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

The project focused on the use of benchmarking results in the regulatory process in EU countries in the water and wastewater and district heating sectors. Benchmarking is a comparison of similar processes or measures across organizations and/or sectors to identify best practices, set improvement targets, and measure progress. Regulatory benchmarking practice can be implemented as part of both ex-ante and ex-post regulatory processes. It can create an asymmetric risk for the regulated industry, where the best performing companies are rewarded for their higher than average efficiency, and the worst performing companies are not guaranteed to recoup the full cost of equity. The report highlights various target efficiency establishment practices used by regulatory institutions in EU countries. In Lithuania, performance indicators in the district heating and water and sewerage sectors are used to regulate utilities. The regulator collects data from entities, averages the relevant groups, and publicly announces the results every year. The dynamics of relevant averaged KPIs are not tracked or disclosed, but this is considered a technical issue. In Estonia, a reference model in district heating was introduced by the Estonian Competition Authority in 2014. This model is a composite efficiency indicator tailored to three different sizes of entities, allowing entities to freely choose their micromanagement decisions for efficiency while supplying consumers with final efficient prices. The reference price as a result of the composite efficiency indicator sends signals to consumers on their informed decision to choose alternative heating solutions and to those responsible for planning the systems in relevant territories. In Latvia, the regulator is developing a publicly available system of KPIs benchmarking for all entities regulated in both sectors. Before the KPIs are made public, the regulator collects the indicators, operates an internal database, and uses them individually. In Bulgaria, the regulator has a rich database for KPIs in the water and sewerage sector and collects data periodically. However, the regulator uses an individual approach to every entity, assigning efficiency factors based on business plans, and there is no evidence of using comparative analysis results. The report emphasizes the importance of benchmarking in the regulatory process, as it can accurately assess the status/level of regulated sectors and their entities, and significantly contribute to the implementation of necessary incentives. Benchmarking can also reduce the request for regulatory resources to deliver regulatory results, especially in situations where regulatory personnel resources are limited, technical experience is not sufficient, and regulatory objectives are broad and long-term in nature. The report highlights the need to consider the entities' ownership of regulated entities in the benchmarking case. Privately owned companies tend to run for higher profit and may sacrifice quality, while state/municipality-owned companies tend to preserve the level of costs and overinvest in "security," "reliability," and "resilience." The report suggests that a transitory period may be considered, focusing on investment planning, ensuring real possibilities for entities to achieve established targets, and applying a relatively short list of key performance indicators targeting strategic objectives of the state within the sector.