Regulation & Policies

Water utilities are at the centre of a complex policies system. This is set up as a series of actions and programs defined by the State with the purpose of reaching general interest goals, such as the efficient allocation of the resource to priority uses, equity in access to water services, or water quality. Policy implementation is entrusted to specialized administrations. Despite the differences in vocabulary between countries and academic disciplines, regulation here means a policy that, through sector-specific rules, limits or influences managers' decisions so to make utility practices consistent with objectives of general interest.

What are the main public policies for a water utility?

Which policies contribute to make sludge management safe for society and the environment?

Economic sustainability of the sludge valorization: the role of WWS regulation

How does the PerFORM WATER 2030 project want to address the role of public policies?

What are the main public policies for a water utility?

Two types of policiesare fundamental to determine the social, environmental and economic sustainability of the water and wastewater services (WWS), together with the stimuli coming from the stakeholders and within the European and national legislative framework. Policies' influence is summarized in Figure 1.

  • WWS Regulation
    The installation and operation of systems and networks for WWS generally have natural monopoly characteristics. Since the co-presence of multiple providers in the same community would lead to higher costs for the sector, unlike what normally happens, competition is to be avoided. In this situation, however, it becomes indispensable to regulate the WWS tariffs and quality. Indeed, absent competition pressure, a utility could find itself increasing prices compared to its costs (market power) and neglecting productive and dynamic efficiency (poor cost control and limited innovation). Additionally, to ensure universal access to water, the regulator introduces social tariffs for economically disadvantaged users.

  • Environmental policy
    Uses of drinking water degrade its characteristics, with deriving risks for human health and the quality of the water bodies downstream. Despite the professional and civil ethics of both managers and workers, the utility may not adequately consider the effects of the reduced quality of urban water on both society and the environment (environmental externalities). Obligations and incentives introduced by environmental policies are decisive for inducing the utility to bear the high costs of treatment to the appropriate extent.

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Figure 1. Water utility e public policies

In Italy, the competences for the two types of policy are divided between subjects such as Ministry for Environment, Land and Sea Protection (Ministero dell'Ambiente e della Tutela del Territorio e del Mare, MATTM), Regions, River Basin Authorities and the Italian Regulatory Authority for Energy, Networks and Environment (ARERA, Autorità di Regolazione per Energia Reti e Ambiente) (see Figure 1 for the respective areas of competence in terms of policy types). Technical agencies are then involved in the implementation and control of the policies.

The WWS regulation and environmental policy are fundamental inputs for the decisions of the water utilities regarding how much and how to recycle or recover the sewage sludge.

Which policies contribute to make sludge management safe for society and the environment?

A first requirement that utility decisions must satisfy is reducing the most harmful externalities for society and the environment. In this context, meccanismi sociali play a significant role. First-level stakeholders that suffer the negative effects of disposal and some sludge management alternatives - among them we can identify residents and economic actors located in the production and disposal or use areas - play a stimulating role. Nevertheless, at least in the present situation, a central role in the transition is played by the environmental policies.

The identification of urban sewage sludge as special waste and the support to its valorization are already present in Art. 127 of the Single Act of the Environment (Legislative Decree 152/2006) To limit harmful effects on health and the ones impacting the most on the environment, Command & Control tools are used. The policymaker establishes compliance obligations thanks to the state authority. For Italy, the limits that the water utility and the other actors must not exceed in the disposal and recovery processes have been defined several times; the relevant European directives have been transposed into standards by provisions on the composition of sludge disposed of in landfills (in the year 2003 and in the year 2010) or recycled in agriculture (in the year 1999 and in the year 2018) and in emissions from incineration (in the year 2005). To "reassure" the agricultural input market, the process of recovery and marketing of fertilizers derived from sludge was finally defined (in the year 2010).

Economic sustainability of the sludge valorization: the role of WWS regulation

As the externalities are reduced to safe levels thanks to standards, we must then tackle the economic sustainability of the different recycling or recovery options. In principle, the market mechanisms typical of a full circular economy scenario could be enough to push the utility to decide which management alternatives to adopt. However, as for today, the supply chains for sludge recycling or recovery are not enough developed to the point of steadily generating revenues. It is policy that must convey to the utilities economic signals that encourage the adoption of the most virtuous alternatives.

A first necessary condition for the economic sustainability of recovery is to allow for utility’s sludge management costs in regulated WSS tariff. ARERA's method accounts for the costs associated with the disposal or recovery of sludge among the costs of wastewater treatment and considers them to a significant degree as environmental costs. Furthermore, starting from 2020, the additional costs caused by the "sludge crisis" of 2017 can be allowed for, as an ex-post adjustment, in the tariff.

Secondly, to induce the utility and other players of recovery chains to adopt the most virtuous forms of management on a large scale, economic instruments that lead the utility to "internalize" the negative externalities of disposal or the benefits of the more benign options are necessary. Examples of such environmental policies are the tax on sludge disposed of in landfills (not used in Italy) and measures to support investments in recycling or recovery technologies in the form of co-financing or a tax benefit.

Finally, economic incentives for the valorization of the sludge come from two recent developments in WWS price regulation (the first implementation of these measures is expected in 2020).

  • Within the technical quality regulation of wastewater treatment service, ARERA defined an economic incentive to maintain and improve the share of the sludge disposed of in landfills. The annual target is differentiated among utilities based on the their starting situation. Utilities leading the ranking of the reference cluster obtain a reward, while the utilities positioned at the end of their ranking incur a penalty.

  • The tariff regulation encourages the energy recovery (both thermal and electrical) and raw materials (for example phosphorus or cellulose) from sludge, incentivizing, as adjustment, those who have carried out activities in this area

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Figure 2 missing

Figure 2. Public policies influencing a water utility in sludge management

Figure 2 summarizes the influence of different WWS regulation and environmental instruments on the decisions of the utility about sludge management. It is important to note that the economic instruments activated by the WWS regulation are neutral with respect to technological and strategic options aside from the favor toward recovery. The utility itself chooses the most cost-effective option, given its characteristics and context, and the economic flows created by the policies.

How does the PerFORM WATER 2030 project want to address the role of public policies?

PerFORM WATER 2030 aims to identify which public policies are effective in inducing water utilities to adopt technologies for the recycling and recovery of sludge, while also highlighting for the different tools the contextual factors that allowed their implementation and critical issues, to draw up specific recommendations.

To this end, case studies are underway for a differentiated sample of Italian and European utilities, based on the systematization of secondary information on utilities, collection of primary data from utilities through interviews, analysis of qualitative information. The case studies will also serve to understand the role of regulatory risk in determining the utilities’ strategies. Finally, the project plans to develop recommendations for utilities and policymakers interested in balancing the economic, environmental and social sustainability of sludge management technologies, also considering the joint presence of policymakers' actions and inter-relations with stakeholders.

Overall economic analysis of management options

Project details

Indeed stakeholders are not limited to policymakers, but also include the social ones. Social stakeholders obviusly cannot directly influence utilities' decisions, nonetheless they can play a stimulating role. Therefore we choose to analyse in detail their influence in a dedicated .

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