Shaping the Future of Regulators

The panorama of Portuguese water regulation: Case study on the Water and Waste Services Regulation Authority (ERSAR)

Context

Considering the evolution of the water sector over the last 25 years and given the absence of a clear national water strategy, it became urgent to globally reorganise the water sector. The reality was that a large number of municipalities of small and medium size provided poor quality of service in general, with no proper infrastructure, financial resources or skilled human resources and had difficulties to implement new European standards.

To implement this sector reorganisation, it was necessary to establish a new set of global, integrated and stable public policies, backed by a solid regulatory, legal and institutional framework, but also to define a territorial reorganisation of the services (promoting economies of scale), and new management models. These new governance tools allowed to further develop the water business sector, introduce competition with a focus on full-cost recovery, define service quality goals, improve drinking water quality, and finally promote the consumer protection and awareness.

Although great improvements occurred, this reorganisation process is still ongoing and there is still room for improvement.

The Water and Waste Services Regulation Authority (Entidade Reguladora dos Serviços de Águas e Resíduos, ERSAR) evolved accordingly but challenges remain because efficiency is increasingly becoming a paramount issue for adequate service provision, and further specialisation is required due to the changes occurred in the water sector.

Issues

The regulator’s previous organisational structure was not able to cope with the current and future challenges posed by the changes in the sector. Indeed, the previous organisational structure was based on functional departments, namely two engineering departments (water and waste), a financial and economic regulation department, a legal department and a water quality department. Cross-functional and support departments included IT, finance and human resources, administrative and a strategic projects department focused on crosscutting projects.

Before the organisational reengineering, the major challenges were:

• Knowledge management: Poor specialised knowledge regarding how to interact with different governance models in a context where the regulatory processes differ for each management model.

• Process efficiency: Delays in responding to requests due to:

  • a lack of priority definition, planning and communication between different teams;

  • poor job descriptions, a lack of accountability and task delegation, diverting the focus for operational execution;

  • an unbalanced distribution of work among different professional groups (engineers, economists and legal staff), depending on the management model requirements.

• Service standardisation: A lack of "standardised services” provided by ERSAR, leading to:

  • different outputs, depending on the issuer specialisation;

  • different tariff analysis or investment plan analysis, depending on the analyst specialisation;

  • different water quality characteristics, regardless of the regulated entities supporting management model.

• No segregation of duties between two incompatible regulatory roles: Regulation definition and regulated entities monitoring.

Approach and intervention

In that context, the need to rethink ERSAR's organisation and to convey a more agile and responsive service to regulated entities became necessary. The restructuring focused in three main pillars:

• Having focused teams, specialised in the specificities of each management model, leveraging know-how in similar processes and applicable legislation;

• Providing a single point of contact, aggregating the sector-specific knowledge with different academic backgrounds;

• Having focused team members, acquainted in the specific characteristics of each regulated entity, and able to follow its development.

From another perspective, the perception that regulators are data-driven organisations and that regulation is a data-driven activity, pose additional challenges to ERSAR. New technologies can introduce higher efficiency in the treatment of an increasing volume of data generated by regulated entities, but the use of these new tools also poses challenges to ERSAR and regulated entities, particularly:

• Decide upon the frequency of reports, such as Quality of Service, which is currently done once a year;

• Choose between different data upload mechanisms, which are still based on spreadsheets and that could be replaced by more direct and efficient procedures, based in interconnected information systems, enabling real-time reporting;

• Overcome obstacles related with the access to technology by regulated entities, since not all have the same expertise, financial and technological resources to deal with change;

• Engage with consumers using different sources of information, different platforms, channels and tools, from static internet websites to mobile user centric apps or even analytical powered tools;

• Finally, help regulated entities face Industry 4.0 and Technological disruption, which pose new needs for regulation, specifically, technological and cybersecurity regulation.

Identified key success factors for the change management process and the restructured organisation:

• Clearer duties and responsibilities, job descriptions, skills and competencies for each department;

• Assignment of a single focal point to each regulated entity, following agile, responsive and specialisation key factors, allowing to address three major challenges (service should be understood as the set of governance activities of defining, applying and monitoring regulatory activities):

  • from a service orientation perspective, the possibility for a regulated entity to interact with a single associated department

  • from a department perspective, the ability to address an end-to-end “service provision”

  • from a department perspective, the ability to define a regulatory strategy, implement it and monitor the result, in an overall "service lifecycle" perspective

• Process formalisation, procedure and activity identification, focusing on standardisation and best practice approaches, promoting continuous improvement and the usage of similar tools and methodologies among similar regulated entities and departments;

• Revision of internal and regulatory calendar time constraints, promoting a more balanced result in specific regulatory activities (e.g. rebalancing of concessional contracts);

• Regulatory information system optimisation, with:

  • seamless integration of the different existing modules

  • development and integration of new modules that support the overall regulatory activity, namely reengineered processes, focused in a collaborative approach

  • data centralisation, following a data architecture model that supports the new agile organisation

  • more agile and flexible data input processes from the regulated entities, promoting automatic interaction between IT systems, without neglecting the need to assure eventual information exclusion from less mature entities

  • new analytical functionalities, using state of the art approaches (business intelligence/big data) but also new disruptive analytical technologies (machine learning and data science) and the skills and organisational structure that supports them.

• Overall performance management driven by quality.

Results, impact and lessons learnt

Although the process is not yet finished, the major outcomes can be summarised as:

Results

• One single department that aggregates the interactions with each regulated entity, resulting in bilateral synergy creation, and a closer relationship with the regulated entities, improving the knowledge about the regulated entities.

• A clearer intervention of each department in the regulatory process, enhancing human resources specialisation and knowledge management, higher process efficiency and standardised outputs, with an improved quality of service towards regulated entities.

Impacts

• An improved regulatory process management, focused on each management model lifecycle.

• A more agile and responsive organisation, capable of rapidly adapting the changes in the sector and to react to more disruptive management models.

• A higher satisfaction of the regulated entities regarding the regulator follow-up activities.

• However, it is not yet clear that process efficiency increased and that timely response improved, since:

  • There are still information gaps between teams that undermine priority definition, planning and communication between different teams.

  • Some issues remain in terms of job descriptions, lack of accountability and task delegation, increasing firefighting and diverting the focus from operational execution.

  • A certain degree of unbalanced distribution of work among different professional groups still persists in some areas, depending on the management model requirements.

Lessons learnt and to be learned

• Change management process: A change management process must be in place. Motivational and resistance to change always inhibit the proper development of a move towards an AGILE organisation.

• Continuous process reengineering: It is always possible to further optimise processes. The organisational landscape changed and some tasks/activities are still performed manually, without the proper technological support, by the wrong person, or end up not being executed at all. To prevent this from happening an enterprise architecture approach is being used in order to cover more aspects of the new organisation design: processes, roles, job descriptions, technology and, most of all, business objects that circulate within personal computers, like spreadsheets, limiting the overall perspective of organisational behaviours and information flows, supporting processes and associated technology.

• Culture change: Culture has not yet completely changed. Some misconceptions about a process driven organisation and the ability to regulate in a more project driven AGILE approach persist. An AGILE project driven perspective could benefit the organisation. The power of a fully AGILE team is yet to be obtained.

• AGILE principles: AGILE organisational approaches imply less documentation and more technological collaboration. This is still hard to obtain due to old and lasting habits and the need to formalise all the interactions, leading to a new challenge: simplification and virtualisation of processes.

• Technological regulation: Ability to realise the need for new types of behavioural regulation: technological and cyber regulation, or structural regulation. The impact of new management models leveraged by disruptive technologies, e.g. the “Uberisation effect”, with multi-sided business models and platforms on top of the existing service provisioning. The need to add extra regulation, considering the emergence of IoT (Internet of Things) technology, which enables the transfer of data over a network without requiring human-to-human or human-to-computer interaction. This brings improved operational efficiency but also new risks, not yet known by the sector, such as intrusion and hacking, denial of service, deconfiguration and loss of privacy with possible malfunctions and risks for the overall operation, directly affecting consumers and the regulated entities, with the power of destabilising the entire sector. Technological regulation is therefore increasingly important, with the need to regulate activities impacted by new disruptive technologies.