Water Sector Regulation

Mohamad Mova AlAfghani

Sunday, November 11, 2012

10:04 AM

Water Services

The term water services in this article refer to the supply of water for domestic or industrial needs and for sanitation. The water supply cycle includes the abstraction, treatment and distribution of water as well as the collection, treatment and disposal of sewage through a sewerage system or direct on-site sanitation. The enabling legal environment in water services consists of two elements: water services legislation and the general administrative and commercial laws in which water services institutions operates.

Since abstractions and the subsequent discharge of wastewater to the environment are regulated through water rights and allocation framework and rules on water quality, this article will deal with regulation beyond the point of abstraction and discharge. This includes the provisions regulating the structure, ownership and control; duties to supply; standards of supply; economic regulation; customer services; and water efficiency. We shall elaborate this below:


Structure - The regulation of water services is shaped by the structure of its industry. Vertically integrated structure has a different need of regulation compared to liberalized structure. While the former focuses only on regulating large-scale monopoly, the latter focuses on coordinating market participants in providing the service, for example, through common carriage regulation.

Ownership and Control

Ownership and Control - The question of ownership and control is a politically delicate one. Legal framework has a role in ensuring that participation channels in determining modes of ownership and control are available. Modes of ownership could vary from full divestiture to "Public Private Partnerships" where some or all parts of the core services are contracted out for a limited time. In some jurisdiction, private sector participation in core services is prohibited. Again, the choice of ownership and control also shapes regulation.


Companies are regulated through license, which in theory, can be revoked if the utility breach its conditions. On the other hand, in "Public Private Partnerships" (PPPs), contracts are often used as an instrument of regulation. This means that provisions on duties to supply; standards of supply; business planning and economic regulation are embodied in a contract. Relying on contract alone may not be adequate in ensuring the quality of service or the independence of a regulatory body. Hence, in addition to contract there may be a need for regulating those features in legislations.

Natural Monopoly

As the natural monopoly and the political character of water are different from other goods, ordinary consumer law is often incapable of tackling consumer problems in the water industry. As such, duties of supply, supply standard and customer service for water services needs to be specifically tailored.

Duties to Supply

Duties to supply - It is important to emphasis that due to the natural monopoly character of water service and the political nature of drinking water, general consumer law and competition law may not be adequate in tackling consumer problems in water services. Hence, it is important that this is regulated in the water services legislation or a public service law. Such legislation may define to whom this duty is owed. The question of disconnection, supply restriction, and protection of vulnerable groups are dealt with in this provision. The quality of drinking water to be supplied such as pressure, biological and physical criteria is defined in the provision regulating supply standard. Some legislation (England and Scotland) only contain requirement that drinking water needs to be 'wholesome' and the detail of the standards is enumerated in a lower implementing regulation. Such implementing regulation may also contain the maximum amount of penalty and fines that a water utility owes to its consumer for breaching the required supply standard. Legislation may also contain a general requirement of minimum quantity of water (20L according to WHO and 50L according to Gleick's Basic Water Requirement) that the utility must supply irrespective of customer's financial situation. The detail of such programme could be outlined in a policy paper or is subjected to the local government's discretion.

Economic Regulation

Economic Regulation - The role of legislation in economic regulation is in ensuring that economic regulators are independent, capable and has adequate power in regulating the utilities. Also, legislation prescribe the rules for selecting members of the regulatory body, its financing mechanism, its power in obtaining information from utilities, the power to conduct investigation and applying sanctions. The rules for tariff setting and the mechanism for stakeholder participation in the regulatory process

Customer Service: Legislation may also contain the rules on customer service. This is differentiated from supply standard and duties of supply as they are meant to regulate the companies dealing with its consumers, such as the question of billing and metering, complain resolution and referral to redress mechanism, if consumer are not satisfied with the utility's response.

Water Efficiency

Since demand management is considered more realistic compared to additional supply, legislation may also contain provisions on demand management, this include the installation of metering tool to induce conservation, hose-pipe bans and other methods of water restrictions during drought. Implementing regulation may also contain the details on the types of tap or toilets to be installed.


Note that in some jurisdictions where contracting out is used as a delivery mechanism, legislation will usually contain only a very general and broad provision on ownership and control; duties to supply; standards of supply; economic regulation; customer services; and water efficiency as most of these would be regulated in the contract. Unless contracting out is regulated, or supplemented by an adequate administrative and commercial legal framework where it operates, this is not the best practice and have sparked some problems in the past.

In addition to the salient features of water services law as elaborated above, it is also important to consider general commercial and administrative law in which water utilities and the regulatory body operates.

Water utilities could be incorporated under different rules and this may have implication on the applicability of administrative law. State-owned water utilities may have its own statute in which case Freedom of Information (FoI) laws are applicable as well as scrutiny by state audit bodies and Ombudsman offices. Corporatized water utility may be regulated under general corporate law and the shares owned wholly or partially by the government. Applicability of FoI law, Ombudsman rules and state audit agencies in this instance may be vague. Hence, unless clarified, there could be doubts as to the applicability of protection granted by general administrative law. If services are fully divested or contracted out through PPPs, by default, FoI, Ombudsman rules and state audit powers are usually not applicable to water utilities. Government could either reform its administrative rule so that it extends its applicability into 'privatised' water services or create another mechanism under water services law.

The rules on transparency and accountability may include the requirement for governments to publish contracts, for regulators to explain regulatory decisions and for the utilities to publish annual report. All of these rules could either be embodied in the general administrative or commercial law or in specific water services legislation.

Good governance in water services relies on the interaction between a specific water services laws and the general administrative and commercial law. For example, while transparency and accountability could be manifested through provisions under the water services law requiring the regulator to publish the utilities performance, more details could be obtained through a Freedom of Information Law. It is therefore important to ensure that water services law and the general commercial or administrative law reinforces each other.

Lessons learned

1. Contracting out water services without adequate umbrella legislation could be problematic. Although services are contracted out, some form of legislation protecting the consumer's rights is desireable

2. General consumer and competition law may not be adequate in solving consumer problems in water services. Either such laws are reformed, or the duty of supply, supply standard and customer services needs to be regulated in a specific water services legislation or a general public service legislation.

3. The enabling legal environment for water services is contingent upon the interaction between sectoral water services legislation and the general administrative and commercial legal settings. General administrative and commercial law may increase the transparency and accountability of water services and address stakeholders participation provided that they are applicable to water services institutions: the regulatory body, consumer council and the water utilities themselves.


1. SM Hendry, 'An Analytical Framework for Reform of National Water Law' Doctor of Philosophy, University of Dundee. 2008

2. MM Al'Afghani, 'The transparency agenda in water utilities regulation and the role of freedom of information: England and Jakarta case studies' 20 The Journal of Water Law 129

3. WHO / UNICEF 2006 Meeting the MDG Drinking Water and Sanitation Target

available at


4. Gleick P, 1996 Basic Water Requirements for Human Activities Meeting Basic Needs Water

International 21 (1996) 83-92 available at http://www.pacinst.org/reports/basic_water_needs/

Tags: #water #GWP #toolbox #regulation