Economic regulators’ role in supporting the ecological transition of water and sanitation service operators

Economic regulators of water and sanitation services (WSS) across Europe were originally established to address harmful consequences arising from the natural monopoly of the sector. This is reflected in their mandates, practices, and regulatory philosophies. While they apply different tariff methodologies, they share commonalities with respect to the overall objective of preventing monopolistic price abuse by WSS operators and protecting consumers’ interests, while at the same time ensuring that operators are sustainably funded and incentivised to maintain and improve service quality standards. At the European level, these regulators operate in a context where the European Water Framework Directive (WFD) introduced in 2000, requires Member States’ regulation of WSS to reflect not only the economic cost of providing WSS services, but environmental and resource costs as well. However, the shift to a ‘full cost’ model has proved difficult, with no Member State achieving full compliance with this goal even two decades later. This situation underlines the key role that WSS regulators have in promoting and improving the adoption full cost reflective tariffs. Furthermore, in a broader context where climate change exacerbates water risks and increases the need for resilient WSS services, water regulators can also play a crucial role in incentivising and ing WSS operators in making their ecological transition. This paper identifies the current practices employed by regulators in supporting the ecological transition of WSS operators, including reflecting the full cost of WSS services, promoting the adoption of circular economy (CE) practices, and addressing emerging challenges such as micropollutants. It also provides options for new and better ways to support the ecological transition of WSS operators. Finally, it concludes with recommendations to support water regulators in shifting from a narrow ‘regulation of natural monopolies’ focus towards a broader role as regulators of externalities.