At the Danish Water Regulatory Authority, we work to ensure that water and waste water companies become more efficient all the time. One of our primary tasks is to set revenue caps for the water and waste water companies. This means that water prices are continuously lower than they would otherwise have been. This contributes to growth, higher consumer welfare and enhanced competitiveness for water-consuming companies in Denmark.
The water sector is characterised by natural monopolies and is therefore not subject to the competition that exists in a well-functioning market. Financial frameworks (revenue caps) that contain efficiency requirements and set an annual ceiling on water companies' revenues contribute to an artificial competitive pressure in the sector, which contributes to efficient operation, lower prices and more innovation.
Setting revenue caps also consists of benchmarking.
We set revenue caps for all municipally owned water and waste water companies as well as consumer-owned water utilities that supply, process or transport a minimum of 200,000 cubic metres of drinking water per year to consumers and businesses. These companies are also subject to tax.
The revenue cap is designed to ensure that:
- Consumers and businesses do not overpay for water and waste water.
- The companies have sufficient funds to operate, maintain and develop their infrastructure to ensure continued high quality and security of supply.
- The companies are continuously streamlining their operations and systems in line with productivity growth in the rest of the Danish economy.
The water sector has a total cost base of approx. DKK 15 billion. Since 2011, we have set efficiency requirements of DKK 2.3 billion.
Which companies are subject to regulation?
The water sector consists of both water and waste water companies. The size of a water company is defined by the annual volume of charged water. Revenue caps are set for water and waste water companies with an annual charged volume of water over 200,000 cubic metres or water companies that are municipally owned. In 2019, there were 334 water and waste water companies.
Water and waste water companies with an annual charged volume of water below 200,000 cubic metres operate as non-profit companies. This means that, without further financial regulation, the companies are permitted to collect revenue (tariffs) from consumers in their supply area corresponding to the company's costs.
All water companies are also subject to environmental regulation, which includes safeguarding of water quality. Environmental regulation falls under the Danish Environmental Protection Agency.
Water and waste water companies with an annual charged volume of 200,000-800,000 cubic metres of water are referred to as smaller water and waste water companies, while water amd waste water companies with an annual charged volume of more than 800,000 cubic metres of water are referred to as larger water and waste water companies. The main difference is that only the larger water and waste water companies are benchmarked.
What does a revenue cap contain?
The figure below shows what a revenue cap generally consists of for smaller and larger water and waste water companies.
A revenue cap consists of:
- A financial basis that includes the companies' operating, construction and financial costs as well as so-called fixed costs.
- Correction of the fixed costs in relation to what the actual costs have been in the previous year.
- An individual, benchmarking-based efficiency requirement for the companies being benchmarked.
- A general efficiency requirement for all companies regardless of size.
- Annual indexation.
- Historical over or under-coverage. Any remaining over or under-coverage will be recognised up to and including 2020.
- Compliance with previous financial frameworks.
- Additions to the financial framework, if applicable. Additions are provided for climate adaptation projects and extensions of supply areas.
Every year, we send status notifications and draft decisions on new revenue caps to the water and waste water companies for consultation by 15 September. By 15 October of the same year, water companies receive their final decisions on financial frameworks or status notifications. Our responses to the consultation responses are always included in the respective decisions.
We send status notifications and financial frameworks directly to the water companies. All decisions since 2011 are published (in Danish) on the website. Decisions can be appealed to the Competition Appeals Tribunal.
The efficiency requirement in the water sector consists of a general and an individual efficiency requirement.
All companies receive an annual general efficiency requirement. The general efficiency requirement creates the efficiency pressure, which is created by the productivity growth in a well-functioning, competitive market.
The individual efficiency requirement encourages the least efficient companies to become as effective as the most efficient in the sector. The individual efficiency requirement is based on our benchmarking model, which compares the cost-effectiveness of the companies. In this way, the level of the individual requirement reflects the efficiency of the individual company compared to other companies in the same sector. The least efficient companies are given a higher individual efficiency requirement compared to the more efficient companies. The efficiency requirement reflects the potential of each company to become as effective as the most efficient in the sector. This means that the individual efficiency requirement is intended to promote the use of existing technology.
Revenue caps are established on an ongoing basis for one regulatory period at a time.
Smaller water and waste water companies are always given a revenue cap for a four-year regulatory period. Larger water and waste water companies have two-year regulatory periods for a transitional period. From 2022/2023, this regulatory periods will also be extended to four years. For the larger water and waste water companies, the regulatory periods are staggered depending on whether they are a water or waste water company. For water companies, we benchmark and prepare new revenue caps in even years, while for waste water companies this happens in odd years.
During a regulatory period, the water and waste water companies receive annual status notifications that state their compliance with the applicable revenue cap, including whether the company has complied with its revenue caps of previous years.
Annual reporting of data
All water and waste companies covered by the Danish Water Sector Act are required to report data annually for the purposes of our determination and control of revenue caps and status notifications – and for large companies, for benchmarking as well.
The reporting to the revenue cap consists of information from the water companies' annual report as well as information on other matters.
Reporting takes place in VandData, our digital reporting system, in the period 1 March to 15 April each year.