29 March 2021
By Ndriçim Shani
Chair of National Regulatory Commission and WAREG Vice President
The national economic regulator for water and wastewater services of Albania (ERRU) has the legal mandate to monitor local water and wastewater operators, in order to avoid possible abuses of their monopolistic power on water supply and sewerage services.
Water supply services typically have high costs, but they are vital for local communities, which makes consumers willing to pay even higher tariffs that ensure access to such services. Due to the monopolistic nature of these services local water utilities may apply unjustified high tariffs.
Generally, private operators use their monopolistic power to maximise their profit by artificially increasing capital investment and maintenance costs of water and wastewater services, which are consequently reflected in higher consumers’ tariffs. The same can happen with public operators, like in the Albanian case, with increasing costs due to poor productivity of the labour force among other factors.
What happens with public operators however can also be the opposite, i.e. keeping tariffs below real costs for political reasons, which is not efficient, too. In fact, local public operators constantly wait the Central Government to subsidize the costs of water and wastewater services. As a consequence, there is a lack of the required maintenance and investments, that eventually leads to a lower quality of services for consumers.
Given the above reasons, the national Albanian regulator has adopted policies that enable the application of a level of tariffs that covers only the justified costs, hence acting as a barrier against the tendency of utilities to include unjustified costs in the tariffs. Similarly, the Regulator plays an important role in contrasting the tendency of local governments to impose on utilities artificially low tariffs, for political reasons, hence preventing them to fully recover costs.
In short, the national regulator fulfils the same role in monopolistic sectors that competition authorities play in checking market power abuse in non-monopolistic markets, where services are provided by operators to consumers at reasonable tariffs, which are regulated by the market itself.
Following the national reform on the decentralization of the water and wastewater sector in 2007, the Central Government lost its control over the water utilities in terms of ownership of their assets and the power to appoint boards and executive directors of water utilities. Based on the current organic law, utilities are fully under the authority of Local Governments. At the same time, the Central Government is responsible for developing strategies and policies to strengthen the water and wastewater sector, in terms of short, mid, and long-term objectives.
Considering that operators are typically interested in pursuing their close and narrow interests rather than the objectives set by the Central Government, the national regulator is an indispensable instrument to monitor the effective implementation of the law at local level, including the implementation of the Central Government policies, and to set uniform quality standards of services for the utilities towards the customers. On the other hand, the Regulator issues licences to operate water and wastewater services, based on predefined legal and technical criteria that licensed operators have to fulfil.
The majority of water utilities in Albania currently needs subsidies from the Central Government in order to cover their Operational & Maintenance costs. It is necessary to consider also the need for additional costs required to cover the investment in the sector.
On the other hand, none of the local government units in the country can generate enough income from the current local fiscal system, to fully exercise their functions foreseen by the organic law. Currently, the income generated from the local fiscal system cannot cover 100% of the afore mentioned needs. This prevents local government units from being financially strong to subsidize those utilities that fail to cover their costs by revenues generated mainly from the customer bills. In this situation, utilities are obliged to request subsidies to the Central Government to cover their operation and maintenance costs and to finance infrastructure investments in the sector.
The legitimization of such dependence of local operators on national subsidies encourages local government units to keep water supply and wastewater tariffs below real costs, given that in a certain way they are easily subsidized by the Central Government.
In order to ensure that the tariffs proposed by local operators are properly analysed and monitored, and that tariff-related decisions are taken on the basis of justified and affordable costs, the Regulator is the only specialised and independent authority with the right power to ensure that tariffs are defined according to economic and non-political criteria.
It is evident that most local government units do not have the necessary capacity and expertise to comply with the implementation requirements defined in the tariff setting methodology for water and wastewater services. The Albanian regulator can play a significant role in assisting utilities and monitoring the proper implementation of the rules set in the tariffs. The role of the Albanian regulator is also to monitor the correct application of the approved tariffs and the fulfilment of the conditions mentioned in the licence provided to the utility by the Regulatory Commission.
In conclusion, the Albanian Economic Regulator in a monopoly environment plays its role as:
“The institution which sets and monitors rules and tariffs, issues licenses and defines the service quality standards for the water supply and wastewater utilities on the whole national territory".