WAREG Secretariat interviews Andrea Guerrini on the recent release of the Technical Quality Indicators in Italy.
The Italian Regulatory Authority for Energy, Networks and Environment (ARERA) has released technical quality indicators for 2018 and 2019. What are they, and how do they work?
ARERA introduced performance indicators on the technical quality of water utilities back in 2017 but only since the current year a true sunshine regulation came into operation. ARERA’s new regulation on the technical quality of water services links tariffs to the ability of utilities to achieve specific objectives defined by the regulator, by means of six indicators inspired by EU legislation, that measure utilities’ performance on the following dimensions:
- water losses;
- quality of water delivered;
- continuity of water supply;
- adequacy of the sewerage system;
- sludge disposal;
- quality of purified water.
On the basis of the data requested to the regulated water companies, ARERA grouped them into clusters according to their starting performance level in the year 2016 and set annual targets to improve performance in each cluster (or maintain good performance achieved) until the end of the year 2019. Additionally, ARERA defined a multi-level set of rewards and penalties linked to utilities’ performances in the years 2018-2019, going from basic to advanced and excellence. For each level, a merit list is drawn up and the top 3 (or worse 3) performers are allowed an increase (or penalized by a decrease) in tariffs.
The publication of Technical Quality data, jointly with other regulatory instruments adopted by ARERA, is a best practice in promoting transparency in the water sector, contributes to attract investments, and fosters competition through reputational drivers based on a public confrontation of performances in different geographical areas of Italy.
What kind of objectives does ARERA wish to achieve by the technical quality regulation, and how do indicators help reach them?
The technical quality indicators are intended to signal to utilities and consumers the level of water service quality, and they offer an official snapshot of the real state of water services quality in Italy. With this initiative, however, I believe that three key objectives are met, well in line with ARERA’s new strategic framework for the four years 2022-2025, and specifically: a) to stimulate innovation in the Italian water sector, b) to increase the climate resilience of water infrastructures and c) to increase transparency and the level of consumer awareness:
- The first objective is to promote innovation. The regulatory rewards for utilities’ performances pushed in the past and currently still push water companies to implement innovation processes aimed at improving their operating results against predefined targets, that the market alone would not be able to address, considering the typically monopolistic structure of water utility services. In fact, the indicators serve as an indirect stimulus set by ARERA to increase service quality, while at the same time leaving companies free to choose the most appropriate tools in terms of technological solutions and investment priorities. However, technical quality indicators could also serve as a direct tool for innovation. For instance, ARERA has recently created a fund for innovative pilot projects submitted by Italian utilities. And it is clear that in order to access these funds, pilot projects will have to demonstrate their potential to improve utilities’ performances against the technical quality indicators.
- The second objective is to strengthen the climate resilience of water infrastructures. From this perspective, technical quality indicators can be used by water utilities as useful tools for their internal cost-benefit analysis to select investment priorities for different objectives. Therefore, utilities can be stimulated to increase their performance not only with reference to economic efficiency objectives but also to environmental objectives like EU targets on decarbonisation and energy efficiency, which are typically negative externalities that the market is unable to address and that would otherwise be neglected. For instance, ARERA’s technical quality indicators can enable utilities to develop environmental risk mitigation measures and to increase investment levels on more climate-resilient infrastructures in Italy.
- The third objective is targeting the consumers rather than the regulated companies, by means of strengthened transparency of information. In fact, the new graphic presentations of ARERA’s indicators are designed for a non-technical public, and more generally for all consumers, who will now be able to easily access the data and compare the quality of the services offered in every city and region of Italy. This also brings a great opportunity to ameliorate water services in our country, by generating further incentives for utilities to compete for their accountability towards their end customers.
On which aspects did ARERA mostly focus to elaborate the technical quality indicators?
In the process of creating the indicators, ARERA worked on the data set already collected at the regional level by the so-called Optimal Territorial Entities (ATOs), which are supraregional entities that represent all the municipalities in a specific geographical area. The ATOs have the power to collect and make a preliminary certification of the data requested by ARERA from the water utilities. A final and official certification of the data is then carried out by ARERA, hence allowing an ‘official’ picture of the water sector in Italy, that can be used to design and implement policies at the national level. For example, the data on the technical and contractual quality indicators were used by the Italian government to plan the interventions in the water sector included in the National Recovery and Resilience Plan.
In addition, we focused on constructing an incentive system that would reward not only the usual top performers (typically in Northern Italy), but also generate incentives for the weakest performers to grow. From this point of view, the real innovation of the new benchmarking system for the water sector in Italy lies in the economic nature of rewards and penalties, as they are directly reflected in the drinking water and sewerage tariffs and allow to increase the efficiency of expenditure on service quality. Finally, we have tried to make these data easy to read, so that users can better understand and compare them.
In the process of implementing the macro-indicators, what were the main difficulties encountered by ARERA?
The process of data collection and analysis was not easy. ARERA had to design an incentive system that would identify and then fairly reward or penalise utilities based on their performance. Another difficulty we encountered is the level of data collection. To date, we have data from 203 operators, which altogether cover only 84% of the national population, a situation that is improving from last year, and that we are monitoring. A large part of the missing information comes from 2 regions that, to date, do not cooperate with ARERA in the data collection process, hence are are subject to investigation. Other utilities have struggled to transmit data on time and will have to improve their internal processes to comply with the deadlines set by ARERA.
Other European countries have already implemented Sunshine Regulation models. Has ARERA looked at these examples when creating the technical quality indicators?
Yes, in the realisation of the quality indicators, we certainly also looked at other successful experiences of Sunshine Regulation in Europe. In this sense, participation in the WAREG Association was fundamental and remains strategic for ARERA, allowing us an immediate comparison with regulatory authorities from 16 EU countries and 8 candidate member countries. Undoubtedly, the new sunshine regulation in Italy aims at reaching the most advanced regulatory experiences in Europe and, more in general, to offer another good example of the role that independent regulators can play in Europe to support the full implementation of EU water directives and regulations transposed by national Parliaments. In this sense, I believe that European Regulators in WAREG can act as the ‘operational arm’ of the objectives set by the European Commission, as they have the power to collect very relevant data for the European water sector.
Professor Andrea Guerrini is Commissioner in the Italian Regulatory Authority for Energy, Networks and environment-ARERA the national independent regulator with tariff-setting and consumer protection powers on electricity, gas, water, wastewater and waste services. He is also President of WAREG, the Association of European Water Regulators based in Milan and in Brussels.