenue
scope, level, and enforcement of effluent
side" links to pollution protection.
charges.
Make the "Water Protection Charge" (WPC)
The current WPC is relatively high (up to twice
more sensitive to the effluent loads.
the size of the municipal sewerage service
Allow the MWWU to withhold some of the
charge) but doesn't seem to have stimulated
improvements in WWT, as the next level of
Croatia
charge payment to build, upgrade, or better
manage a WWT facility.
treatment, which would result in lower WPC
payments, is very expensive to introduce.
Higher effluent charges proposed by MoE as
Effluent charges are rather low and eroded by
Czech Republic
an amendment of the Act.
the inflation. Their operative change is difficult
because the level of charges is stated by the
Act.
No specific proposal.
In Hungary an effluent charge regime was
Hungary
introduced in 2004. Policy recommendations
can be made after the operation in the first year
of the charge has been assessed.
Set effluent charges at a level prompting
In Moldova there are a number of WWTPs,
operation of existing WWTPs
which are, however, not in operation due to the
financial difficulties of MWWUs. By
introducing a relatively low level of effluent
Moldova
charge and an effluent monitoring program, the
wastewater treatment infrastructure could be
brought back to operation. There is, however, a
risk that financially unstable MWWUs would
not respond to the effluent charges in any way.
Redesign the effluent charge to cover the full
The present levels and design of effluent
load of pollution, not only above limit
charges do not prompt effluent reduction.
Romania
effluents. Increase the charges to levels
providing an actual incentive for effluent
reduction.
Increase the effective effluent charges so as
An increase in effluent charges is currently
to ensure an "incentive" function. This
being discussed. The outdated regulation on
requires an examination of the unit cost of
pollution charges (valid from 1979) does not
pollution reduction.
suit the current situation. An expert group of
Slovak Republic
Allow for payment holidays in case of
water engineers was invited to assess the unit
mitigation investments
cost of pollution reduction and this will serve as
a basis for setting new effluent charges.
Provides an incentive for MWWU to reduce
effluents and concentrations.
Glenn Morris / Andrįs Kis
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4.3.2 Effluent Charge Designs
One difficulty with effluent charges is that they are an economic instrument usually applied on top of
command and control regulatory standards. Each MWWU has to get approvals to build and operate
the elements of its system. This usually means that its designs are usually scrutinized by various
interested authorities and subject to environmental reviews. When approved for operation, a WWTP
usually is assigned limits on the amount and concentration of effluent. In this setting, the effluents
charges are often assessed only on the excess of these limits. The reason behind this is that the
WWTP has already had to install expensive equipment to reduce effluents to a reasonable level. Why
penalize the MWWU by making it pay effluent charges on effluent levels that are inherent to the
technology that was approved by during environmental review of the WWTP? Shouldn't you only
penalize to the extent that the operator exceeds the assigned limits? While this is not universally the
case e.g., Croatia increases customer wastewater tariffs directly with its water protection fee and
Slovakia applies the effluent charges to all effluents, many effluent charges are applied only on the
excesses above the assigned effluent limits. These effluent charges are often called fines.
Operating a system of fines instead of a charge regime does not necessarily have a valid economic
argument. Whether or not the fines are compatible with economic efficiency criteria depends on the
technology approved and the damage function for relevant effluents. One option that would increase
the incentive for pollution control on the cost side of the effluent charge is to apply the effluent charge
to the total, not just the excess, effluent. If, however, the effluent charge levels are based on a revenue
target rather than a damage function, extension of effluent charges to all effluents may actually reduce
economic efficiency. As in some other examples cited here, the merit of the reform depends on more
than just one dimension of design or one consequence of the many changes stimulated by the reform.
An issue that sometimes arises during the design of effluent charges in the region is the inherited
WWTP infrastructure of utilities. At some of the utilities advanced wastewater treatment equipment
were installed from government sources at some point in the past, when the utility was either state
owned or the investment was supported through a grant scheme. These utilities, whatever their
present ownership, are certainly at an advantage compared to those utilities which were never granted
modern WWT technology, and now have to invest in it without outside help23, for two reasons:
· Initial effluent charge payments of the utilities with more advanced technology will be lower due
to less pollution released.
· They do not have to invest into WWTP now, or only to a lower extent, spending on, for instance,
modernization of existing equipment.
There are several ways of easing the dual burden of utilities that lag behind. One possibility is to set
the compliance date for the effluent charge several years in the future, ensuring enough time to design
and construct an appropriate collection and treatment system. The effectiveness of this strategy
depends crucially on the credibility of government. Moreover, ME DRB governments usually run
negative budget deficits, and they are keen on securing more revenues, having low willingness to
"postpone" introduction of the effluent charge.
Another possibility is offering the option to the utilities to spend a certain percentage of effluent
charge payments for a specific number of years on investment into their abatement technology.
Lastly, a government or W&WW industry operated sinking fund can also be effective. Part or all of
the effluent charge revenues would be channeled into this fund, from where WWTP investment would
be supported, either as a grant or as preferential loan. (See section 5.2.2 for more detail on the last
option.) Provision of government grants, however, runs a serious risk of low economic effectiveness,
this option should therefore be applied with great care, if at all. EU grants, at the same time, will be
available in most ME DRB countries to upgrade or introduce WWTP technologies at MWWUs, and
these grants will, by design, assist in bridging the gap between poor and good performers.
23 In a number of the ME DRB countries some outside investment support is available, from the EU and/or
domestic government grants.
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REFORM: Effluent charge on total effluent
Issue Summary: Current charges commonly apply to only to excess effluent.
Possible Reform Strategy: Apply the effluent charge on total effluent.
Strategy Description
Comment/Concerns
Encourages MWWU to reduce effluents beyond current
Apply the effluent charge on total effluent.
limits. This is true, however, if the current effluent charge is
higher than the current marginal cost of control.
Has little effect on discharge points that are essentially
weakly controlled as a result of problems with measurement
and enforcement.
The revenue effect the amount of new fee revenue produced
may be significant.
Will increase costs and probably the tariffs charged by the
MWWU.
4.3.3 Process Changes
4.3.3.1
Measurement/Monitoring
Most effluent measurements are self-reported i.e., they are made and reported by the polluter, in this
case the MWWU. The greater the effluent charge, the greater the incentive the MWWU has to under-
report effluent levels. While it is common to have local environmental agencies double checking
effluent levels, the resources of these organizations are limited and the likelihood of the MWWUs data
being successfully challenged is very small. Allocating more resources to monitoring programs may
be a wise decision in some countries.
4.3.3.2
Reduce Latitude for Regulators Judgment
When issues arise regarding the assessment of an effluent charge, the environmental authorities will
often begin negotiating agreement to remedy the problems rather than insisting that the MWWU pay
up right now. This approach may actually be optimal given the appeal process or other means an
MWWU has of contesting the effluent charge payment. However, this does pose a problem for the
effectiveness of the effluent charge even if the charge levels are raised.
4.3.3.3
Publish effluent charge payments
Publication of effluent levels, effluent charges assessed, and effluent charge payments is a good way
to raise public awareness on how effective current effluent charges are in reducing pollution, and may
provide an incentive for polluters to comply with regulations.
Glenn Morris / Andrįs Kis
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5 Supporting Reforms for Tariffs or Effluent Charges
5.1 Bookkeeping and Accounting Reforms
5.1.1 Bookkeeping/Accounting
Potentially one of the most important areas of reform is the development of bookkeeping and
accounting practices that support modern management and oversight of the MWWU (See Table 22).
More specifically, the books or some part of the books - must be kept to provide a good picture of
the cost structure24. This information on cost structure should support cost-of-service pricing through
cross tabulation of costs by activities, service areas, and accounts. Both the need for such a capability,
as well as the value of such information for planning and analysis purposes, was abundantly clear to
members of our Project team that needed to collect and interpret case study information.
The bookkeeping should also support public oversight of the MWWU. The owners or their
representatives cannot meet their responsibilities unless they have access to information that clearly
shows the financial condition of the MWWU and has enough detail to explain why it is in that
condition. The owners have an interest in seeing that the MWWU is being run in a cost-effective
manner and the MWWU accounts should be designed to help them make that judgment. Similarly, the
bookkeeping and accounting practices should be designed to support the oversight of economic
regulators. Their responsibility is to assure that the MWWU does not abuse its privileged economic
position as a public monopoly. To provide this information may require reforms in bookkeeping
standards in general; developing new standards for regulated, local monopolies; or moving the
MWWUs into a class of business entities where the necessary scope and standards already prevail.
REFORM: Upgrade bookkeeping and accounting practices
Issue Summary: Current book keeping is not detailed enough to support planning and oversight
Possible Reform Strategy: Upgrade the bookkeeping practice
Strategy Description
Comment/Concerns
Develop a set of book keeping accounts that provide better
Supports management decision making, including tariff
information on the costs structure and better supports
design and investment planning
investment planning and tariff calculations.
Integrate the accounts with the billing system
Supports oversight by owners and economic regulators
Will involve extra personnel and other costs.
May not conform to current book keeping requirements; may
be necessary to keep two or more sets of accounts.
An important aspect of this system would be use of the economic lives of assets (not their tax lives) in
the computations of tariff requirements and other management decisions. This could mean, for
example, that the economic depreciation of gifted infrastructure in the revised management books can
be used as a cost in the calculation of "sustainable" tariff levels.
24 It is sometimes said of modern corporations that they keep three sets of books: for tax purposes, for the use of
external audits/accounts, and for use in business management.
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5.1.2 Audit Reforms
While bookkeeping reforms will help the MWWU with economic oversight, the study team also
identified the need for public audits to assure that the books are honest and tariffs justified. For those
MWWUs that are owned outright by municipalities or jointly with partners, the municipalities'
citizens as both owners and customers in most cases desire the assurance that the Utility's books
are clean and accurate. This is one way to address the lack of confidence in governance that seems to
be uppermost in people's minds when they are asked to consider an increase in tariffs.
The audits we have in mind are "performance" audits. Such audits go more deeply into the books and
examine the structure of costs and tariffs to see that the MWWU is well organized and managed. Such
audits can assist the managers to identify potential cost savings and cost-effective ways to improve the
overall level of service.
For audits to be effective, the country may have to establish rules and regulations for auditing,
especially related to allowances for depreciation of "inherited" infrastructure based on "book value"
and other possible abusive practices. As part of this process the MWWUs need to establish how they
plan to finance future investment, the two main strategies are: 1) to set up reserve funds that are
funded from current tariffs (and drawn down as the future investment is required) and 2) fund the
future investments externally and repay the debt using future tariffs. The ASTEC model allows the
user to select either strategy.
REFORM: Introduce a periodic public audit of MWWU books
Issue Summary: The regulators and customers desire some assurance that the books are accurate as a
basis for establishing rates.
Possible Reform Strategy: Require periodic performance audits
Strategy Description
Comment/Concerns
Will involve extra costs. Should be paid for by the MWWU
Require periodic independent performance audits of
(customers) but the contract might be awarded by the
MWWU books
regulators.
There may be problems with the legal basis for this
Can reduce the cost by making them the audits samples of
requirement - privacy provisions etc.- that have to be worked
parts of the books.
out.
The frequency and depth of audit can vary with the size,
financial condition, and investment plans of the MWWU.
Glenn Morris / Andrįs Kis
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Table 22.
Accounting, Bookkeeping, and Audit Reform Proposals Affecting MWWUs in Study Countries of the DRB
Country
Book-Keeping for Management
Audit of MWWU Books
Rationalize the Cost Basis Used in
MWWU Regulation
Reform Rationale Refor
m
Rationale Refor
m
Rationale
·
Prepare new
·
Existing accounting
·
Periodic,
·
Audits contribute to ·
Budget from the
·
There is currently
accounting standards
standards are too general
independent audit of
more efficient
department up. Each
no way to compare
specifically designed for and rigid and do not
MWWU books is
operations as well as
department in the
actual to budgeted costs
cost centered
allow accounting for
needed
more credible tariff
MWWU will develop
by department or
accounting of MWWUs. management purposes.
·
Audit results
setting
its own budget based on activity within
·
If this is not
·
Reformed accounts
should be made
·
Improved
its costs and conditions. MWWUs.
feasible, then a
should continue to
available to the public
transparency of books
Include budgets for
Bosnia-
"parallel" cost center
provide required reports
contributes to the
both operating and
Herzegovina:
accounting should take
to support economic
credibility of the
capital accounts in each
department.
Applies to both RS
place within MWWUs
regulation.
management and
and FB&H
to help planning.
increases the
·
Need help in
acceptability of new
preparation,
tariffs among service
implementation, and use
users
of the new accounting
standards and system.
Needs to be coordinated
across water utilities
Bulgaria
·
Introduce cost
·
Good quality
·
Periodic,
·
Audits contribute to ·
All MWWU fixed
·
Re-valuation of
centers at MWWUs.
accounting and financial
independent audit of
more efficient
assets should be re-
assets is essential due to
information for cost
MWWU books is
operations as well as
valued so that cost
high inflation in the
based tariff setting is
needed
more credible tariff
based tariffs have a
1990's. According to
difficult to obtain at most
setting
realistic basis
the Water Law,
MWWUs due to lack of
however, only fixed
cost center accounting
assets that are not state
(public) or municipal
property must be re-
valued.
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Country
Book-Keeping for Management
Audit of MWWU Books
Rationalize the Cost Basis Used in
MWWU Regulation
Reform Rationale Reform Rationale Reform Rationale
·
Consider
·
Many smaller
·
Require periodic,
·
Supports central
·
Allow real
·
Old, artificial
separating the water and communities operate the
independent audit of
government grant and
depreciation to be used
depreciation and
wastewater components
water system as part of
water utility books to
financing programs.
in the cost basis used in
valuation data are often
of operation
the general municipal
identify possible cross-
tariff review
being used for this
·
Creation of cost
utility enterprise.
financing of other
purpose. Better, current
centers within
·
This bookkeeping
projects with funds ear-
market and technology
accounting
requirement will make it
marked for pollution
data should be used.
Croatia
reduction.
·
New data
possible to begin a
requirements and
determination of the
·
Audits to identify
reporting templates to
balance sheet and
that central government
assist financial analysis
management
support for MWWUs is
performance regarding
actually being spent
the water and wastewater effectively and
component.
enhancing water
services.
·
Introduction of
·
Many MWWUs do
·
Make technical
·
Current "technical
·
Allow real
·
Old, artificial
cost centers by service
not have sufficient
audits standard and
audits" by the Ministry
depreciation based on
depreciation and
users or geographic
information on the costs
periodic. Have
of Agriculture (MOA)
the economic life of
valuation data are often
locations.
and revenues related to
MWWU pay for the
are occasional and rare. equipment and current
being used for this
specific customer
audits, but direction of
Makes it difficult for the
investment costs to be
purpose. Better, current
groups.
the audits under the
MOA to get the data to
used in the cost basis
market and technology
regulatory authority.
do its job.
used in tariff review
data should be used.
·
MOA has an
Czech Republic
initiative to amend the
Act; reform proposal to
support/qualify the
proposal?
·
May need to
develop a parallel
reform for the smaller
MWWU not under
MOA authority.
Glenn Morris / Andrįs Kis
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117
Country
Book-Keeping for Management
Audit of MWWU Books
Rationalize the Cost Basis Used in
MWWU Regulation
Reform Rationale Reform Rationale Reform Rationale
·
Introduction of
·
Many MWWUs do
cost centers by service
not have sufficient
users or geographic
information on the costs
locations.
and revenues related to
specific customer groups
Hungary
(the accounting
standards provide this
option, there is no need
for "shadow" accounting
in order to operate cost
centers).
·
Improved book
·
To provide
·
Periodic,
·
Audits contribute to
keeping by cost centers
information for cost
independent audit of
more efficient
Moldova
based tariffs
MWWU books is
operations as well as
needed
more credible tariff
setting
Romania
·
Require MWWU
·
Current book
·
MWWU has a
to keep detailed books
keeping reflects old,
periodic audit of its
(accounts) on water
centralized budget and
books to show that
system costs, etc. This
management system
costs and revenues are
supports independent
·
New, cost centered
being properly logged.
audit, tariff setting, and
system is needed to meet
regulatory review.
Slovak Republic
the needs of auditors and
·
Examination of
regulators
individual constituents
of costs and tariffs
·
Clear description
of cost items including
depreciation and future
savings
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5.2 Financing Reforms
5.2.1 Depreciation Reforms
Amortization, as described in the Glossary, refers to repayment of capital that was borrowed in the
past to construct part of the MWWU system and that has to be repaid. The members of the Project
team have also seen it used with reference to infrastructure that has been gifted to the MWWU. The
"amortization" used in this sense is really "depreciation". If properly estimated, it may be introduced
as "cost" that can be legitimately recovered by the MWWU in its tariffs. Unfortunately, we don't see
much evidence that the estimates of depreciation (under the term "amortization") are based on the
market value or replacement value of the assets.
Moreover, we are concerned that the tariff levels and resulting revenue supplements supported by the
"amortization" of costs are not being used to replace the infrastructure that is, presumably,
depreciating with use. If the supplementary revenues so produced were earmarked for a capital fund
that would be used to replace the infrastructure in question when its useful life runs out (see
"economic life" above), we might have more confidence that the current tariffs and budgets are based
on a "sustainable" financial program. Unfortunately, while we encountered "amortization" in the
books of MWWUs, we did not encounter such capital funds. The supplementary revenue seems to be
diverted to covering other operating expenses. We may be wrong given the condition of, and our
limited access, to the books it was sometimes difficult to understand entries but this definitely needs
additional consideration.
REFORM: Depreciation Clarification
Issue Summary: Sometimes used inappropriately to justify a larger cost basis.
Possible Reform Strategy: Require that depreciation be defined in a way consistent with the
economic purpose of the cost basis for a public monopoly
Strategy Description
Comment/Concerns
Review and, if necessary, revise the conditions under which
This may, in some cases, reduce the cost basis and the
depreciation can be added to the cost basis.
allowable tariff.
If depreciation is allowed in the cost basis in anticipation of
Establish a proper economic and technical basis for
costs, proper protection of the funds may require that the
calculation of depreciation
revenue be earmarked for that purpose
Can use depreciation in anticipation of a cost to finance
future upgrades in pollution control.
5.2.2 Central Managed Pooled Funds
Central Managed Pooled Funds (CMPFs) environmental funds, regional development funds, water
supply development funds, pollution control funds are a means of overcoming financing problems in
various sectors. These CMPFs have been common in the ME DRB countries. They can supply capital
when ordinary sources of capital are not available or the cost of alternate sources is considered
prohibitive. They address one problem but raise several others: How to capitalize the Fund to begin
with? How to decide who gets the capital? On what terms should the capital be offered? How to
assure that the capital is used as intended by the CMPF?
Glenn Morris / Andrįs Kis
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It may be possible to address the problem of capitalizing a state fund that helps finance pollution
control at MWWUs by taxing the MWWUs. This is essentially the strategy adopted by Croatia, where
a series of "fees" are assessed on MWWUs. While the process is under re-consideration, currently a
substantial portion of these funds go to the "Croatian Waters" organization and are then used to
provide capital needed to make investments by MWWUs. A reform based on this strategy is a type of
"forced investment". Certainly, many of the MWWUs are looking to the central government for help
to meet their investment needs. It isn't likely, however, that they favor capitalizing this support by
having a fee levied on MWWU services.
As noted above, one source of funds that is often "earmarked" for water pollution control is the
effluent charge. This financing strategy develops the "revenue" side of the link between effluent
charges and pollution reduction.
Such initiatives should be handled with great care in design and execution. In ME DRB countries,
there is a tradition of having Central Government financing and, more recently, introduction of CMPF.
However, recent experience has demonstrated the possibilities for political influence and general
mismanagement in fund allocations. Thus, today, there is a trend toward CMPFs being turned into a
"soft-loan bank" (as was the case of Slovenia, the Czech Republic, and Hungary) or partially or fully
cancelled (recently the case in Slovakia). Note that the countries cited here are the ones in the ME
DRB with more developed capital markets where many of the MWWUs have access to the capital
markets and the cost of capital has considerably declined during the past decade. MWWUs in these
countries also appear to be operating on a more sustainable financial path than in some of the other
countries, making them more attractive clients for the financial institutions.
REFORM: Pooled capital resources to capitalize a revolving fund using the revenues from effluent
charges or other taxes or fees added on to water and wastewater services
Issue Summary: Poor access to capital to support MWWU effluent control investment.
Possible Reform Strategy: Capitalize a capital pool that will be earmarked for MWWU pollution
control investment using the effluent charge.
Strategy Description
Comment/Concerns
Use the revenues from the effluent charge to capitalize a
It may stimulate investment in WWTP
revolving fund designated for MWWU WWTP investments
Organize management of the CMPF to be independent of
Is the revenue stream large enough to make a difference?
political influence.
On what basis will the capital will be allocated? Will it be
Include post-funding performance reviews of fund
allocated efficiently? Competitive awards may lose
recipients.
"leverage" but provide an incentive for honest, aggressive
bids.
Disperse funds on a competitive basis using cost-
How to assure that funds raised are actually used for their
effectiveness as the funding criterion. Award the funds on
designated purpose?
the terms of the marginally competitive application.
Limit the use of a domestic revolving fund to those
MWWUs, which are excluded from access to EU
investment grants, such as ISPA and Cohesions Fund. This
Will have some, maybe high, "transactions" costs.
way the size of the funds, and the corresponding burden on
the economy, will be limited.
Be that as it may, a reform that effectively increases the level or scope of an effluent charge should be
coupled with a plan for effective use of the revenues produced. Without major changes in the charter
and direction provided for such CMPF in the past, we would be very hesitant to encourage earmarking
of revenues from effluent charges to such Funds.
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5.2.3 Government Fees and Taxes on Water and Wastewater Services
In most countries, water tariffs are currently inflated by a system of "charges" that are not associated
very closely with costs e.g., value added tax, extraction fees, concession charges. The most obvious
example is Croatia where up to half the tariff paid can go to paying taxes and fees. While, in
principle, water services may be a good product(s) to tax due to its often low elasticity of demand, we
might reduce taxes and fees in order to 1) keep the water tariffs lower and 2) give the MWWUs the
local capacity, through their tariffs, to finance sustainable levels of water and wastewater services.
REFORM: Reduce taxes and fees paid on MWWU services
Issue Summary: Taxes and fees drain resources from the MWWUs.
Possible Reform Strategy: A variety of components, all connected with reducing the fee and tax
burden.
Strategy Description
Comment/Concerns
Reduce the VAT on water and wastewater services
Usually will also reduce the effective tariff
If taxes are necessary because of special obligations e.g., EU Will provide additional revenue raising capacity to MWWUs.
tax harmonization, assess fees and taxes only on collected,
Use of the capacity based on local investment priorities.
not billed, revenues.
Reduce the fees on water and wastewater services
Only assess fees or taxes on that portion of services in
excess of minimal requirements.
At a minimum the central government should review the fees and charges it assesses and examine
their rationale, and their practical effect. Do the customers get some services for their fees
commensurate with the fees themselves? If not, then it is likely these fees are simply taxes with a
rationale that may not "hold water".
Table 23.
Taxation and Fee Reform Proposals Affecting MWWUs of Study Countries of
the DRB
Country
Modify Central Fees
Modify Taxes
Reform
Rationale
Reform
Rationale
·
FBiH and RS
·
Provide
should change the
assistance and
Bosnia-
basis of taxes applied
support to change the
to collected revenue as
tax laws for MWWUs
Herzegovina
opposed to billed
and establish a tax
revenue.
mechanism that is
more equitable
Bulgaria
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
121
Country
Modify Central Fees
Modify Taxes
Reform
Rationale
Reform
Rationale
·
Reduce or
·
The "water user
·
Reduce the 22%
·
As a critical
eliminate the fees
charge", the
VAT on water and
public service that is
collected by MWWU
"development of
wastewater services.
metered for billing,
for the central
infrastructure"
collecting VAT on this
government
charge, the "water
service is a 'regressive'
·
Pay the "user
concession charge"
tax.
charge" on water
constitute a
·
This tax may
delivered for
significant portion of
impair the ability of
production, not billed
the bill (25% or
the MWWU to collect
water.
more). It isn't clear
revenues from poor
what service
·
customers.
Croatia
customers get for
their payment.
·
This tax may be
impairing the ability
·
Looks as if the
of the MWWU to
fees are used to cross-
raise funds for projects
subsidize services,
through tariffs
including
increases.
infrastructure, in
other areas.
·
Provide
incentive to reduce
water losses in
distribution.
·
Modification of
·
50% of Charges
·
A change in the
the Charges for the
for the Withdrawal of
VAT from 5% to 19%
Withdrawal
Groundwater will
is proposed as part of
Czech Republic
become revenue of
harmonization with
regional budgets
the EU. Possibly
instead of the Czech
return to lower rates
State Environmental
for water and
Fund.
wastewater.
·
Revise the water
·
The present fee
extraction fee
structure is not
Hungary
coherent, some of the
details lack economic
rationale.
Moldova
No modification is suggested at this time. The level of the fees and taxes is low and they do not
impact the operation of MWWUs in any major way
Romania
·
Revise the water
·
The present ratio
extraction charge
of ground water (1
Slovak Republic
SKK/m3) and surface
water (1 SKK/m3)
extraction fees is not
logical.
5.2.4 Access to Direct Financing from Private and Quasi Private Capital Markets
Achieving reasonable access to direct financing from private financial markets should be a goal of the
MWWUs. In most of the region, the many current sources of risk to the lender make this an elusive
goal. The MWWUs lack collateral (beyond the systems themselves). Some members of the Project
team describe this as a "chicken and egg" problem in so far as it applies to creating a "sustainable"
level of operations. The MWWU might be able to invest in cost saving capital improvements that will
"pay for themselves". The current revenue stream, however, is compromised by the need to use it to
cover the costs that the capital improvement is intended to remedy. The revenue stream can't support
122
UNDP/GEF Danube Regional Project
repayment of the loan without the capital improvements but the utility can't make the improvements
because it doesn't have access to the capital. Some of the barriers identified include:
· MWWU (owners, management) are not trained to prepare bankable projects (good engineers,
inexperienced business people),
· Banks prefer short-term loans rather than long term loans of the sort often compatible with the
long operating life of much of the infrastructure,
· In the absence of collateral, banks often require someone to pledge to assume liability should the
MWWU default on the load and the MWWU usually finds it impossible to get a third party with
sufficient commitment and assets to offer liability,
· Ownership of the "assets" of the water system are sometimes not well-defined,
· There is no agreement as to which MWWU assets can legally be offered or held as collateral,
· Often it isn't clear who might be responsible for repaying the loan and succession of possible loan
"guarantors", and
· Substantial uncertainty over the conditions and consequences of a "bankruptcy" filing of a public
company (public utility).
Some of these problems are not amenable to changes in laws or regulations, but some are. Those that
are, are part of the reform elements listed below.
One possible impediment to private financing - the lack of an interested third party to guarantee a loan
might be addressed by sub-dividing regional MWWUs into operating units that more closely
conform to municipalities. If a municipality is more closely associated with a MWWU, and in closer
control of the MWWU via its ownership interests, then it might be more predisposed to guarantee a
loan to the MWWU using its own assets and revenue stream as collateral.
In addition to commercial loans, private equity (partial private ownership) is potentially a source of
financing. Section 5.3.5 below provides some background on privatization of MWWUs. It should be
emphasized, that in some of the ME DRB countries well-performing MWWUs, do have access to
private capital financing either directly or through their municipal owners. Nonetheless, bad
performers, especially in these countries, have difficulty securing capital, which, as described above,
places limits on moving towards more efficient operations.
REFORM: Promote access to private financing of MWWU investments
Issue Summary: Most MWWUs currently have no effective access to private capital markets
Possible Reform Strategy: A variety of components aimed at reducing barriers to private financing
of MWWU investments.
Strategy Description
Comment/Concerns
Need a clear determination of who owns the "assets" of the
May mean that the system and its assets are not the property
water system
of the municipality after bankruptcy.
Need to identify clearly what assets can be held as collateral
A possible back door to "privatization"
Provide loan guarantees to the water systems by the
Will the owner of the MWWU abuse the guarantee of the
municipality or some central government authority
municipality or government authority?
Clarify what recourse the lender has if a loan becomes non-
performing
Possible sub-division of regional MWWUs in order to
Resistance from those municipalities whose service is
enhance a municipality's willingness to guarantee a loan to
currently cross-subsidized in a regional system.
the MWWU.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
123
5.3 Institutional and Other Supporting Reforms
5.3.1 Regulation of Costs and Tariffs at the National Level
One of the recommendations of the OECD is that "governments shift from being a provider of water
services to being a regulator" (OECD, 2003b, p.14). This is, indeed, the direction in which many of
the ME DRB countries are headed with "devolution" and "privatization". Most, however, do not
appear to have a coherent program of economic regulation of publicly sanctioned monopolies,
especially public monopolies. This becomes even more crucial as W&WW services start to become
either privately owned or privately managed systems.
REFORM: Promote rate of return regulation of public monopolies
Issue Summary: The region needs something to replace the often discredited price regulation of
MWWUs
Possible Reform Strategy: Develop a system of rate of return regulation coupled with diligent and
independent oversight.
Strategy Description
Comment/Concerns
Develop a rate-of-return system of regulation of MWWUs
May not provide enough incentive to keep costs down.
Regulators should be independent and empowered to
evaluate the efficiency as well as the cost basis of the
May be costly to implement.
MWWUs.
How to assure independence of the regulatory body?
Under the current system tariffs in many countries can
include substantial net revenues, but the rationale for these
"rates of return" and their effectiveness in promoting good
management and justifiable prices is questionable.
5.3.2 Coordination with River Basin Management
Romania, Croatia, and the new countries of the EU in the DRB are developing river basin
management bureaucracies along the lines set by the EU Water Framework Directive. These
organizations may begin to play a more important role than other entities in infrastructure planning
and development. Given that we don't know the specifics of the scope and nature of their authority,
we can hardly offer proposals for "reform". However, we do recommend that the MWWUs work with
these river basin management agencies to assure that they don't create barriers to effective tariff and
charge reform as discussed here.
5.3.3 Perfection of Ownership
Ownership of the MWWUs has, in many cases, reverted to municipal governments or municipal
governments in partnership with the central government. Sometimes, however, it isn't clear what is
owned. Does ownership include the land on or in which the asset rests? Where does the ownership of
the distribution network begin and end? What if there are separate water and wastewater utilities?
What about the storm water system; is it part of the wastewater collection system? Numerous
questions surrounding ownership should be clarified as part of the effort to improve management of
the MWWUs. Resolution can be of great help in effective development and implementation of
management, regulation, privatization and other possible reforms.
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UNDP/GEF Danube Regional Project
5.3.4 Customer Choice and Sewerage Connection
In cases when connection to existing or newly constructed sewers is not compulsory, low income
households often choose not to connect, in order to save on wastewater tariffs. Their strategy, instead,
is to construct and operate septic tanks in their gardens from which wastewater leaks into the ground,
or to pay entrepreneurs to collect and transport their sewage with trucks. The transported sewage
more often than not, ends up being disposed illegally, causing local pollution of groundwater and
surface water. A related consequence is that sewerage systems and treatment plants are frequently
underutilized, resulting in higher unit costs, and increased tariffs for those who choose to be connected
to it. Increased tariffs may provide even less incentive for connection, and may even prompt some
households to disconnect from the sewer.
Possible reform recommendations are the following:
· Make connection compulsory for those households that are located close enough to the sewer.
· Strict monitoring of sewage hauling activities, including prohibitive fines for illegal disposal.
Monitoring can extend to invoicing of the service, requiring households to keep the invoice for
some time after transport. This way both the delivery of the sewage can be inspected more
effectively, and the invoice is also a proof that the sewage from the households does not just leak
into the ground (if that is illegal)
· Provide economic incentives to households to connect to existing sewers, e.g. make those
households pay a surcharge which could easily connect to the sewer, but choose not to. This
surcharge can be increased (or simply just triggered) if they cannot prove with an invoice that their
sewage has been collected by an authorized enterprise.
· The municipality might set a liquid waste fee based on water consumption on those households
that do not have connection to the sewer. In exchange for the tariff, the municipality provides a
properly monitored service of hauling the sewage from the septic tanks of the households without
additional fees. This way households do not have an incentive for illegal disposal. On the other
hand they are motivated to connect to the sewer (if this is physically feasible), illegal hauling and
related illegal disposal is eliminated. There are examples for the successful operation of this
scheme in Hungary (Debrecen, Dombovar).
5.3.5 Privatization of the MWWU
This is a reform that has frequently been recommended by international experts. Such a reform might
very well remedy both the shortage of financing and the problems with professional management.
Even so, there are presently strong legal prohibitions against privatization in which the infrastructure
is sold to a private firm under a contract to provide services to the community. These prohibitions
may reflect the views of special, local interests currently involved in the operation of the MWWU.
They also, however, reflect the very real concerns that the privatization process would be tainted by
politics and that the level of service will fall, the tariffs for service will rise, or both. While there is
some evidence from the United States that privately owned MWWUs are slightly more efficient and
provide comparable service to those owned by municipalities or public agencies, there are substantial
risks in pushing such a change too far, too fast.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
125
Table 24.
Broad Institutional and Financial Reform Proposals Affecting MWWUs in Study Countries of the DRB
Perfection of Ownership
Devolution of
Organization of
Supplementary National
Economic Regulation and
Responsibility for Water
Management Units
Financing for Water
Rate of Return Regulation
Country
System Planning
Systems, Especially
Effluent Treatment
Reform Rationale Reform Rationale Reform Rationale Reform Rationale Reform Rationale
·
Transfer
·
Current
·
Clearly
·
Currently
·
Increase
·
Decisions
·
No reform
·
At this
ownership of
ownership is
guide or direct
the
the autonomy
should be
proposal
time domestic
assets clearly
sometimes
the ownership
infrastructure
of the MWWU
based on local
financing of
to the joint
ambiguous e.g.,
of
for municipal
priorities and
WWT
stock
the wastewater
infrastructure
water supply
considering
infrastructure is
companies
collection
toward a single
and
local resources
out of question
Bosnia-
system is jointly entity
management
due to the
owned with the
may be divided
economic
Herzegovi
storm water
among
hardship
na
authority.
different
·
Provides
entities or parts
incentive for the
of the same
MU to take
entity
better care of
existing
infrastructure
·
Offer
·
Separating
·
Domestic
·
This
·
Currently
·
Prior
some of the
smaller units on
financing
proposal limits
establishing a
regulation was
small
a case basis
should focus on the domestic
new entity for
under a
MWWUs for
from the big
those MWWUs funding need
monitoring and
Ministry with
privatization or regional
which do not
and the
regulating the
many public
transfer the
company could
have access to
potential extent
service and
works
ownership to
improve their
EU funds
of
economic
responsibilities
the particular
management
misappropria-
performance of
and reflected
Bulgaria
municipality if
efficiency by
tion
MWWUs.
the old, state
feasible.
allowing them
ownership of
to introduce
the entire water
tariff design that
system.
reflects the local
conditions
better than the
uniform tariff
for the region.
126
UNDP/GEF Danube Regional Project
Perfection of Ownership
Devolution of
Organization of
Supplementary National
Economic Regulation and
Responsibility for Water
Management Units
Financing for Water
Rate of Return Regulation
Country
System Planning
Systems, Especially
Effluent Treatment
Reform Rationale Reform Rationale Reform Rationale Reform Rationale Reform Rationale
·
Stop the
·
State
·
State
·
Municipal
·
Independe
·
Reduce
·
Reduces
·
Develop a
·
Assuring
practice of
ownership in
ownership in
companies
nt activities
the role of
fees that are
new system of
no monopoly
bailing out bad
MWWUs does
MWWUs,
providing
often cross-
Croatian
simply
tariff controls
power is used
loans provided
not help to solve together with
several
finance each
Waters as the
"recycled"
based on rate of in tariff setting
by Croatia
their problems,
the
independent
other
lead agency in
trough Croatian return
Waters through while
responsibility
services should
·
Difficulty
funding
waters.
regulation.
acquiring a
threatening the
of decision
either be
establishing the MWWU
·
Gives
stake in badly
independence of making should
organized into
cost basis for
infrastructure.
MWWU more
performing
local decision.
be transferred
separate legal
tariff setting
It should have a direct control
MWWUs.
back to the
entities or
coordinating
Croatia
over revenues
municipalities
under
role for river
collected for its
independent
basin
services.
accounts
management.
·
Croatian
Waters
proposes to
limit its role to
loans to a few
priority
investments.
·
Plan for
·
Will be
the
prepared by the
development of Regional office
pipelines and
for at least 10
Czech
sewerages
years (new
Republic
obligation
according to
the law from
2001 the first
dead line 2005)
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
127
Perfection of Ownership
Devolution of
Organization of
Supplementary National
Economic Regulation and
Responsibility for Water
Management Units
Financing for Water
Rate of Return Regulation
Country
System Planning
Systems, Especially
Effluent Treatment
Reform Rationale Reform Rationale Reform Rationale Reform Rationale Reform Rationale
·
Encourage ·
Actually
·
Domestic
·
This
cooperation
this is an "anti-
financing
proposal limits
among overly
devolution"
should focus on the domestic
fragmented
proposal. As
those MWWUs funding need
system
devolution in
which do not
and the
Hungary
elements
some cases
have access to
potential extent
owned by
went so far that
EU funds
of
separate
economies of
misappropria-
MWWUs
scale or scope
tion
were difficult
to realize.
·
Transfer
·
With the
·
At this
MWWUs to
exception of
time domestic
the
Chisinau
financing of
municipalities
MWWU,
WWT
Moldova
utilities are
infrastructure is
directly owned,
out of question
and partially
due to
controlled by
economic
the state
hardship
·
Devolutio
·
Develop a
·
Assuring
n of decision
rate of return
no monopoly
making and
regulation
power is used
investment
in tariff setting
Romania
initiative to
River Basin
Authorities
from the center
(Apele
Romane)
128
UNDP/GEF Danube Regional Project
Perfection of Ownership
Devolution of
Organization of
Supplementary National
Economic Regulation and
Responsibility for Water
Management Units
Financing for Water
Rate of Return Regulation
Country
System Planning
Systems, Especially
Effluent Treatment
Reform Rationale Reform Rationale Reform Rationale Reform Rationale Reform Rationale
·
Clearly
·
Currently,
·
Define
·
National
·
National
·
Currently
define and
Municipal
national
sources are
Regulatory
the NRO is
determine the
Boards depend
priorities in
limited and
Office (NRO)
concerned with
responsibilities
completely on
construction of
expensive
reviews books
household tariff
of Municipal
the
infrastructure
to assure that
setting and the
Boards
recommendatio
including
no excess
tariff setting
·
Establish a ns of
national
returns are
formula. This
contract review
"operators".
financial
being earned
is expensive
process that
This should be
support
by the operator
and time
will allow
balanced that
or owners.
consuming and
review and
the
the resulting
thoughtful
responsibility
tariffs do not
consideration
for
necessarily
Slovak
of contracts
development
reflect current
Republic
between
plans are
costs.
municipal
agreed among
representatives
representatives
and operators
of MB, not
purely "what
will operator
say"
·
In
Slovakia, the
process is
currently
murky. This
creates distrust
of outcomes.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
129
5.4 Management Reforms
5.4.1 Collection of Accounts (Revenue Recovery)
As described in Chapter 3, non-payment or extended delay in the payment of existing tariffs is a
serious problem for a substantial number of the MWWUs in the ME DRB. This need is further
corroborated by the reform proposals of Table 25. The reasons for non-payment (or non-collection)
are various and often interrelated: no, weak, or poor tools of enforcement or sanctions for non-
payment, including possible entitlement under the law; low incomes of customers decrease their
ability to pay; poor management of metering, billing, and collection; migrant customers; special or
privileged customer classes from whom payment is not really expected; etc. Even a delay in payment
poses problems, especially in a highly inflationary environment. Delays of a year in a country with
25% annual inflation degrade real revenue substantially.
This problem is most pressing in communities with very low levels of economic activity. In such
conditions the MWWU sometimes accepts "goods in lieu of payment", especially from business
customers. Such transactions reflect the desperation of both the Utility and the customer.
A particularly vexing problem is non-payment by public entities schools, recreation facilities,
government offices, electric utilities, hospitals, police, fire, etc. These entities are particularly
stretched. In some countries, they are the most important non-payers. Many don't have any (legal)
income stream or a pitiful level of income beyond whatever budget they get from the central
government and municipality. Non-payment by these vital public services is a special problem for a
public utility that, almost by definition, has a special obligation to serve the public interest.
Non-payment can also be part of a vicious cycle: non-payment leads the MWWU to increase tariffs
levied on those that pay which leads more customers to withhold payment.
Our study, however, did identify some examples of revenue recovery strategies that were successful.
These should be examined in more detail for lessons adaptable to other countries and municipalities.
REFORM: Change policies to reduce non-payment
Issue Summary: Non-payment in some MWWUs reduces revenue by up to 50%
Possible Reform Strategy: A strategy compounded of many elements
Strategy Description
Comment/Concerns
Stricter recovery measures may violate legal rights or due process
laws.
Shut off service
Shutting off service to specific households or accounts may not be
possible technically, especially in old-style apartment buildings.
Require deposits of customers in advance of service.
These deposits can be used if the customer does not pay Enforcement may be costly
on time.
Non-payment weakens the MWWU financially and undermines
Apply a late payment penalty to overdue bills.
attempts to raise revenues that might be used to invest in pollution
reduction or other investments.
Sometimes firm action in selected cases, and publicity
Recover the payment through legal channels: garnish
surrounding the resolve of the MWWU to collect overdue
wages, posses private property.
accounts, will stimulate payment from other overdue accounts.
Introduce legal changes that will allow shutting off the
service in case of non-payment
130
UNDP/GEF Danube Regional Project
5.4.2 Concession or Franchise Agreements for Operating the MWWU
Privatization of MWWU operations through a franchise agreement, concession, and/or actual transfer
of property is becoming more common. In particular, some of the major cities in the ME DRB now
have such arrangements with international firms: Sophia, Budapest, Zagreb and Bucharest. In
addition, some of the old regional water companies have such agreements with the municipalities that
now own the infrastructure of the system.
The reform we think deserves further consideration is one in which a contract to operate a MWWU is
awarded to a private "partner" through a competitive bidding process. It is important to explore the
terms and conditions set up for "concession" contracts between municipalities (owners) and MU
(operators) both locally and internationally to determine how to properly implement such an
arrangement. There are examples in Bulgaria where the concession award process resulted in contract
that were so suspect that they were voided by the central government. Also, it is important to examine
the prospects for this type of reform within the context of national laws and decrees that already
regulate the process.
5.4.3 Structure of Water and Wastewater Utilities
One of our company consultants suggested that, in the spirit of eliminating cross-subsidies across
different services, MWWU be broken into two independent companies. One provides water services;
the other wastewater services. Some municipalities in the region already follow this model e.g.,
Budapest and Belgrade. This way the water and wastewater costs are automatically kept separate and
tariffs are based only on the costs of that particular service. This design has its disadvantages,
including duplication of some overhead services and some coordination and operational issues related
to metering and billing. These problems, however, are not insurmountable and the duplication burden
might be offset by some advantages of specialization.
5.4.4 Community Relations
Given the skepticism of customers regarding the validity of increases in tariffs and the merit of both
MWWU investment programs and the efficiency of their execution, it seems that a small investment in
improving communications with customers and water policy makers would benefit both MWWU
owners and operators alike.
A community relations program of the MWWU might do this communication. The program would be
used to explain tariffs to customers, suggest measures for water conservation, explain the reason for an
investment activity, follow up on customer's complaints, etc. This would, we think, very nicely
compliment other reforms related to bookkeeping, tariff setting, etc.
5.4.5 Training in Management and Finance
At various points in the description of conditions and possible reform proposals, the inexperience of
some MWWU owners and management teams has been noted. While most management, and
certainly most of the professional staff, may be bright and technically competent, they do not have
much training or experience making strategic management and development decisions. They need to
become familiar with how to build and use management information system, how to develop and
defend forecasts and tariff proposals, how to explain themselves to the owners or customers, etc.
We suggest that the process of training managers and management staff be made more formal, perhaps
through a professional development plan designed for, and with, upper tier staff members.
Privatization of system operations, and the introduction of new and experienced staff from outside the
existing MWWU may be an alternative, but we suspect that part of the private operators plan would
involve training of existing managers.
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
131
Table 25.
General Management Practice Reform Proposals: Metering, Invoicing, Collection, and Revenue Recovery
Management Development and
Metering Management
practices
Revenue Recovery
Country
Retention
Reform Rationale Refor
m
Rationale Refor
m
Rationale Refor
m
Rationale
·
The early
·
Elements
·
Develop and
·
Current
·
Establish
·
The potential
·
Increase the
·
Delay or non-
identification and
needed to establish implement
systems take
incentives,
for improved
efficiency of
payment are too
prompt removal
a truly effective
business-like and
budgets and
including salaries
operations exist at
revenue collection
high and create
and replacement of metering program
customer-oriented
customer revenues
and benefits, to
most MWWUs,
by establishing a
serious financial
non-functioning
management and
outside Utility
attract and retain
but well trained
deposit system and difficulties for
meters,
planning practices. control.
well-trained
workforce is
pursuing collection MWWUs
·
The periodic
·
Sign a service
management and
needed to exploit it through the courts
(as frequently as
contract with each
staff
six months to a
customer
·
Link some of
year for the largest
·
Develop an
the incentives to
meters down to
accurate and up-
improved
about five years
to-date billing
operating
for small
system
efficiency and/or
residential meters)
financial
removal and re-
·
Use a "Water
performance
and Wastewater
Bosnia-
calibration or
repair of large and
Tariff Manual"
Herzegovina small meters,
written to develop
and evaluate new
·
The selection
tariff levels and
(from at least two
designs
different
manufacturers, for
competitive
reasons) of meters
of a type that are
suitable for local
conditions at a
reasonable price,
·
The
calibration, repair
and/or rebuilding
of meters of the
type and capacity
132
UNDP/GEF Danube Regional Project
Management Development and
Metering Management
practices
Revenue Recovery
Country
Retention
Reform Rationale Refor
m
Rationale Refor
m
Rationale Refor
m
Rationale
of those in the
system, and
·
Reading and
recording data
from all meters in
a timely and
accurate manner
(with an oversight
capability to
ensure
compliance).
·
Improve
·
No reliable
·
Ensure
·
To avoid
·
Loose the
·
Working
·
Try to
·
Budget
water metering
methodology and
adequate
distribution of
political pressure
under political
implement water
entities are among
along the supply
equipment exists
supervision on the
water to illegal
on management
pressure can
saving and control
the biggest debtors
and distribution
for measuring
water supply
connections.
and create
increase the risk of programs
and they have little
network, not just
water before
network and
incentives for
suboptimal
(lectures, training,
incentives to save
at the end
distribution, e.g.
control of water
performance
decisions
etc.) that will
water. If it is
Bulgaria
consumers.
for surface water
distribution.
improvement (in
decrease budget
difficult to ensure
·
Continue with the measurement
addition to the
entities
payment from
installation of
is based on depth
existing benefits to
consumption but
them then it could
water meters at
of water, and for
leakage
will be sufficient
be probably useful
end consumers.
ground water on
improvement).
enough to allow
to help them use
capacity of the
them to perform
efficiently the
pumps.
their daily
water provided.
activities.
·
Not an issue
·
Improve
·
Improve the
·
In general
·
Create
·
While non-
in most places
financial planning
non-engineering
MWWUs have
incentives to speed payment is not a
and management
skills of
very good
up the process of
problem in
accounting
management
engineers, but
payment.
general, delayed
Croatia
through hiring and
often lack other
payment is
training of
well trained
frequent,
personnel
experts, like
increasing the
economists and
costs of service
finance
and reducing
professionals.
liquidity
Glenn Morris / Andrįs Kis
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133
Management Development and
Metering Management
practices
Revenue Recovery
Country
Retention
Reform Rationale Refor
m
Rationale Refor
m
Rationale Refor
m
Rationale
·
Encourage
·
To encourage
smaller
water conservation
communities to
by customers,
adopt metering
particularly
·
Encourage
households in
individual
apartment blocks.
Czech
apartment
Republic
metering in
apartment blocks
by increasing
tariffs to the
owners of blocks
that don't have
apartment-based
metering.
·
Improve the
·
Large
management skills
MWWUs,
at small MWWUs,
including regional
especially skills
ones, usually have
Hungary
needed for
well trained
business planning,
managers,
tariff setting,
including financial
financial analysis.
experts and
economist.
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UNDP/GEF Danube Regional Project
Management Development and
Metering Management
practices
Revenue Recovery
Country
Retention
Reform Rationale Refor
m
Rationale Refor
m
Rationale Refor
m
Rationale
·
Extend
·
This will
·
Retain good
·
Considering
·
Improve the
·
The basis for
installation of
result in lower
personnel through
the bad financial
frequency and
collecting revenue
water meters at
consumption,
attractive and
conditions of most
accuracy of billing
(bills) is often not
households
lowering the costs
timely
MWWUs in
·
Increase the
promptly and
of operation for
compensation
Moldova this is
efficiency of
accurately
the MWWU
not an easy task.
revenue collection
delivered.
·
Households
by establishing a
·
Delay or non-
Moldova
will pay based on
deposit system and payment are too
true consumption,
pursuing collection high and create
instead of
through the courts
serious financial
estimated
difficulties for
consumption,
MWWUs
which is upward
biased in order to
cover part of the
system leakage.
·
Extend
·
This will
installation of
encourage
water meters at
households to
households
reduce water
·
Part of the
consumption and
repair their
Romania
resulting cost
savings should be
household
offered to
plumbing
households to
compensate for
plumbing repair
expenses
·
Informing the
·
Better
Slovak
customers about
acceptance of
future investment
tariff changes
Republic
plans and thus
rising costs
Glenn Morris / Andrįs Kis
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135
6 Conclusions and Recommendations
In this Chapter we develop our reform recommendations further by assembling "bundles" of specific
reforms discussed in Chapters 4 and 5. Bundling of reforms is important because reform elements that
are complementary and mutually reinforcing will be more effective. Bundling is also important
because it provides an opportunity to sometimes compensate for the problem areas inherent in an
individual reform proposal e.g., additional elements that make the reform bundle as a whole not only
more effective but "proportionate" and "practical". In the following discussion we list the elements of
the bundled strategy, describe their advantages and disadvantages, and attempt to link these
advantages to the criteria selected for evaluation:
· are the reforms working through tariffs or effluent charges effective in reducing pollution from
MWWUs, especially nutrient and toxics pollution;
· are they proportional, in the sense that the effects of the reforms are at least as beneficial as
they are adverse;
· and are they practical, in the sense that there will be significant support for implementation.
6.1 Tariff Designs/Bookkeeping/Audit
REFORM: Tariff Re-Design
Bundled Strategy Elements: Multipart tariff designs
Cost-of-service tariff setting
Bookkeeping improvements
Independent, performance audit
Strategy Evaluation:
Advantages Disadvantages
Advantage Evaluation Disadvantage Evaluation
·
Tariffs are more
·
Benefits proportionate
·
Possible sacrifice of
·
Trade off a (hopefully)
efficient and more reliable
with costs at account,
some efficiency to equity
small loss in proportionality
and would charge higher-
system, and social levels
·
No direct impact on
for a big gain in practicality.
polluting large customers
·
Fixed tariff payments
pollution reduction through
higher tariffs.
are not subject to shifts in
the supply side of tariff
customer demand
reforms, especially nutrients
·
The reforms support the and toxics.
principle of charging highly
polluting users of the
wastewater system more.
Indirect but possibly quite
effective in pollution
reduction.
·
Tariffs offer some
·
Offers a means of
·
Perhaps obtain any
·
As above. Probably a
protection for lower income
addressing legitimate equity
equity advantage with a
good trade-off but depends
users
issues and makes the tariff
sacrifice of some efficiency
on the particular reforms and
reform more practical
·
High fixed tariffs may
setting.
actually be very burdensome
to small volume users.
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UNDP/GEF Danube Regional Project
Advantages Disadvantages
Advantage Evaluation Disadvantage Evaluation
·
Book keeping supports
·
Practical and, to the
·
May make
·
Costs are low relative
underlying tariff analyses
extent that decision making
administration more costly.
to the possible benefits.
improves, a proportionate
advantage.
·
Audit supports the
·
A practical advantage
·
May make
·
Costs are low relative
integrity of the change in
administration more costly.
to the possible benefits.
tariffs.
·
Move toward a more
·
Indirectly effective if
·
No direct pollution
·
Most likely a necessary
efficient and transparent
the efficiencies lead to better reduction.
condition for cost-effective
organization.
management and public
pollution reduction.
support
Cross-reference reforms:
· If the billing system is integrated with the book keeping system, analysis of tariff designs
should be better and more up-to-date
· A better tariff design may make it easier to make the case for an increase in tariffs.
· Metering of consumption is required for most tariff reforms
6.2 Collection of Customer Accounts/Billing/Community Relations/Service
Levels
This reform is built on improved collection of debt from the MWWU customers. Its success depends
in a large measure on the details of the more aggressive collection action (see possible approaches
listed in Chapter 5 and in the summary below) and what the Utility has done in the past to improve
debt collection. In some communities of the region substantially improved collection was achieved
simply by "demonstration" of enforcement in some high profile cases.
REFORM: Collection and Billing Reforms
Bundled Strategy Elements: Improved account collection
Institutional support for collection enforcement
Provision of low-level water and wastewater services
Billing system improvements
Community relations
Metering
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
137
Strategy Evaluation:
Advantages Disadvantages
Advantage Evaluation
Disadvantage
Evaluation
·
Revenues enhanced by
·
Collection supports the
·
May result in loss of
·
A possible reduction in
more effective collection
proportionality between
service to customers who
the practical appeal of this
e.g., follow-up
service and payment
can't pay
reform
correspondence, publicity,
·
Enhance revenues may
deposits, late fees, legal
support the 'supply' side of
actions enforcing payment,
tariff reform links to pollution
legal property confiscation,
control i.e., more resources to
criminal penalties.
invest in pollution control.
·
Those accounts that now
do pay will reduce water use
and may reduce pollution
through reduced water (and
wastewater) flows.
·
Billing system reforms
·
Will make invoicing
·
Cost savings may not
·
Value may come from
more reliable, regular, and less
be forthcoming right away.
the way billing reforms
costly.
complement revenue
·
Possibly provide a better
collection.
paper trail for enforcement.
·
Provision of alternative
·
An effort to make the
·
May be expensive
·
The evaluation depends
low service levels: collective reforms practical by reducing
on the particulars of these
drinking water provision at
some equity concerns
low service levels.
pipe stands, public baths and
bathrooms, etc.
·
Community relations
·
Probably critical to an
·
Community relations
·
The practical merits
effort to explain the problem
effective enforcement effort, a
can be costly and possibly
depend on 1) the standing of
and gather community
key to a practical reform
counter-productive
the MWWU in the
support. Also publication of
community and 2) the
enforcement actions.
quality of the arguments in
support of these reforms
(which means the quality of
the reforms themselves) 3)
and the outcome of initial
enforcement actions.
·
Installation, testing, and ·
Helps support practical
·
Could be some
·
Need to make choices
replacement of meters
implementation of the
problems with costs,
on the extent and financing
program.
especially in blocks of flats.
of the metering program in
·
Important to seeing that
order to make it as cost-
service is proportionate to
effective as possible.
payments.
·
Those accounts that now
do pay will reduce water use
and may reduce pollution
through reduced water (and
wastewater) flows.
·
Move toward a more
·
Indirectly effective if the
·
No direct impact on
·
Most likely a necessary
efficient and transparent
efficiencies lead to better
pollution reduction.
condition for cost-effective
organization.
management and public
pollution reduction.
support.
Cross-referenced reforms:
· Multipart tariffs may ameliorate the problem with either non-payment in general or the equity
concerns associated with more aggressive collection of debt.
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UNDP/GEF Danube Regional Project
6.3 Local Finance/Central Government Fees and Taxes/Effluent Charge
Credits
REFORM: Tariff levels and locally directed investment
Bundled Strategy Elements: Increases in tariff levels
Pooled capital (and credits) for pollution reduction
Tradable effluent charge credits
Reduction in central government fees and taxes on services
Strategy Evaluation:
Advantages Disadvantages
Advantage Evaluation Disadvantage Evaluation
·
Increased tariffs
·
Local direction
·
Local priorities may not ·
Difficult to evaluate
support larger, locally-
presumably encourages
encourage investments in
without more detail and
directed investments
proportionate and practical
pollution reduction.
testing.
·
The investments are
investments.
·
A strong "presumption"
locally directed and
·
Difficult to evaluate
in favor of MWWU and
presumably based on local
without more detail and
local governance.
evaluation of priorities.
testing.
·
The MWWU can get
·
This could be very
·
The intent of this
·
The magnitudes of
credit against payment of
effective at directly
reform element would be
these effects are uncertain,
current or future effluent
financing incremental
thwarted if it isn't well and
·
May be less effective or
charges, usage fees, taxes,
pollution control
effectively monitored
inefficient unless properly
etc, by either investing those
·
It could lead to
designed and monitored.
funds on improvements in its
inefficient levels of
sewerage collection or
investment in pollution
treatment system or,
control.
alternately, loans to another
MWWU for a similar
purpose
·
Reduction in
·
Local direction
·
The resources released
·
The magnitudes of
government fees and taxes
encourages proportionate
may not be used effectively
these effects are uncertain,
would free local resources
and practical investments.
or proportionately.
·
Difficult to evaluate
for use locally.
·
Difficult to evaluate
without more detail and
without more detail and
testing.
testing.
·
MWWU could lend
·
May make the credit
·
The program may be
·
The magnitudes of
each other capital (including
more cost effective and
costly.
these effects are uncertain,
the effluent charge credit)
assure better proportionality
·
The damage functions
Difficult to evaluate without
for investment in and
between costs and effects.
may be different across the
more detail and testing.
operation of a pollution
·
Difficult to evaluate
sites and net environmental
reduction project and "get
without more detail and
damage may result
credit" for this investment as
testing.
if it were controlling its own
effluent or meeting it own
emission limits.
Cross-referenced reform:
· Bookkeeping, accounting, and audit reforms may ameliorate some of the concerns regarding
judicious use of revenues released under this bundle of reforms.
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139
6.4 Financial Risk Reduction/Management Strengthening
REFORM: Financial risk reduction and access to capital
Bundled Strategy Elements: Investment risk reduction
Management strengthening
Economic regulation
Strategy Evaluation:
Advantages Disadvantages
Advantage Evaluation Disadvantage Evaluation
·
Financial risk reduction
·
In reducing risk, one
·
Legal changes that
·
The proportionality and
will make the MWWU a
reduces capital costs, a clear
reduce MWWU risk may
practicality of the reform
better credit and investment
benefit.
pose some legal problems.
depends on how these
risk and open up capital
·
Uncertainty as to
effects balance in practice.
markets
whether this will translate
Very difficult to judge
·
Some institutional
into effluent reduction.
outside of a specific setting.
elements: ownership
Effectiveness depends on the
perfection, clarification of
use of capital that is
parties responsible for debt,
presumably now more
eminent domain, durable
accessible and attractive due
concession contracts
to the reforms.
·
Management
·
Improves
·
May prove costly
·
The proportionality and
strengthening, including
management's ability to sell
practicality of the reform
possible privatization.
its projects.
depends on how these
·
More favorable
effects balance in practice.
assessment of risk under
·
Very difficult to judge
better, professional
outside of a specific setting.
management.
·
Effectiveness depends
on the use of capital that is
presumably now more
accessible and attractive due
to the reforms.
·
Economic regulation of
·
This oversight should
·
May not be as
·
If regulation doesn't
tariffs and cost basis
encourage investors that
advantageous if the
reduce financial risk, then
costs of capital will be
regulators only discourage
economic regulation will
recovered.
excessive tariffs and let local only be effective in reducing
·
Effectiveness depends
authorities decide on the rate pollution through one of the
on the use of capital that is
base that must be covered by other links to behavior and
presumably now more
tariffs.
investment.
accessible and attractive due
to the reforms.
Cross-referenced reforms:
· Independent audits and accounting reforms will also work to reduce risk and open capital markets
to the MWWU.
· More stable revenue streams from tariff design and revenue collection reforms will also reduce the
perception of risk.
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UNDP/GEF Danube Regional Project
Interaction between tariffs and collection - The reforms must not only occur in the rates per se but the
system of billing and collection. Increases in rates without such reforms will only exacerbate the
problem of non-collection and may even simultaneously encourage both greater water use and revenue
declines. The reasoning is that, as rates rise more customers who are metered cannot (or will not) pay
for the service. They will then be freed from any economic constraint on water use and any
conservation incentive the existing rate provided would be lost.
Privatization offers a dual advantage: capital, and management expertise. These two together can
improve the operating efficiency of the MWWU impressively. Note, however, that a badly executed
privatization will do more harm than good, and privatization will provide direct capital to the MWWU
only if the buyer has an obligation to raise the shares in the company.
6.5 The Responsibilities of the Central Government: A Local View
Resistance to local tariff increases may reflect the position that national mandates should be financed
at the national level. In particular, why should local municipalities through their local utilities and
customers - have to pay for environmental obligations undertaken by the central government? Most
especially, why shouldn't the central government pay for them if the cost of those obligations vary
from place to place and are particularly burdensome for select customers or geographic regions.
Variation in cost is partly due to earlier government or EU grants for some MUs for reaching or
getting close to the standards, while not for others.
This argument is especially strong when the obligations that do not equate local costs with local
benefits and, further, demand local tariffs reflect "full cost pricing". This may be seen as both
inefficient and inequitable and, the more inefficient and inequitable, the greater the resistance by the
ratepayers. Such resistance may take the form of moving from the community e.g., an industry that
relocates can, with a single decision, devastate the finances of a small water system.
If "full cost pricing" means those that incur the costs should pay the costs, then it may be argued that
the central government should be paying for all wastewater treatment beyond what is justified by local
benefits. In practice, actually, a large share of national MWWU wastewater treatment investments is
paid for by EU funds in most ME DRB countries. In further consideration of the use of tariffs, in
particular, as a tool for pollution reduction, more attention should probably be paid to such an
"incidence" criterion.
6.6 Burden Indices
Annual baseline expenditures of households in the case study communities under combined water and
wastewater tariffs are between 15 and 150 /year, equivalent to between 0.6% and 4% of gross
national income (GNI) per capita. Per household disposable income would provide a better basis to
compare the financial burden of W&WW services on households, but disposable income figures were
available only for a portion of the case study countries. Data available from a selection of the
surveyed countries shows that net disposable household income is slightly higher than GNI per capita
in the region. Therefore the percentage figures in Table 26 can be considered as upper estimates of
household W&WW expenditures as a ratio of disposal household income.
As we progress through the scenarios, the percentage burden increases to 2.2 to 20% in the sustainable
case, despite lower consumption levels as a reaction to increased tariffs. In Moldova and Bosnia
Herzegovina W&WW expenditures become so burdensome on households that even the financially
sustainable services pose a serious problem. Introduction of higher tariffs to fully support any
enhanced wastewater treatment investments appear to be out of the question in these case study
communities. Moreover, recall that the "upgrade" scenarios discussed here are based on local targets
for water system development. These targets may not, especially in the case of wastewater collection
and treatment, be as stringent as those reflected in EU directives or national plans. As a reference
point for consideration of tariff burden, OECD reports that water and wastewater charges combined
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
141
are mostly less than 1.5% of disposable income in most member countries and between 2.24% and
3.75% of income for the lowest income (usually decile) households (OECD, 2003b).
In the case of the Slovakian, Hungarian, Czech, Bulgarian, and one of the Croatian (Duga Resa) case
study communities, sustaining and upgrading the infrastructure from own resources may still be
affordable for most households. Again, we caution that this may not hold if the local targets for long
term service levels are not sufficient to meet more demanding EU directive or National planning
targets. Even with existing local targets, the poor households in the case study communities of these
countries would likely find it to be a serious hardship to pay increased tariffs necessary for
maintenance and development of infrastructure under an "upgrade" scenario. Households in the other
Croatian case study site, Karlovac may already be facing tariffs that are overburdening them. In the
case of Romania we do not have dependable burden estimates from the case study at this time but the
baseline expenditures on water system services as a percentage of national income are in line with
those of Hungary and Bulgaria.
We have to keep in mind that the expenditure estimates below were derived from scenarios in which
all costs are recovered by service users. In case of (foreign) grants or preferential loans the financial
burden placed on the population would somewhat ease. The present practice of cross-subsidizing
from other SUs, especially industrial users and legal persons, also contributes to lower household
expenditures, but at the price of efficiency loss in sectors of the economy.
Table 26.
Annual Water and Wastewater Expenditures of Case Study Community
Households under Scenario Progression
Sustainable
Case study site
Baseline Sustainable
Upgrade Baseline %
Upgrade %
%
As percentage of gross national income
/year
per capita
Bosnia-
Herzegovina:
47 212 341 4.6%
20.7%
33.3%
Doboj
Bulgaria: Pleven
40-42 46-48 47-51 2.8% 3.3% 3.4%
Croatia: Duga
61 130 186 1.6%
3.5%
5.0%
Resa
Croatia: Karlovac
150 255 395 4.0%
6.8%
10.5%
Czech Republic:
90 97 143
2.0%
2.2%
3.2%
Vyskov
Hungary: EDV-
97 104 125 2.3%
2.4%
2.9%
WR
Moldova: Chisinau
15 33 33 4.0%
8.8%
9.0%
Romania: Pitesti
37 2.5%
Slovakia: Poprad
19 30 0.6% 0.9%
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UNDP/GEF Danube Regional Project
Figure 19 Annual Water and Wastewater Expenditures of Case Study Community Households
under Scenario Progression (/year and % of GNI per capita)
450
35,0%
400
30,0%
350
25,0%
300
250
20,0%
200
15,0%
150
10,0%
100
5,0%
50
0
0,0%
ac
ry
ia
a
ia
esa
ar
ova
ovin
ania
arlov
public
old
m
Hunga
ga R
Bulg
M
Ro
Slovak
tia K
erceg
ech Re
ia Du
Croa
Cz
ia-H
Croat
Bosn
Baseline
Sustainable
Upgrade
Baseline %
Sustainable %
Upgrade %
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143
7 Recommendations for Further Development and Testing of
Reforms as Part of an Implementation Process
7.1 Project Outputs to Build Upon
The T&C Project has produced:
· Specific reform proposals that are aimed at remedying some of the barriers to efficient, effective,
and practical use of tariffs and effluent charges to support financing of important water system
investments in general and water pollution reduction investments in particular.
· The ASTEC spreadsheet model for use in testing the effect of a) different tariff and charge
regimes and b) investment programs on the balance sheets, consumption levels, and water and
wastewater quality of the municipal water utilities.
· A set of exercises (case studies) that, in combination with the spreadsheet model, illustrate the
physical, economic and equity consequences of a) different tariff and effluent charge strategies in
a specific MWWU context and b) various institutional and management strategies.
The T&C project has developed tools and established a basis for provision of assisted research and
evaluation to test and fine-tune country-specific and MWWU-specific reform proposals. These tools
can be used in a variety of ways, and with a variety of audiences. For example, they can be used to
· Encourage policy makers at the national level to undertake intelligent consideration of the
institutional reforms proposed by the Project.
· Encourage local policy makers to consider thoughtful implementation of new tariff structures and
investment policies.
· Train local water system managers to conduct rate studies in conjunction with investment planning
and environmental protection.
The precise nature of these interventions will depend on the specific reforms proposed. It is clear that
efficient assistance will vary with the:
· Audience (broadly grouped into national, local, management, and customer decision makers),
· Countries (there are large differences in the status and condition of municipal water systems
across the region) and
Message (assistance in data development and use of software to help clean up balance sheets, training
in development and interpretation of scenarios to test investment options, illustrative exercises to test
the consequences of tariff, effluent charge or other policies on the firm and its customers).
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UNDP/GEF Danube Regional Project
7.2 Reform Implementation
The reform proposals and the tools used in their development can now be used to refine, test, modify
and implement tariff and charge reforms in the counties of the ME DRB. Based on our collective
experience developing and evaluating the reform proposals included in this report, we offer the
following recommendations in support of an implementation process.
7.2.1 Elaboration and Application of ASTEC-Based Case Studies
The case studies developed by our country consultants have been extremely valuable in helping our
understanding of the issues and reform opportunities in real MWWUs in the DRB. The full value of
this activity has not, we think, been fully realized. We think an opportunity exists to develop these
case studies in closer collaboration with the country consultant and local system managers. This
elaboration will allow us to better test the reform proposals and the operational features of ASTEC. It
will also give the local managers and interested local officials a chance to see the tools we developed,
to develop an understanding of the way we analyze and evaluate reform proposals, and to develop and
test their own variations of those proposals.
7.2.2 Workshop on Tariff and Charge Reforms for Policy/Decision Makers
As a practical observation, interest in tariff reform usually derives from other objectives e.g., to obtain
the "internal" capital needed to meet co-investment requirements and operating costs of an ISPA or
other grant program. There is not usually a big or powerful "constituency" for the efficiency features
of these reforms. Implementation of tariffs reforms that promote pollution control must be bundled
with achievement of the other objectives.
It therefore makes sense to test the tariff and charge reforms and reform "bundles" with a group of
policy and decision makers who can help us further evaluate these reforms. The purpose of this
workshop would be to introduce the policy makers to our work to date and to get their feedback on our
initial reform proposals. Their experience and perspective will be invaluable as we try to shape the
proposals to be more workable and effective. They would also be able to help direct us toward
developing a reform development process that would increase the likelihood of adoption.
7.2.3 Demonstration Workhops for MWWU Managers and Directors
Proposal reforms can be introduced to municipal decision makers through a series of workshops that
describe how we developed and tested these reforms in this Project. These workshops would feature
the experience of the country consultant and case study managers and staff through their active
participation in the workshop. Such workshops would, we hope, also start to build a wider
understanding of the tariff and effluent reforms we propose, including their interaction with each other
and other policy objectives. Through this process we hope that we can begin building a constituency
for implementation of some of the policy reforms. Likewise, such workshops provide another
opportunity for feedback on the reform proposals and obstacles to implementation.
7.2.4 Coordination with Other Assistance Projects
The Project should look for opportunities to build on past international assistance projects aimed at
supporting MWWUs and identify and collaborate with those projects about to begin or now in
progress. Certainly, we don't want to either duplicate or compete with the assistance project. The
reforms we are proposing should also be of keen interest to international finance organizations
(development banks, etc.). We should, likewise, be aware of and make efforts to coordinate our work
Glenn Morris / Andrįs Kis
Volume 1: Water and Wastewater Tariff and Effluent Charge Reform Issues and Proposals
145
with such organizations so as to assist the case study or demonstration communities in their search for
investment capital on reasonable terms. We should undertake the risk reduction bundle of reforms, for
example, with an understanding of what criteria these international "banks" apply when "bankable" is
determined and see if we can help the municipal utilities move toward meeting those requirements.
7.2.5 Demonstration Projects of Municipal Tariff and Effluent Charge Reform
Demonstration reform projects are probably the best way to develop and test the reforms to the point
where their practical merits can be displayed to interested or skeptical observers. Of course, not all
elements of reform can be demonstrated on municipal scale, but those that can will fill in a lot of the
uncertainty surrounding the operational details of reform evaluation and implementation. To do this
effectively, the demonstration teams will need to represent a pool of skills that cut across the various
features of reforms that we have recommended: accounting, investment planning, economic
regulation, finance, pollution measurement, meter design and reliability. There will likely be a need to
build local capacity in many of these areas as part of each demonstration.
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8 References
Alic, Ramiza. Personal communication with Glenn Morris. February 25, 2004.
Barde and Smith. "Do Economic Instruments Help the Environment?" The OECD Observer, No.24,
Feb/Mar 1997.
Berbeka, K. et. al. "Water Pricing in Selected Accession Countries to the European Union; Current
Policies and Trends. Executive Summary". A Report Produced for the European Commission; DG
Environment. December, 2000.
Berbeka, K. and L. Somlyódy. "Financial Flows in the Water Sector in the CEE Region:
Background Report Draft". Global Water Partnership. Undated.
Berbeka, Krzysztof. ed. "Financial Flows and Affordability in Water Resources Management in the
CEE Region". Final Report. Global Water Partnership: Central and Eastern Europe. Krakow-
Budapest. May, 2003.
Boland, John J. and Dale Whittington. "The Political Economy of Water Tariff Design in Developing
Countries". In Dinar, Ariel ed. The Political Economy of Water Pricing Reforms. Published for the
World Bank by the Oxford University Press. 2000.
Cueva, Alfredo H. and Donald T. Lauria. "Assessing Consequences of Political Constraints on Rate
Making in Dakar, Senegal". In Dinar, Ariel ed. The Political Economy of Water Pricing Reforms.
Published for the World Bank by the Oxford University Press. 2000.
Dinar, Ariel ed. The Political Economy of Water Pricing Reforms. Published for the World Bank by
the Oxford University Press. 2000.
Ecologic. Effluent Charging Systems in the EU Member States. 2001.
Ecotec Research & Consulting. Study on Economic and Environmental Implications of the Use of
Environmental Taxes and Charges in the European Union and its Member States. Report to the
European Commission, DG Environment. April, 2001.
European Union. Water Framework Directive. 2003.
European Union Parliament. "Summary Report on a Workshop on Effluent Charging Systems in the
EU Member States". November, 2001.
Hall, Darwin C. ed. Marginal Cost Rate Design and Wholesale Water Markets. Vol. I of Advances
in the Economics of Environmental Resources. JAI Press. Greenwich Connecticut. 1996a.
Hall, Darwin C. "Calculating Marginal Cost for Water Rates". In Darwin C. Hall, ed., Marginal Cost
Rate Design and Wholesale Water Markets. Vol. I of Advances in the Economics of Environmental
Resources. JAI Press. Greenwich Connecticut. 1996b.
Hall, Darwin C. and W. Michael Hanemann. "Urban Water Design Based on Marginal Cost". In
Darwin C. Hall, ed., Marginal Cost Rate Design and Wholesale Water Markets. Vol. I of Advances
in the Economics of Environmental Resources. JAI Press. Greenwich Connecticut. 1996b.
Hall, Robert. "The Specification of Technology with Several Kinds of Output". Journal of Political
Economy. Vol. 81, pp 879-892. 1973.
Lau, Lawrence. "Applications of Profit Functions". Production Economics: A Dual Approach to
Theory and Applications. Vol. 1. Melvyn Fuss and Daniel McFadden, ed. North-Holland Publishing
Co. New York. 1978.
MAKK: "A környezetterhelési dķj jogszabįly tervezet hatįsvizsgįlata" [Impact assessment of the
proposed environmental load fee regulation. in Hungarian]. Budapest. 2003.
Miljųstyrelsen, Punktkilder 1998, Orientering nr. 6, Kbh. 1999.
Glenn Morris / Andrįs Kis
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Morris, G and Andrįs Kis. "Assessment and Development of Water and Wastewater Tariffs and
Effluent Charge Designs Focusing on Nutrient Reduction and Control of Dangerous Substances in the
Danube River Basin. Inception Report". UNDP/GEF Danube Regional Project. April, 2003.
Russell, Clifford S. and Boo-Shig Shin. "Public Utility Pricing: Theory and Practical Limitations".
In Marginal Cost Rate Design and Wholesale Water Markets. Darwin C. Hall, ed. Vol I of Advances
in the Economics of Environmental Resources. JAI Press. Greenwich Connecticut. 1996a.
Russell, Clifford S. and Boo-Shig Shin. "Am Application and Evaluation of Competing Marginal
Cost Pricing Approximations". In Marginal Cost Rate Design and Wholesale Water Markets. Darwin
C. Hall, ed. Vol I of Advances in the Economics of Environmental Resources. JAI Press. Greenwich
Connecticut. 1996a.
International Association of Water Supply Companies in the Danube River Catchment Area. "Tariff
Development for Drinking Water and Waste Water: Actual State and Expected State for the Reform
Countries of the Danube Catchment Area". Report to the UNOPS. 2002.
Organization for Economic Co-operation and Development. Financing Strategies for Water and
Environmental Infrastructure. OECD. 2003a.
Organization for Economic Co-operation and Development. Improving Water Management: Recent
OECD Experience. OECD. 2003b.
Speck, Stefan, Jim McNicholas and Marina Markovic. "Environmental Taxes in an Enlarged Europe:
An Analysis and Database of Environmental Taxes and Charges in Central and Eastern Europe." The
Regional Environmental Center for Central and Eastern Europe, Szentendre, Hungary. October, 2001.
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9 Annex 1: An Analysis of the Links between a Change in
Tariffs and Pollution Reduction
Water and wastewater tariffs are levied primarily to produce revenues to pay for the infrastructure and
operating costs associated with providing water and wastewater services (W&WWS).25 In the
following discussion we examine how a tariff increase under one of the simplest tariff designs - a
single commodity charge - might affect water pollution levels as well.26 To aid the reader, in Figure
20 we have illustrated the main effects of a tariff increase from T0 to T1 in the drinking water market.
The graph in the center of Figure 20 shows what the initial market impacts are likely to be. The
change in drinking water consumption corresponding to the tariff increase from T0 and T1 is shown by
the reduction in consumption from D0 to D1. Higher tariffs reduce the consumption for municipal
water as a reflection of the demand curve. The increase in the tariff simultaneously affects the amount
of money exchanged for the service.
These two effects a quantity change and a financial change - stimulate changes on both the service
user side of the market labeled the "Demand Side" in Figure 20, and the MWWU side of the market
labeled the "Supply Side". We now elaborate these changes and their possible consequences on each
"side" of the drinking water market. On the "demand side" customers will reduce water use and, most
probably, will pay more for the water they do use. That is, they will not only pay a higher price but
will also likely spend more on the drinking water they do consume. This is noted in the "Demand
Side" box. To note that there is a possibility that drinking water customers' expenditures may actually
decline when the tariff is increased, we have put a question mark after that initial demand side
outcome.7
The next box on the demand side of Figure 20 displays the main consequences of reduced water
consumption in terms "Wastewater Effluent". Reduced consumption will likely lead to reduced
effluent flows (unless all the reduction is the result of changes in use associated with "comsumptive"
activities). More problematically, lower consumption may also mean higher effluent loads. Because
of the uncertainty we again attach a question mark to this consequence of a tariff increase. The box
immediately to the of the right of "Wastewater Effluent" illustrates that, when "Directly Discharged",
25 For this discussion we treat water and wastewater tariffs as if they are one tariff applying to one type of
service: joint water and wastewater service. While the service is not strictly joint water and wastewater service
levels are in some respects independent of one other the billing method usually applied makes them appear
joint to the customer (SU). In particular, the wastewater tariff, whatever its level, is usually assessed on the basis
of drinking water delivered to the SU's account. Sometimes this delivery is estimated; sometimes it is metered.
In either case, most customers that have both water and sewer service are billed as if the wastewater service they
receive is proportional to the water service. In most cases, this is not a bad assumption, although the factors of
proportionality can vary significantly for different types of customers.
26 A decrease in tariffs will have the same effects but work in the opposite direction.
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wastewater effluent reductions resulting from a tariff increase may affect the level of water pollution.
In general, the greater the reduction in wastewater and the loading of that wastewater, the greater the
water pollution reduction from a tariff increase. Without knowing specifics, we can't say whether
these links from a drinking water tariff increase through direct discharge result in lower or higher
levels of water pollution.
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Figure 20 Principle Links to Pollution Reduction and Other Impacts of an Increase in Water Tariffs from T0 to T1
Costs
Lower Cost of Water Supply
Demand
Supply Side
Curve
Tariff/
Demand Side
Wastewater
Direct
Unit of
Effluent
Discharge
service
Lower
Consumption
Lower Effluent
Water Pollution
Lower Water
Revenues
Flows
Reduction(?)
Use
Higher
Revenues?
Higher
Lower Effluent
Other Use of Revenues?
T1
Expenditures?
Loads?
Increase in Investment?
T0
Investment
Wastewater
Treated
D1
D
Service
0
Other Investment?
Treatment
Discharge
Level/Unit
Investment in Water
of Time
Pollution Reduction?
Operating
Water Pollution
Changes(?)
Reduction(?)
Investment
Changes(?)
Water Pollution Reduction
Investment in Sewerage
Collection?
Investment in Wastewater
Treatment?
Error!
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Below "Wastewater Effluent" is the "Wastewater Treatment" box. If the wastewater is treated,
changes in incoming effluent amounts and concentration can affect the level and effectiveness of
treatment. The ultimate effect on water pollution reduction will depend on the physical conditions of
treatment and their associated costs. Here, again, while we know that an increase in the drinking
water tariff, via changes in effluent flows, can lead to changes in wastewater treatment, we cannot
categorically determine the associated sign, much less the size, of reductions in water pollution.
In considering the effectiveness of a drinking water tariff reform proposal, the demand side effects on
pollution reduction will commonly be small. Demand side effects can, however, be important in some
cases and should not be overlooked. It is important, therefore, to understand the various ways in
which these effects link to pollution reduction.
Moreover, pollution reduction is not the only concern of public policy. While we have been
concentrating here on the "effectiveness" of a tariff reform design in terms of links pollution
reduction, we also need to be anticipate the other changes that link to the consumption and expenditure
changes of the "demand side". As noted at the outset of this discussion of the demand side, the tariff
increase will impact customer drinking water expenditures. This consequence of a drinking water
tariff increase also needs to be weighed when assessing the proportionality and feasibility of a tariff
reform proposal.
The effects of a drinking water tariffs increase on the "Supply Side" are shown on the left side of
Figure 20. Here the reduction in water consumption shown on the demand side is seen as a reduction
in production. Simultaneously, there is a change in the revenues received by the MWWU. Just as we
expected an increase in customer expenditures on the "demand side", we expect that there will be an
increase in revenues on the "supply side". For the same reasons, however, we cannot be sure of this
(see footnote 7). We again denote this uncertainty in the direction of the change with the question
mark after "Higher Revenues".
In the "Cost" box of Figure 20 we note that lower production will in turn lead to lower total costs of
providing drinking water. If the total cost of production decline due to a tariff increase and, as is often
the case, the revenues from sales increase, the MWWU should be more net revenue left for other
purposes. This link is examined in the "Revenues" box to the left of the Supply Side box.
Whether or not associated changes in revenue translates into water pollution reduction, especially
reduction in nutrient and toxic loads, depends on how these revenues are used. This, in turn, depends
on the priorities of the MU and its owners. It also depends on the priorities of the RUs that regulate or
condition the MU decisions. On the left of Figure 20 we highlight various possible uses of the
possible net revenue. "Other Use of revenues" suggests that the net revenue produced by a tariff
increase can be used to support the operating costs of a wide variety of service upgrades e.g.,
improving drinking water quality, and improving the reliability of the billing system. If a decision is
made to use net revenues to finance an "Investment", the investment can be used to build a variety of
new infrastructure that may have no direct impact on pollution reduction e.g., investment in service
reliability, leakage reduction, or expansion in water service. Such investments may even result in
higher wastewater volumes, effluent loads and, ultimately, water pollution.27
If the tariff increase ultimately leads the MWWU to invest the net revenues in "Water Pollution
Reduction" then the tariff increase can potentially have a big impact on water pollution reduction. If
the choice is made to use the revenues to support introduction or upgrade in wastewater treatment to
secondary or tertiary levels, and to operate these systems effectively, we expect there to be a
significant reduction in pollution loads returning to water bodies, especially nutrient and most toxic
loads. The net effect on water bodies, of course, depends to some extent on what alternative treatment
27 Whether such expansion results indirectly in a higher pollution load on the environment depends on what
alternative disposal methods were being applied by household and commercial customers who would be served
by the expanded water and/or wastewater system.
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or disposal methods are displaced by the new investment.28 Given these contingencies, especially the
one regarding proper operation of the new or upgraded treatment facility, we even mark the link
between a tariff increase and this outcome with a question mark.
In summary, then, the links through either the supply side or demand side of a tariff reform, - even a
reform as seemingly simple as a straightforward increase in a drinking water commodity charge - to
water pollution reduction are multiple and can be technically and behaviorally complicated. The
effectiveness of the reform depends on the behavior of several agents MUs, RUs, and SUs - in
combination with associated technical and financial conditions.
Finally, we note again that "effectiveness" is not the only criteria by which to judge the merit of a
tariff reform proposal. We need to consider the other consequences of tariff reforms, some of which
are suggested in Figure 20. On the supply side, for example, there is the critical role of the many
agents involved in setting service and investment priorities. There is a political linkage between the
municipal officials, representing municipal ownership, and service users, as the political constituency
upon which those officials depend for political support. If the costs represented by an increase in
tariffs, get disproportionate to incremental benefits derived from the MWWU by the service users, it
will be difficult to design a "practical" reform. Such relationships, and the various ways in which they
manifest themselves in the ME countries of the DRB, are also very important to understand when
identifying and evaluating reform proposals.
28 Careful land disposal of sewerage, for example, can also result in substantial reduction in nutrients and toxic
loads returning to water bodies.
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10 Annex 2: Effluent Charge Links to Pollution Reduction
An effluent charge as discussed here is a charge levied on a MWWU based on the amount of effluent
that the MWWU discharges into a water body from its wastewater collection system or its wastewater
treatment plant. Often times these charges are in the form of a "fine" that is assessed if the MWWU
exceeds a "permitted" level of effluent discharge. In other cases it is assessed on all effluent, even that
effluent that is within the limits in the systems permit. The actual charge can vary widely in design as
both the range of water pollutants covered and the way in which the effluent load is measured varies.
Some of these variations are discussed in this Annex or other chapters of this report.
Like tariffs, effluent charges are an economic instrument. Their merit depends not only on the level
and design of the effluent charge; it also depends on the reactions of MWWUs and their customers to a
change in effluent charge regime. Like tariffs, changing this economic instrument can 1) affect the
flow and pollutant load of wastewater in a number of ways and 2) have other important economic and
social effects. This is illustrated in Figure 21 for an increase in effluent charge from EC0 to EC1. In
this case we assume an effluent charge design in which the effluent charge only applies to effluent
levels in excess of permitted levels E'. We call this a "fine" design because it works like a penalty or
fine that is imposed for violation of a rule or standard. In this case the penalty is proportional to the
size of the violation.
The main link between effluent charges and pollution reduction works through the effect the effluent
charges have on the MWWUs costs (the "cost side"). In principle, the higher costs imposed by an
increase in effluent charge are supposed to stimulate investment in wastewater treatment by MWWUs
as a cost savings measure. How this works depends on both the effluent charges (shown as ECo and
EC1 in Figure 21) and the marginal cost of abatement (shown as MAC in Figure 21). The MAC goes
down as the level of abatement goes down i.e., as the amount of effluent goes up. If the MWWU
minimizes the total cost of abatement and effluent charges, it will reduce effluent to the point where
the marginal abatement cost is equal to the marginal benefit of abatement reduction, which, of course,
is the effluent charge. For effluent charge EC
0 in Figure 21, the MWWU abates to the point where
effluent production is E0. The MWWU will pay for abatement up to this point and then pay an
effluent charge equal to the product of the effluent charge EC0 and the effluent in excess of permitted
levels (E0 E').
If the effluent charge increases to EC1, the minimum total cost for the MWWU will be obtained at an
effluent emission rate of E1. In other words, raising the effluent charge will provide the incentive for
the MWWU to increase abatement activities and reduce effluent production. Note that in this
example, the level of pollution is still greater than the "permitted" level of effluent E'. The higher
level of abatement will increase total abatement costs by the amount of the area under the MAC
function between E0 and E1. The amount paid in effluent charges is now EC1 times the new excess
effluent (E1 E'). Since EC1 is bigger and (E1 E') is smaller, we don't know under all conditions
whether total effluent charge payments will increase or decrease. In Figure 21 it looks as if the
effluent charge payments would decline. The geometry of the Figure, however, also can be used to
show that under this effluent charge regime the total costs of the MWWU will increase with an
increase in EC up to EC' where the MWWU will abate to the point where it is in compliance with its
permit.
The cost side box of Figure 21 summarizes these results. With higher effluent charges and reduced
effluents the total costs of operating the MWWU increase. As these costs are passed on to the
consumer in the form of higher tariffs, customers can be expected to reduce water consumption and
wastewater disposal. The consequences of this tariff change are just as illustrated above in Figure 20
of Annex 1. This illustrates, again, that tariffs and effluent charges are likely to have some, perhaps
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significant, interdependence. The further effects of these cost side influences on pollution reduction
depend on the size of the effluent charges, the tariff increase, and the demand for water and
wastewater. As in the case of a tariff increase, this will reduce consumption but the ultimate effect on
effluent produced by the MWWU will depend on wastewater service demand and the costs of
wastewater service provision.
An examination of this particular effluent charge regime would not be complete without consideration
of the "revenue side" of the effluent charge. This is shown on the right hand side of Figure 21. The
effluent charge payments made by the MWWU become revenues from the perspective of the recipient,
presumably some RU. We note again that it isn't certain that an increase in EC will result in
additional revenues and, certainly, an increase beyond EC' in this "fine" design will yield no
additional revenue at all. The revenues from the effluent charge, whether increased or not, can be used
in a wide variety of ways and their potential impact on effluent generation might vary from a
substantial reduction (due to financing of a wastewater treatment facility) to a small increase (due to,
for example, the use of the revenues to support expansion of service to new customers).
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Figure 21 Illustration of an Effluent Charge Increase: Effluent Fine Design and Baseline Effluents Greater than Permitted
Cost Side (for E0 E')
· Higher Total Cost
· Higher Tariffs
Marginal
Revenue Side
· Effluent Charge Payments?
Cost/ Per Unit
· RU Revenue Change?
· Higher MWWU
of Effluent
Revenues?
Reduced
EC'
Expenditure Change?
· Other expenditures?
· Investment in pollution
Pollution Reduction (for
EC1
reduction?
E0 E') due to
· Incentive to invest in, and
EC0
operate, abatement
MAC
technology
Pollution Reduction?
· Reduced demand due to
tariff increases?
E'
E1
E0 Total Effluent
Produced/ Unit of Time
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11 Annex 3: The ASTEC Model Users Guide
11.1 General Remarks
The present User's Guide is intended for the country consultants working on components 1.6 and 1.7
of UNDP-GEF Danube Regional Project (Assessment and Development of Water and Wastewater
Tariffs and Effluent Charge Designs Focusing on Nutrient Reduction and Control of Dangerous
Substances in the Danube River Basin), who have participated at the Orientation Workshop in May
2003 in Budapest, and who therefore received an introductory training about the spreadsheet model.
The User's Guide is also useful for other experts, though they may need to spend more time reading it
and trying the model in practice to acquire sufficient familiarity with it. Familiarity with not only the
model, but also with
- the Guidelines for Entering of Spreadsheet Cost Data for Case Study Scenarios,
- the Pilot Case Study Guidance Document,
- and the Analytical Framework
are essential for proper use of the model and interpretation of the results. The present document is a
,,technical" guide, while the aforementioned other documents help in constructing sensible scenarios,
proper use of input data and interpretation of results.
The present version of the model requires Excel 2000 or a more developed version of Excel, with
Solver installed and Excel enabled to run macros. The user surface of the model is in English, but the
Excel itself can be in any language, that is not supposed to affect the proper functioning of the model.
In older versions of Excel or obsolete computers running some of the scenarios may require a lot of
time or it may not be possible. If you are experiencing problems running the model, please consult the
section on troubleshooting at the end of the User's Guide.
The model that you receive is read-only version. When you enter data into it, you need to save it
under a different name, therefore you will always have a back-up copy of the original model.
11.2 Structure of the Model
Eight worksheets of the model are displayed for use, while a number of sheets containing side-
calculations are hidden.
The Control sheet is used for initiating commands, such as running of scenarios, copying one scenario
into another one and deleting scenario data. Sheets S1 to S5 contain scenario specific input data, these
sheets are to be filled in by the user. Data should only be entered into colored cells, while white cells
should not be modified, because that may create problems for the model. Likewise, cells, columns,
rows and worksheets should not be deleted or inserted by the user, because that will change the
references to some of the cells, again creating problems for the model. Information can be copied
between colored cells, but it should never be cut and pasted, because cutting cells will modify the
references.
Some cells have comments with a red little triangle in the right upper corner. By moving the cursor to
the cell, the comment will pop up. These comments usually include guidance on data entry.
The Output_DSR sheet contains detailed scenario results (after a scenario has been run), while the
Output_CT sheet contains comparative tables of scenario results. These sheets cannot be modified by
the user, but the displayed information can be copied into a different file for further computations by
the user.
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If operation of the model is interrupted by the user or by an error, then the otherwise hidden sheets are
also displayed, but they will be hidden again after the next successful run of the model.
The present model version can be applied for analysis of management units, which serve up to 9
service users (SUs). An extension for 20 SUs is planned, as the need for a larger number of SU
categories arose during elaboration of case studies.
11.3 Operation of the Model
11.3.1 Entering Data
Scenario specific data is to be entered into worksheets "S1" through "S5". On the top of the sheet
(rows 2-6) there are hyperlinks pointing to ranges where scenario data is entered. The user can
quickly reach these ranges by clicking on the hyperlinks. Please bear in mind to fill in only the
colored cells, and do not add, delete or cut&paste cells, rows, columns or worksheets during data
entry.
11.3.1.1
General Input
Scenario name (cell C9) is the concise name of the scenario, which will be used to identify the
scenario in all the other sheets. A longer description of scenario features is possible in cell E9.
Real interest rate is the difference of the nominal interest rate and the rate of inflation. Details on its
computation are in the Memo on Guidelines for Entering of Spreadsheet Cost Data for Case Study
Scenarios.
Number of loops: the user can maximize the number of loops (iterations) used for modeling. During
optimization the computer repeats the same computing algorithms, gradually getting closer and closer
to the optimal solution. The higher the number of loops that the user allows, the more precise the final
results will get, but the longer the computation process will take. It is suggested that initially this
number is between 5 and 10, and if the precision of the results is not satisfactory, then it can be
increased for subsequent runs of the model.
Precision: the expected precision of the final results is the maximum difference between the costs and
revenues of a given cluster of service user. This figure is only used during cost recovery and/or
marginal cost pricing scenarios. The lower this number, the more precise the final results will be, but
the longer the computations will take. 3%-5% seems like a reasonable starting point, which can be
lowered if the results are not sufficiently precise.
11.3.1.2
Specifications of Service Users
This is the input area for specifying the modeled SU categories and the baseline patterns of
consumption and charging regimes in range B14:D22. Baseline refers to the fact that the data
provided here is valid for the baseline situation, before the introduction of any scenario changes.
The name should concisely summarize the most important features of the SU category. Through the
name the user can differentiate between user types (e.g. households, industrial users), it can provide a
reference for the type of service (water, wastewater or both), the location of the service area (town,
village), the charging regime, the sensitivity of consumption to changes in the commodity charge (low
or high elasticity) etc.
A predefined category is "Leakage and storm water". While this is not an actual service user, the
resources certainly get used, since leaking water first needs to be extracted and treated, and storm
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water is also collected and treated together with the rest of the wastewater stream. Subsequently, there
are certain cost items that can be associated with leakage of supplied water and collection of storm
water, and this SU category is set up exactly for this reason: in order to summarize these cost items
and then to make sure that they are eventually distributed to the rest of the SUs and are recovered from
the tariffs paid by them29. If you do not have information on leakage and storm water or you would
not like to make that part of your analysis, you can simply leave the corresponding cells empty.
The number of accounts refers to the actual customers or users of the service within a given service
category. For instance, if you have 10,000 households in a SU category, and each of them are
individually billed then 10,000 is the number of accounts. If these 10,000 households live in 500
apartment buildings, and it is the buildings, and not the households that are the direct users and payers
of the service, then it is more logical to use 500 as the number of accounts. The number of accounts
may change by the scenario. For instance, if you introduce metering for individual households of big
apartment buildings, then the number of your accounts will increase, while average consumption per
account will decrease.
The service: a given SU can use only water service (W), only wastewater (or sewage) service (S), both
services in a composite way, i.e. they cannot be decoupled from each other (WSc), both services
independently from each other (WSi). In the latter case the two services are not linked with each
other, the user can choose to abandon one service and switch to an alternative provision, e.g. self-
supply, without having to give up the other service.
11.3.1.2.1
Water Consumption and Charging Regime
Baseline annual water use per account: the average water consumption within the SU category. In
case of leakage, the total annual leakage in the service area of the MU should be provided here, if
available (cell E23).
Fixed annual water tariff: Fixed tariff or service charge that the individual account will have to pay
regardless of water consumption.
Commodity charge: a unit charge, which is paid after consumption of each cubic meter of water.
Quantity of water per account provided in exchange for the fixed annual tariff: sometimes SUs are
entitled for consumption of a certain quantity of water without having to pay the commodity charge
after this consumption. Having this option also provides the opportunity to represent block fee tariff
systems. In case of block fees end users are categorized according to their present blocks and all
consumption preceding the present block is considered as part of the fixed tariff. As illustration let's
imagine a charging regime in which there is a fixed charge of 100 USD, plus a commodity charge of 2
USD/m3 for the first 1000 m3, then 2.5 USD/m3 for all subsequent consumption. In this case end users
who consume more than 1000 m3 will fall in the 2.5 USD/m3 commodity charge category, and their
fixed tariff is 100+2*1000=2100 USD/year, in exchange for which they also receive 1000 m3 of
water.30
11.3.1.2.2
Wastewater Discharge and Charging Regime
Other than the baseline annual discharge, all of the variables are defined similarly to baseline annual
water consumption. Baseline annual discharge of wastewater can be defined either as an absolute
29 The underlying rationale is that leakage is an unavoidable side-effect of water service provision (though its
extent can be limited), while storm water collection is also a service, even if does not directly correspond with
wastewater collection and treatment, and it should not take place through the sewerage.
30 With the present model setup, this notion limits movement across blocks; therefore if large-scale changes take
place (i.e. if the new quantity after a change in price would fall in a different block) then the user category has to
be redefined manually.
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number in m3/year, or as a percentage of water use. The latter option should be used only when water
and wastewater services are composite services, i.e. they cannot be decoupled from each other and as
water consumption changes, so will the discharge of wastewater. Storm water collected by the sewer
on the territory of the MU is to be entered in cell I23, if available.
11.3.1.2.3
Elasticity of Demand
Elasticity of demand is the percentage change in consumption as a result of a one percent increase in
the commodity charge31 of the corresponding service. For instance, if the elasticity of demand for
water consumption is 0.2 then one percent increase in the commodity charge triggers a 0.2 percent
decline in water consumption relative to the baseline level.
Three types of elasticity can be supplied. The actual elasticity that should be filled in depends on the
types of services used by the SU, as depicted by the next table.
Type of service
Elasticity to be supplied
Water service only (W)
Water elasticity (range O14:O22)
Wastewater service only (S)
Wastewater elasticity (range P14:P22)
Water and wastewater services provided
Water elasticity; wastewater elasticity (ranges
independently from each other (WSi)
O14:O22 and P14:P22)
Water and wastewater services provided as Water and wastewater elasticity as composite
composite goods (WSc)
goods (range Q14:Q22)32
11.3.1.2.4
Value Added Tax (VAT)
Under most VAT regimes corporate entities do not consider VAT as a part of business decisions, since
incoming VAT will simply be transferred to the central budget or paid out as part of the bills after
purchases.33 Since MUs in general are corporate entities, and some of the SUs are also corporate
entities, VAT should not have a fundamental role during modeling. Nevertheless, in case of
households, which cannot get VAT refund, the full W&WW tariff and charge will appear as a real
expense. Therefore, in order to account for the different perspectives of households and corporate
entities, the financial accounts in the output sheets will include the non-refundable VAT paid by the
31 Service users will alter their consumption as a result of a change in the commodity charge only. A change in
the fixed tariff will not directly trigger a behavioral response, since changing consumption will not alter the
payment of the fixed tariff. A change in the fixed tariff will result in an income effect only, which may
eventually have minor implications on water consumption, but this effect is not modeled.
32 The elasticity of demand for water and wastewater services as a composite service is the percentage change in
the demand for a unit of this service as a result of a one percent increase in the sum of the water commodity
charge and the corresponding wastewater commodity charge together. For instance, if consumption of a cubic
meter of water results in 0.9 cubic meter of WW discharge, then the composite service comprises of a cubic
meter of water consumption and 0.9 cubic meter of WW discharge. If the commodity charge of the water
service is 1 /m3 and that of the WW service is also 1 / m3, then an increase of 0.1 / m3 of water service will
result in 5% increase of the commodity charge of the composite service (0.1/2). If the elasticity of demand is
0.2, then 5% increase in the composite commodity charge will result in 1% decline in consumption.
33 There may be cases when VAT does have a role in business decisions, subject to e.g. the VAT refund
regulations, bookkeeping rules on the VAT part of long-term investments or expected changes in the level of
VAT. In the majority of cases, however, VAT is not one of the major factors shaping corporate decisions.
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SUs. To be able to do so, the user needs to supply the VAT rates and declare whether VAT is
refundable by a given user. This information is to be entered into range R14:T22. Moreover, all
monetary values should be entered in the model as net values, without the VAT.
11.3.1.2.5
Avoidance of Tariff Payment
Here the user can specify if a share of the tariff is avoided (not paid) by SUs. The percentage of
avoided tariffs needs to be supplied in range U14:V22 by SUs and services. If all tariffs and charges
are paid, then these cells should be left empty or zero should be entered. Unpaid tariffs will be
displayed in the output sheets after the model has run.
11.3.1.3
Fixed Costs and Grants
Section 3.1.A is for water services, section 4.1.A is for wastewater services. You can enter up to 50
cost or grant items here.
Leakage and storm water. The first column in this matrix (column C) is dedicated for leakage of
water in case of water services, and collection of storm water in case of wastewater services.
Costs and grants. The rest of the items are defined by the user. First you need to choose in row 27 if
a given item is cost or grant. Grant is a transfer from the government, the municipality or the EU to
the management unit as a contribution to the investment. If the transfer needs to be repaid, then it is
not a grant any more, but a loan, therefore it cannot be included as a grant. If such a loan needs to be
repaid with a preferential interest rate, then the interest rate for this item can be changed to reflect the
conditions of the loan.
Future or present value payment can be chosen, to differentiate between a loan repayment obligation
and savings for future investments. When an investment is financed from a loan, then present value
payment needs to be chosen. When the MU makes savings for a future investment, then future value
payment needs to be selected.
The name of the item should concisely describe the most important feature(s) of the investment cost or
grant. The name can refer to the technology, the geographical location, the service users served by the
item. E.g. Water treatment at well "A" or Pipeline to town "B".
The lifetime of the equipment can be the full lifetime, if the system is to be financially sustained for an
indefinite time, it can be the remaining lifetime of the loan which financed the purchase of the
equipment, or it can also be the remaining lifetime of the equipment in case of "Future value payment"
if the full cost of the equipment needs to be saved until then in order to replace the present equipment.
The annualized value is computed by the model automatically. If, for a given cost or grant item, you
choose to apply an interest rate which is different from the general scenario interest rate supplied in
cell C10, then you need to modify the formula in the annualized value row of the item, by changing
the reference to cell C10 to the specific interest rate. Also, attach a comment to the cell describing the
reason for the different interest rate.
In order to be able to reach cost recovery for individual service user groups, the costs (and grants)
need to be distributed among the SUs. If an item is not distributed among them, that will still be used
for cost calculations and appear in the output sheet as non-distributed value. If you would like to
distribute a value among SUs, first you need to specify if you would like to distribute it as a
percentage or proportionately with the volume of water consumed or wastewater discharged by the
SUs. The basis for distribution can be set in row 33 for water and row 75 for wastewater services,
while the actual assignment of costs takes place in the rows below it. In the first part of these rows the
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names of the SU categories are displayed, but only those, which consume the given service, so that
you do not accidentally distribute a cost item to an SU, which does not use the service.
In case of percentage distribution insert a percentage in the cells in this table. In a closed system, i.e.
when all of the cost is distributed among SUs, the column should add up to 100%. It is important that
you insert percentage values with the % sign or insert figures which are between 0 and 1, otherwise a
100 times higher value will be used. (E.g. if you would like to assign half of the costs of a given item
to a particular SU, then you can insert "0.5" or "50%" in the appropriate cell, but do not insert "50",
because that is interpreted by the model as 5000%.)
In case you choose the volume of water or wastewater as the basis for distributing costs, insert 1 into a
cell if the item appears as the cost of a given service user. Otherwise insert 0 or leave the cell blank.
You can also allocate costs to leakage (and storm water collection) and then redistribute them among
SUs. This feature is especially useful if you would like to track the costs associated with leakage or
storm water collection and/or if these costs should be spread among SUs or some of the SUs according
to a specific algorithm.34 The costs of leakage and storm water can be spread or redistributed among
SUs in range C34:C42 and C76:C84, respectively.
11.3.1.4
Investment Costs Covered by a Connect Charge
3.1.B is for water, 4.1.B is for wastewater services. The model offers the possibility for introduction
of a connect charge in case new users are added to the system. New users usually imply increased
costs which, to sustain economic efficiency, should be covered by their connect charge, which is a
payment category especially for covering the additional costs of connection, which is different from
both the commodity charge and the fixed tariff. In cell BB26 (for water) and BB68 (for WW) you can
specify the duration of the connect charge, i.e. the number of years through which the costs related to
connection will be recovered. The rest of the input data can be entered similarly to fixed costs and
grants.
11.3.1.5
Variable Costs and Transfers
In Section 3.2 (water) and 4.2 (wastewater) variable costs, subsidies and charges can be entered, the
last two items are considered as transfers, since they represent money transfers from or to the
government or municipality. In case of water services in row 47 you need to specify the category in
which the item falls, then in row 48 the name of the item is to be described, in row 49 its value. If a
given item applies to a specific service user, "1" needs to be inserted in the appropriate row below. A
similar table for wastewater services is available from row 88.
11.3.1.6
Quality of Supplied Water
In Section 3.3 you can supply important characteristics of the quality of the supplied water, i.e.
drinking water. This should not be mistaken for the quality of wastewater or effluent, which is
specified in 4.3 under pollution charges. The data supplied in Section 3.3 is not used for any
computations, but this is a useful way of describing scenario features. If, for example, you introduce
new investments into purification of water, that will not only have an effect on costs, but the supplied
water will meet higher standards. Therefore, specifying the quality of water in this section is a way of
specifying the scenario.
34 If you invest into leakage reduction, you need to know your costs before and after the investment, in order to
be able to make a reasonable decision on the investment. One can also consider, for instance, that distribution of
water in a suburb, with lots of houses spread over a large area, probably results in more leakage per household
than in an area with big apartment buildings.
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11.3.1.7
Pollution Charges
The water pollution charges under Section 4.3 are specified in more detail than the quality of supplied
water in Section 3.3, and pollution charge data is actually used for computations. First, in row 105,
the basis of the charge needs to be selected. It can be the volume of wastewater as well as the quantity
of pollution. The name of the pollutant is supplied in row 106. The concentration of the pollution
only needs to be filled in if the charge is based on the quantity of pollution. Actual pollution levels
will be computed by the model based on the concentration and the volume of wastewater discharge.
The measure or level of the pollution charge is supplied either by cubic meter (in case the charge is
based on the volume of wastewater) or ton (if it is based on the quantity of pollution). The distribution
of the costs takes place just like in Sections 3.2 and 4.2. It is advised that the order of the pollutants is
the same in all scenarios; otherwise the results displayed in the output sheets will not be comparable
across scenarios.
11.3.1.8
Modeling Options
11.3.1.8.1
Cost Recovery
In Sections 5.1 and 5.2 you can specify if you would like to have cost recovery for given SUs for water
and wastewater services, respectively. These choices are only valid for marginal cost pricing and full
cost recovery scenarios (see below). If you would like to achieve cost recovery, you need to enter
"yes" in column D.35 There may be scenarios in which you would like to achieve cost recovery in
general, but for certain SUs you want to set an exogenous tariff and charge, even if those do not result
in cost recovery. You can do this by setting column D of the appropriate row as "no", while supplying
the tariff and charge in columns O and P of the same row.
Furthermore, if you would like certain service users to have the same commodity charge then you can
specify "clusters" here. SUs belonging to the same cluster will have the same commodity charge after
the model finished the optimization process. When do you want to use this option? Primarily when
you would like to achieve cost recovery or marginal cost pricing for certain SUs together. E.g. you
would like to test what happens if the same charges apply to the households of two neighboring towns
(which face different cost levels), because you are not able or do not wish to differentiate their
charges.
How do you specify clusters? Potential clusters appear in columns F to N. If you would like to assign
two service users to the same cluster, then first you decide which cluster (which column) they should
belong to, and then you enter "1" into two cells where the column of the cluster and the rows of the
SUs cross each other. All the rest of the cells in the column should be left "0".
If there is a SU which is not clustered with any other SU, then you assign that SU into a cluster
individually, without any other SUs, i.e. there is only one "1" in that column, all the rest of the cells
are "0".
One SU should only be assigned into exactly one cluster. The control cell in column E of the matrix
has a red color if you accidentally assigned the SU into more than one cluster, or did not assign it into
any. If you do not want to achieve cost recovery for the SU, then you do not need to assign it into any
of the clusters.
35 If you leave any of the cells in column D of the tables empty, the model will assume that you do not wish to
have cost recovery for the particular SU.
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Clusters for water services do not necessarily have to be the same as for wastewater services.
Nevertheless, having completely different structures for the two services will extend the computing
time of the model (and may not even lead to a solution).
11.3.1.8.2
Scenario Choices
The user will need to selected the scenario type out of the following five categories:
1. Full cost recovery without marginal cost pricing. During optimization only the commodity
charge changes so as to reach full cost recovery by clusters of users. This is economically not
an efficient scenario, since some of the investment costs may be recovered from commodity
charges; nevertheless it is widely used in practice.
2. Full cost recovery with marginal cost pricing. In this case both the commodity charge and the
fixed tariff change in order to cover operating costs (with the commodity charge) and
investment costs (with the fixed tariff) by clusters of users.
3. Marginal cost pricing without full cost recovery. This is a simple marginal cost pricing
scenario, in which case commodity charges are equal to operating costs, by clusters of SUs,
but fixed tariffs do not have to be equal to investment costs. Original fixed tariffs are used.
4. No marginal cost pricing, no full cost recovery, original tariffs and charges are used. Here the
original fixed tariff and commodity charge are applied, no optimization is carried out.
5. No marginal cost pricing, no full cost recovery, new tariffs and charges are used. The fixed
tariffs and commodity charges supplied in ranges O128:O136 and O141:O149 for water and
wastewater services, respectively, will be used for modeling. No optimization is carried out,
but the new level of commodity charge will influence service level through the elasticities of
demand.
In case of a cost recovering or marginal cost pricing scenarios (1 to 3 from the above list) the user can
also make a choice on how the model should handle avoidance of payment:
Costs of non-payers are not recovered. In this case it is assumed that payers will need to recover their
full costs in case of a full cost recovery scenario, or their operating costs through the commodity
charge in case of marginal cost pricing. Payers will, however, not recover the cost of non-payers.
Costs of non-payers are recovered by payers. Here payers will actually pay more than their true share
of costs would justify, so that revenues from them will recover all costs, including costs associated
with services to non-payers within their own SU cluster (cross-financing among SU clusters is not an
option).
11.3.2 Commands
Commands on operation of the model can be initiated on the Control sheet.
You can copy data from one scenario into another by inserting the number of the source scenario into
cell C11, the number of the target scenario into cell D11, and hitting the Copy button. This feature is
useful when you would like to create a new scenario by modifying an existing scenario.
Likewise, you can delete scenario data by inserting its number into cell C14 and hitting the Delete
button. This is quicker and less troublesome than manually deleting the content of the cells on a given
scenario sheet.
If you wish to run a scenario, insert its number into cell C17 and hit the Run button.
In the range B21:F26 information about the scenarios can be found, with display of the date and time
of the last run, the time needed to run the scenario and whether satisfactory results have been
produced. If the results have not been satisfactory, that may be either because the set of equations
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167
describing the scenario cannot be solved or because the prescribed precision of the results have not
been attained. The latter can be remedied by modifying either the precision of the results (G10 of the
scenario sheet) or the number of iterations (cell E10 of the scenario sheet).
Lastly, the name or abbreviation of the local currency should be entered in cell C30. The local
currency can be set as 1000 (or higher) units, especially if the currency is very weak compared to the
EUR or USD. In this case all monetary units in the scenario sheets also need to be entered in a unit of
1000. The exchange rates to EUR and USD need to be entered in cells C31 and C32. After the model
has run, the results can be displayed in any of the three currencies, by hitting the appropriate buttons.
Please note that only the results will be displayed in the chosen currency, the variables on the input
sheets will stay in the original currency.
11.4 Troubleshooting
The model was prepared in Excel 2000 and tested both in Excel 2000 and Excel XP. In both versions
the model worked without problems. In earlier versions of Excel, however, the model, especially
when scenarios with marginal cost pricing or full cost recovery are being run, may not work properly.
A number of settings are necessary for appropriate operation of the model:
- Excel should be enabled to run macros. You can do this at Tools/Macro/Safety, choosing mid level
safety. Any time when the model is opened, you will be asked if you would like to open the macros,
and you can say yes.
- Solver should be installed in Excel. You can check this on any of the sheets at Tools/Solver. If the
Solver window pops up, then Solver is installed. If it is not installed, you can do it at Tools/Add-ins.
You may need the installation disk for this.
- A number of items need to be installed within the Visual Basic Editor of Excel (Visual Basic is the
programming language in which the macros were written). You can reach the Visual Basic Editor by
hitting Alt+F11 on any of the worksheets. Then go to Tools/References and check if the following
items are marked or not:
Visual Basic for Applications
Microsoft Excel 9.0 Object Library (a different version number may appear for different versions of
Excel)
OLE Automation
Solver.xls (or Solver.xla)
Microsoft Forms 2.0 Object Library (or a different version number). If any of the above are
unmarked, you need to mark them.
If you do not find Solver.xls or xla in the list, which is the reference most often missing, then you need
to hit "Browse" and go to the project library in which solver is located. Most often this library is
ProgramFiles/Microsoft Office/Office/Makro/Solver/Solver. If you do not have such a library, then
you need to find Solver from Windows Explorer with the ,,Find" tool.
Sometimes your Solver is installed but you still receive an error message when you try to run the
model. As a remedy to this problem, try the following:
- Go to any of the spreadsheets and open the Solver window (Tools/Solver) and then close it. For
some reason this action (sometimes) "wakes up" Solver.
- Unmark and then mark again Solver within the Visual Basic Editor, Tools/References.
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Another source of error may be when you inserted a wrong type of data into a cell, e.g. text instead of
a number, because Excel cannot make a computation on text. We have tried to limit this possibility by
restricting the data types of many of the input cells, but the problem may not have been eliminated
completely.
If you insert or delete cells, columns, rows or worksheets, that will almost certainly be the source of
breakdown, because the program code refers to predefined cells, the location of which now changes.
Likewise, if you cut and paste cells, that will change the references, probably resulting in errors during
modeling.
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12 Annex 4 Exchange Rates in Study Countries of the DRB
Exchange rates in study countries of the DRB (February 2004)
Country
Currency
Exchange rate
(Local currency/)
Bosnia Herzegovina
BAM
1.96
Bulgaria
BGN
1.946
Croatia
HRK
7.60
Czech Republic
CZK
32.50
Hungary
HUF
257.00
Moldova
MDL
15.70
Romania
ROL
40080.00
Slovakia
SK
40.60
Document Outline