Energy Cost Recovery Issues for Water Utilities

I.  Overview 

In the water supply and wastewater sector, out of the 57 water utilities (WT), 48 fail to cover their operating and maintenance (O&M) costs. Electricity costs in the water and wastewater sector account for about 30% of the total O&M costs.  The utilities that fail to cover O&M costs secure their financial survival through central government subsidies, and/or by not paying their electricity bill to the Albanian Power Distribution Operator (OSHEE). This situation has led to an accumulated debt of 10.7 billion ALL (about 89 million euros) of this sector to the OSHEE, which together with interest arrears over the years amounts to about 19.5 billion ALL (about 162 million euros).

Under such a situation, the Water Regulatory Authority, with the support of OSHEE, has undertaken a study that analyzes the situation in detail, as well as provides relevant recommendations for water sector to get out of this state. The study provides a key approach to assessing this situation as well as some recommendations as a starting point for solving the problem. The analysis is mainly focused on 6 water utilities, the amount of debt of which accounts for about 63% of the total debt of the water and wastewater sector to OSHEE (see Table No. 1). Energy costs for these utilities range from 40 to 60% of O&M costs. The conclusions and recommendations from the analysis of these 6 companies have a generalizing character for the entire sector.

Table No.1 O&M Costs and Accumulated Debts from Energy Costs for the Water and Wastewater Sector (2020)

II.  Study Approach

The problem of water utility paying their electricity to OSHEE is complex. In order to reduce the debt created to OSHEE and create solvency for the ongoing energy bill, this study focuses on the following four factors:

  1. Increasing electricity efficiency and performance indicators for water utilities;
  2. New tariff plan for water supply and sewerage services;
  3. Partial / full subsidy from the state budget;
  4. Reduction of electricity tariff for water utilities.

The study analyzes only the first three factors, because given the current state of the energy crisis, the fourth element is not currently seen as an opportunity to be considered.

III.  Increasing Electricity Efficiency and Performance of Water Utilities

The increase in electricity efficiency is generally related to physical investments, mainly in the pumping stations of the WUs and WWTP systems, but also in the revision and improvement of the hydraulic schemes of these systems.

Every WU should have an Energy Efficiency Plan (EEP), which analyzes the efficiency of electricity use, mainly in drinking water and wastewater pumping stations, as well as in wastewater treatment plants (WWTP). Referring to the 6 WUs considered in this study, Kavaja WU, Kruja WU and Kurbin WU do not have any EEP, therefore drafting such plans must be a priority for them.

One of the main performance indicators related to electricity consumption is Non-Revenue Water (NRW), which for the 6 companies considered ranges from 52% – 80%. Table no. 2 gives the values of NRW and average consumption liters/day, per person. It is found that the utilities of Durrës, Vlora and Fier that have very high values up to 80% of NRW also have a very high rate of daily water consumption per capita in liters. This shows that compared to the real water demand, these companies pump more than their volume of water needs, which impacts in an over-consumption of electricity. These utilities must be seriously committed to reduce their NRW i.e. the technical and administrative losses, thus reducing and the electricity consumption.

Table no. 2 NRW and Average Rate of Produced Water, year 2020

In particular, other performance indicators should also be considered and analyzed, mainly, Collection Rate and Staff Efficiency.

IV.  New Utility Tariff Plan

O&M cost recovery can be partially or completely achieved by increasing revenues by increasing the tariff of household customers (HC) for the water and wastewater services based on the criteria of justified costs, as well as the affordability of the customers to pay the water bill (not exceeding the value of 5% of average monthly household expenses).

Table no. 3 presents in absolute value (ALL/month) the current average monthly bill for household customers (average 4 persons/household with an average consumption of 100 liters/day/inhabitant) for W and WW services provided to customers. It also provides the average expected monthly bill, which would enable 100% coverage of O&M costs of companies (in ALL/month), and the related increase needed, as well as the maximum invoice threshold to respect the affordability criteria.

Table no. 3 Expected average current monthly bill and Affordability level

It is noted that the utility that results in the greatest need to increase the tariff level is Patos with 79%. In fact, regarding the requested tariff increase, the Affordability Criterion is respected, but in most of the above utilities, a very high and immediate tariff increase is required, which in general can create a strong negative reaction from consumers, especially for the utilities of Patos, Kavaja, Kruja, and Kurbin. For a tariff increase for W and WW services considered reasonable and acceptable, a case-by-case analysis must be performed for each utility. The deficit that would be created by a gradual increase (not immediate) of the tariffs, which does not make possible for a full payment of the electricity bill to OSHEE, would have to be compensated by the subsidies allocated by the central government.

V.  Subsidy from the State Budget

Based on the justified needs of the utilities to cover 100% of O&M costs, in order to enable the continuation of the activity, the central government, through the National Agency of Water Supply, Sewerage and Waste Infrastructure (AKUM) subsidizes a part of O&M direct costs. For 2020, the real need for subsidizing the sector has been 1.34 billion ALL (about 10.8 million euros). 47 WUs have received subsidies from the state budget during 2020 in the amount of ALL 0.72 billion (about EUR 5.8 million), but there were still ALL 0.9 billion (EUR 7.3 million) uncovered or about 23% less than the real needs for subsidies. The subsidy from the central government should be carried out in full in accordance with the needs of O&M cost recovery because the shortage generally leads to non-payment of the electricity bill to OSHEE.

Conclusion

  • Improving the financial performance of water utilities vis-a-vis OSHEE to enable the settlement of liabilities to the latter, requires a case-by-case analysis of each utility, combining the three factors addressed above.
  • Increasing electricity efficiency and overall performance for WSS companies should be achieved through a performance contract, based on a realistic analysis and assessment of Key Performance Indicators (KPIs), as well as their objectives, including AKUM and WRA. In the performance contract, the main focus should be on the KPIs, especially NRW, Current Collection Rate, and Staff Efficiency.
  • Companies must apply to the WRA with a new Tariff Plan, which in compliance with the WRA criteria for the approval of tariffs, can cover up to 100% of O&M costs, i.e. liabilities to energy bills to OSHEE.
  • OSHEE must put pressure through all legal instruments against water utility debtors in order for them to create the necessary liquidity and settle their liabilities.
  • The performance contract and the new tariff level should serve as a basis for the real assessment of the needs for subsidies for each utility owing to OSHEE.
  • Liabilities related to interest arrears on unpaid energy bills of WUs to OSHEE are proposed to be able to be reviewed and liquidated by separate agreements between each utility and OSHEE.
  • Utilities should be aware of and make every effort that contributes to increasing energy efficiency, and consequently reduce energy consumption and its cost, starting with the development of energy efficiency plans.

VI.  Case Study – Durrës WU

Durrës WU is the utility which has the highest accumulated debt to OSHEE (ALL 6.1 billion), where the accumulated real debt is ALL 3.2 billion and the corresponding interest ALL 2.9 billion. In this utility, the share of the cost of electricity in the total O&M costs for 2020 is about 55%.

The utility, in addition to the existing water supply system, has introduced a new system in Fushë Kuqe aquifer with an additional flow of about 637 liters/sec. All of its component systems of water supply, sewage, and wastewater treatment plant operate with mechanical lifting, which makes the cost of electricity for this utility the highest in the sector.

Given that in general the pumping stations throughout the service area are relatively new and with high pump efficiencies, it seems as non-essential to reduce the electricity consumption by this factor by increasing the efficiency of the pumps.

The “NRW” indicator for 2020 was 80%. Improving this indicator for Durrës WU should be the main focus of this utility, to increase the financial income of the utility from illegal connections and abuses with billing, which would increase the solvency of the utility against its obligations to OSHEE. On the other hand, this would influence the increase of the quality of customer service, because the reduction of NRW would lead to the increase of water supply hours for consumers.

Analyzing the complexity of water supply systems in its service area, in addition to the commitment to reduce administrative losses, there is still a need for investment to reduce this indicator in terms of physical losses, mainly in their distribution networks.

The current average bill for household customers served by Durrës WSS is 1,900 ALL/month. In order for the O&M costs of this utility to be covered 100% through the invoiced income, it is necessary that the level of invoicing to customers be increased by approximately 9%. This increase would make the average monthly bill increase by about 174 ALL/month and the bill reach the value of 2,080 ALL/month. But referring to the collection rate that determines the revenues collected for 2020, to cover the costs of O&M the tariff would have to be increased even more, which seems unacceptable and outside the WRA criteria for the approval of a new tariff plan. This situation leads to the need for continuous subsidies from the state budget of Durrës WU.

In conclusion, in order to improve the financial situation of Durrës WU and to enable the coverage of direct costs of O&M and then the total costs, the following proposals are made for Durrës WU:

  • Enter a Performance Contract with objectives arising from an in-depth analysis of the utility’s key performance indicators (KPIs) and the possibility of improving them year after year. Given a water production rate of 348 liters/day/inhabitant, the NRW indicator of 80% and the Unacceptable Current Collection Rate of 59% should be analyzed;
  • Durrës WU operates with a staff efficiency indicator of 5.16. It is necessary to improve this indicator to reduce redundancy and reduce O&M costs.
  • Apply to WRA for a reasonable and acceptable increase of existing tariffs, based on the update of the current 5-year Business Plan of the utility, where the criterion of affordability is met;
  • Continue subsidies from the state budget, to partially meet the needs to cover the direct costs of O&M based on the realization of performance contract indicators;
  • Enter into a contract with OSHEE for the liquidation of accumulated debts, extended on time based on the terms of mutual agreement;
  • As Durrës WU has not yet repaid investments made in the past (interest and principal), the need to cover the total costs of the activity in the future, including a high bill of electricity costs (including debts accumulated), it is recommended to create an opportunity for Durrës WU to have its independent source of electricity to fully or partially meet its needs for electricity, through alternative renewable sources. This idea is further reinforced by the current energy crisis, from which a further increase in the price of electricity is expected.

Note: This article was prepared by Ndriçim Shani, Chairman of Albanian Water Regulatory Authority (WRA) and Ana Ismailaja, Specialist at WRA