Municipal Energy Reform Project in Ukraine (MERP): Overview of Benchmarking Systems in EU Countries in Water & Wastewater and District Heating Sectors

The study aimed to provide assistance to the national regulatory institution of Ukraine in establishing a utility benchmarking system by providing information on best international practices. The report outlines the variety of Key Performance Indicators (KPIs) used in different EU countries and enables decision-makers to choose the ones best reflecting the situation in Ukraine. KPIs are used for several purposes, including introducing efficiency in the market, increasing transparency, and incentivizing utilities to strive for higher achievements. Regulators use KPIs to make market overview reports and to provide a set of KPIs related to a utility's managerial, financial, operational, and regulatory activities. Benchmarking can have two forms: metric benchmarking and process benchmarking. Metric benchmarking systematically compares the performance of a particular utility against other similar utilities, while process benchmarking compares the effectiveness of a utility's processes and procedures against selected peers. The performance indicator constitutes the mix of both types of benchmarking, and it is a quantitative, comparable measurement of a specific type of activity or output. The report highlights the importance of benchmarking in the water and wastewater sector, particularly in Ukraine, where the greatest attention was given to this sector due to ongoing processes. The study suggests that the set of KPIs proposed for the Ukrainian regulator should reflect the objectives of the state/regulator in the sector and enable the measurement of progress towards achieving these objectives. The concept of benchmarking and its role within the incentive-based system of utility regulation are also discussed in the report. Benchmarking is a powerful and targeted mechanism for regulatory pressure upon utilities to increase efficiency and deliver greater value for consumers. It enables regulators to introduce "virtual competition" among active entities in the case of real competition being absent in the industry. The report concludes that benchmarking or yardstick competition is able to provide a regulator with information on efficient CAPEX and OPEX levels and to reduce the informational rents experienced by regulated utilities. Results of benchmarked efficient CAPEX and OPEX are later used by regulators to set pricing decisions. Benchmarking is also a solid instrument for utilities to assess self-performance, facilitate financial assistance, and refer in the case of advocacy needed. The process of benchmarking cycle consists of several steps, including organizing a benchmarking team, deciding on the project objectives, and selecting the peer utilities for comparison. The report provides a comprehensive overview of benchmarking systems in EU countries and highlights the importance of benchmarking in the water and wastewater sector in Ukraine.