This is the first video on the subject of water regulation. We can think of public regulation of water utilities as another type of policy intervention. We may choose to deploy to improve outcomes in the water and sanitation sector. In almost call cases when they decided that the private sector will play a major role in the delivery of water and sanitation services, this triggers the establishment of a water regulator. In the first video for this session on regulation, I will describe the context for water regulation in low and middle income countries. In the second, third and fourth videos we will take an in-depth look at the regulatory model developed for use in the United Kingdom. In later videos, we will conclude both the session and the course with a discussion of the case of the North Penn Water Authority. Usually we think of regulation as imposing restrictions or rules against undesirable behaviors. There are four main types of undesirable behaviors that often concern water regulators. I find it useful to classify these undesirable behaviors into financial, public health, environmental and social. From a financial perspective, the water regulator may be assigned their task of preventing a water utility from exercising monopoly pricing. From a public health perspective, the water regulator may be assigned the responsibility of ensuring that a private water utility meets drinking water quality standards. Alternatively this regulatory task may be assigned to a health ministry and not the water regulator. From an environmental perspective, the water regulator may be assigned the responsibility of ensuring that affluent discharges from municipal waste water treatment plants do not result in surface water quality violations. Again this regulatory task may be assigned to a separate environmental protection agency, not the water regulator. And from the social perspective, the water regulator may be assigned the responsibility of ensuring that poor households have access to improved water and sanitation services. But as we discussed in our previous videos on the design of subsidies, this regulatory task also may be best assigned to other government institutions. In industrialized countries, the primary task of most water regulators has been to prevent monopoly pricing. In other words, it has been to ensure that private water utilities do not set water tariffs far above their cost. Many public utilities do not have an independent regulator that approves their pricing and tariff policies. This is because it's typically assumed that publicly on water utilities will naturally behave in the public interest and do not need additional regulatory oversight. As we've seen in this course, this assumption is often not justified because public water utilities may engage in a variety of rent seeking and corrupt activities. The most common approach used in industrialized countries to regulate private water utilities is called rate of return regulation. With rate of return regulation the regulator has three main tasks. The first is to determine reasonable expenditures by the private water company. Note how different this is from a private corporation that assumes that commercial risk associated with its expenditure decision. The second is to decide how much profit or rate of return is reasonable given the capital at risk in the risk profile of the business. The revenues is a private water companies that are considered quite secure, so it's assumed that investors and private water companies are not assuming much risk. Regulators thus typically allow rate of return that's relatively modest compared to other corporate enterprises. The third task is to estimate the tariff that will allow the company to recover its cost and receive this predetermined rate of return on its capital investment. The private water company, has a financial incentive to increase its capital expenditures in order to increase the rate base on which its rate of return is calculated. The regulator must thus scrutinize the private water company's expenditures and approve its capital investment plans, to ensure that the companies rate base is not too high. One of the concerns about rate of return regulation is that, the private water company does not have a sufficient incentive to use capital wisely. And will be biased towards capital expenditures, relative to achieving operating efficiencies. In developing countries however, the water regulator often has a different role with respect to pricing and tariff regulation. As we've seen in previous videos the problem in low income countries is not that the water prices are too high. Instead they're typically much too low. In low income countries there's often a regulator that oversees publicly owned water utilities. If the water utility is publicly owned, and monopoly pricing is a remote risk, what precisely is the role of water regulator in a low income country? There's several answers to this question. First, as we've seen, when tariffs are too low, water utilities have less incentive to produce and deliver water efficiently. Here an important responsibility of the water regulator is to nudge water utilities toward more efficient operations. One approach is for the regulator to publicize performance indicators for different utilities. This can enable private citizens in the state to better understand how effectively different utilities are performing. Effectively benchmarking one utility against another. Second, in developing countries where prices are too low, the regulator must play a role in making the case to the government in civil society that tariffs actually have to be increased. In this case, the objectives of the regulator in the water utility are not opposed to each other. It's just that it's often easier and more credible for the regulator to argue for higher prices than it is for the water utility. Third, in developing countries, the regulator has an important role to play in terms of public education and outreach. This can involve various kinds of information treatments as we discussed previously in this course. Fourth, the water regulator may need to be established and staff trained, even though the water utility is publicly owned because there maybe plans for engaging a private operator in the future. Here, it's important to establish a regulatory capacity in advance so that the regulator is in place and ready to do its job if and when an private operator is engaged. If the water regulator in low income countries has several new roles and responsibilities are not common in high income countries. Where would a newly established water regulator go to hire its staff? Who makes a good regulator? In the early 1990s, the World Bank and other international donors first began pushing for the involvement of private operators in the water and sanitation sector in developing countries. But there were few water regulators in low and middle income countries. At the time few people in the water sector had anticipated this shift toward the private sector. Many senior water professionals were both skeptical of this policy shift and untrained in regulation. So as it turned out, most of the professional staff of the new regulatory institutions in low income countries, were hired from the younger generation. This younger generation of water professionals and economists was typically more open to the new ideas. And they needed the jobs in the new regulatory institutions. But where were they to obtain the training they needed to be a regulator? At the time, few universities around the world offered programs in regulation. What happened was that the World Bank provided seed money to the Public Utility Research Center at Warrington College of Business at the University of Florida at Gainesville in the United States, to design a two week course on utility regulation and strategy. The course began in 1997 and is offered twice a year. I had the privilege of teaching in this program for a few years. Over 3,200 regulators, managers, and policy makers from 152 nations have attended the two week program to date. The two key faculty were professors Sanford Berg and Mark Jamison. They've made a tremendous contribution to the field of regulation in developing countries. Also, you can take a look at this link below their names where you can find a variety of resources on regulation. Academic programs and regulatory agencies around the world have used these materials in their own training programs. The glossary is now in ten languages. So if you're interested in working for a water regulatory agency, this course at the University of Florida and the associated resources is a great place to start. Thanks for watching this video.
