Recommendations for Improving the Regulatory Framework in the
Bahamas
Authors: Nils Janson, Glen Laville, and Traci Kuratomi
6 October 2012
Organisation of Caribbean Utility Regulators (OOCUR) Conference 2012
Utility Regulation in the Caribbean: A Case for the Harmonization of Approaches
for Regulation
Introduction
The water and sanitation sector in The Bahamas is marked by inconsistent
results, with some network providers performing well, some consumers receiving
poor service, and the Water and Sewerage Corporation (WSC), the Governmentowned network utility, operating unsustainably. The ineffective regulation of the
water and sanitation sector in the Bahamas has led to results, in particular for the
WSC, that are not satisfactory to customers or to owners of the providers (for
example, the Government in the case of the WSC). Poor results occur when the
regulatory framework does not provide adequate incentives for proper
performance or behavior. This uneven sector performance is closely related to an
ineffective regulatory framework. This paper presents recommendations for
improving the economic and environmental regulation of the water and sanitation
sector.
Economic Regulation of the Water and Sanitation Sector
Challenges of the Economic Regulation of the Water and Sanitation Sector
In a properly functioning market, service providers receive fair and reasonable
returns in exchange for operating efficiently and providing customers with the
service they desire at a price they can afford. Markets in sectors that are
characterized by natural monopoly (a structural lack of competition) will only
function properly if they are governed by effective economic regulation. Economic
regulation is the set of rules and organizations that set, monitor, enforce, and
change allowed tariffs and service standards.1 It seeks to address the problem of
natural monopoly by mimicking competitive pressure. Therefore, poor outcomes
in the water and sanitation market signal deficiencies in the regulatory
framework. Interviews with the utilities, and secondary information provided by
Government authorities reveals three key features of the economic regulation of
the water and sanitation sector.
First, all network providers lack a functioning regulator. The water and sanitation
market in The Bahamas has no functioning regulator. The WSC is assigned
several regulatory functions by the WSC Act, but does not perform these
functions. In addition, it is inappropriate for the WSC to simultaneously operate
as both a service provider and a regulator.
1
Groom, Halpern, and Ehrhardt, Explanatory Notes on Key Topics in the Regulation of Water and Sanitation Services, The World
Bank Group, p. 1
2
Secondly, private network providers appear to perform well despite lacking a
regulator. All three major private utilities charge tariffs that are sufficient to
achieve financial sustainability, operate with a reasonable level of efficiency, and
maintain an acceptable quality of service. The only major problem in the
performance of the private network providers is that NPDC provides poor quality,
highly saline water.
Thirdly, the WSC is not operating on a sustainable basis. The WSC, the largest
network utility in The Bahamas, faces well-documented problems of poor
finances, deteriorating infrastructure, and low quality of service. The deterioration
of WSC’s financial and operational performance has led to a reliance on
government subsidies and a decrease in demand on New Providence. The
deterioration can be attributed to four main reasons. First, the WSC’s cost of
service has increased due to its greater reliance on desalination and due to
increases in the costs of other inputs, such as electricity and fuel. Secondly, the
WSC’s tariffs have fallen below the company’s cost of service. Thirdly, subsidies
available to the WSC have had to be used to cover the increasing operating
losses, which has led to reductions in capital expenditures in the system.
Fourthly, decreased capital expenditures in the WSC’s system have contributed
to a high and rising level of non-revenue water (NRW).2
The WSC’s problems are closely linked to an inadequate process for setting and
reviewing tariffs, which keeps WSC’s rates well below the cost of service. The
WSC has not been able to increase rates since 1999, and must receive approval
from the Minister in order to do so.
Recommendations for Establishing Effective Economic Regulation of Water
and Sanitation in the Bahamas
In order for economic regulation to be effective, it must account for the context in
which it will be applied. Many past regulatory failures have stemmed from
regulatory reforms that are not appropriate for the market and sector that is being
regulated.
There are six key factors that should be taken into consideration when
developing economic regulation of the water and sanitation sector in The
Bahamas. First, there is no competition among the network providers; each
operates within a well-defined service area with limited overlap from other
network providers. Secondly, private wells are a competing source of potable
2
Non-revenue water equals the volume of water put into supply minus the volume of water billed.
3
water. Thirdly, URCA is the most appropriate entity for economic regulation of
water and sanitation, but does not currently have the authority, money, or
capacity to do so. Fourthly, among the network providers, WSC clearly requires
more substantial economic regulation, while the New Providence Development
Company (NPDC), Grand Bahama Utility Company (GBUC), Paradise Utilities
(PU), and other network providers could be regulated on a more limited basis.
Fifthly, the jurisdiction for regulating GBUC is unclear (this is subject to the
outcome of an ongoing court case between the Port Authority and the Office of
the Attorney General). Sixthly, the priority for economic regulation in the sector is
to put in place an appropriate tariff structure and appropriate service standards.
The laws governing the sector must be changed to improve the economic
regulation of the sector. Below, each of the recommendations is presented.
Economic Recommendation 1: Empower Utilities Regulation & Competition
Authority (URCA) as economic regulator
URCA should be activated as economic regulator of the water and sanitation
sector. It is understood that URCA was created with the intent that it would
eventually become responsible for regulating the water and sewerage sector (in
addition to its role as economic regulator of communications sector). URCA is
well-placed to act as economic regulator of the water and sewerage sector for
three reasons.
First, it has the regulatory expertise to successfully regulate water and sanitation
providers. URCA already regulates the communications sector, and URCA is
familiar with the regulatory concepts and processes that will need to be applied to
regulate the water and sanitation sector.
Secondly, it has demonstrated that it has the independence necessary to
regulate objectively. URCA has established and maintained its independence
from both government and industry in order to operate and be seen as an
objective regulator in the communications sector.
Thirdly, the model of a single regulator operating in multiple sectors has strong
precedent in the Caribbean. This model of a single regulatory authority with
responsibility across multiple sectors works well in smaller countries that have
few regulatory experts or a small number of regulated entities.
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Economic Recommendation 2: Limit economic regulation in water and sanitation
to network providers and regulate network providers through differentiated
licenses
It is recommended that URCA limit the economic regulation of the water and
sanitation sector to network providers, and that URCA regulate network providers
through differentiated licenses. In the water and sanitation sector, there are
several entities that are commercial providers of potable water, including
commercial self-suppliers, reverse osmosis producers, and water bottlers.
However, network providers are the only entities that have natural monopolies
and, thus, they are the only entities that should be subject to economic
regulation. Of course, all providers, including the network providers, should be
subject to environmental regulations and regulations related to health impacts.
It is recommended that the network providers are regulated with licenses that
have differentiated terms. This differentiated approach has been successfully
implemented in the Caribbean and in states in the United States. It allows the
economic regulator to focus its resources on the providers with the largest
number of customers, providers with financial difficulties, and providers that are
not providing an adequate quality of service. Differentiated licenses are also
consistent with URCA’s light-handed regulatory philosophy. A light-handed
approach to regulation costs consumers less than a uniform approach, requiring
them to pay for only as much regulation as needed to ensure adequate
performance and sustainability of each provider.
Licenses should be differentiated based on the type of network providers. Three
categories of licenses are recommended: individual licenses, class licenses, and
registration licenses. Individual licenses will require the most oversight by URCA
and registration licenses will require the least. Initially, WSC should be the only
network provider subject to regulation through an individual license. Other water
utilities and independent network providers should have class licenses, which will
initially have no oversight of the tariffs and service standards. For class licenses,
URCA’s oversight of tariffs and service standards would only be triggered if 30
percent of a utility’s customers petition for URCA review. Finally, condominium
associations operating as network providers should be required to register with
URCA under registration licenses, which require no active oversight by URCA.
URCA will only review the performance of providers with registration licenses if a
court determination requests URCA’s expert opinion, or if it receives a petition by
75 percent of the condominium association’s members.
5
All individual and class licenses issued by URCA should include the following key
terms: service area exclusivity, service area obligations, minimum service
requirements, length of licenses, and transition from franchise agreements or
heads of agreement to licenses.
It is further recommended that URCA begin regulating the water and sanitation
sector by regulating the WSC with an individual license. URCA should regulate
the WSC’s tariffs and service standards in a comprehensive rate review taking
place at standard intervals (say every three to five years). This would require
URCA to do three things. First, URCA must regulate the WSC’s tariff. The WSC’s
tariffs must be set at a level that recovers its reasonable cost of service. 3 The
WSC’s rates should gradually transition to a cost recovery level in a process
managed by URCA, which would allow the WSC to improve its quality of service
and justify the rate increases. During the transition, the Government should agree
to pay a subsidy to the WSC that is equal to the difference between the WSC’s
regulated rate and the cost recovery rate determined by URCA.
Secondly, URCA must regulate the WSC’s service standards. Regulating service
standards benefits both consumers and utilities, but URCA must carefully
consider the cost-benefit trade-off that when deciding the level at which to set
service standards.
Thirdly, URCA should use output-based aid to provide targeted subsidies. The
WSC’s geographical subsidies should be replaced with a targeted subsidy that
provides tariff relief directly to low-income customers. This subsidy would cover
the price of a clearly defined amount of water (for instance, the amount of the
minimum consumption block) for targeted poor customers.
Economic Recommendation 3: Fund URCA’s regulation of network providers in
the water and sanitation sector with a fee paid by customers
It is recommended that the Government use a levy in order to pay for the costs
that URCA would incur while regulating the network providers in the water and
sanitation sector. The amount of this levy would be based on the licensee’s
annual revenues and would seek to cover a proportionate share of the relevant
operating costs of URCA for regulating the licensee4. Each network provider
3
Groom, Halpern, and Ehrhardt, Explanatory Notes on Key Topics in the Regulation of Water and Sanitation Services, The World
Bank Group, p. 47
4
These recommendations are consistent with provisions in Section 92 ‘URCA Fees’ of the Communications Act, 2009.
Clause (1) (c) states “annual charges for licences to be calculated based on the licensee's relevant turnover” and (2) (d)
indicates “shall seek to cover a proportionate share of the relevant operating costs of URCA under subsection (d) for the
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would charge its customers this levy; that is, the costs of regulation would be
passed-through from the network provider to its customers. This approach to
paying for the costs of regulation is widely used by regulators since it increases
the regulator’s autonomy. Furthermore, it is reasonable for customers to pay the
costs of regulation since the regulated entity’s customers are the beneficiaries of
the regulation.
In addition, the Government should not charge any volumetric fees for
abstraction of groundwater. In theory, charging households and businesses for
abstracting groundwater might appear to be a reasonable approach for protecting
the resource. However, in the case of the Bahamas, it is opined that
implementing an abstraction fee is impractical and could lead to negative results.
It is believed that the cost of identifying, metering, billing, and collecting
volumetric fees from the users of groundwater would be restrictively high.5 In
addition, an abstraction fee could lead to a higher rate of abstraction and greater
use of what may be unsafe water by households. If the Government charges
network providers an abstraction fee, then network providers would simply pass
through the volumetric abstraction fee to their customers (the households and
businesses). This would make it more attractive for households and businesses
to increase the use of private wells and could lead to even an even higher rate of
abstraction and greater use of what may be unsafe water.
Environmental Regulation of Groundwater Protection and Pollution Control
Challenges of the Environmental Regulation of Groundwater Protection and
Pollution Control
Fresh water in The Bahamas is extremely vulnerable to pollution because of the
thin soils, the high porosity of the carbonate bedrock, and the fact that
approximately 90 percent of the freshwater lenses are within five feet of the
ground surface. However, The Bahamas does not have an effective framework
for the management of water resources and the regulation of groundwater
protection and pollution control.
Responsibilities for managing the environmental threats described above are not
well-defined and are spread across a number of Government agencies and
corporations, including WSC, and various departments and sections within the
performance of its duties under this Act. The fees for a licence shall be proportionate and be published in an appropriate
and sufficiently detailed manner, so as to be readily accessible”.
5
It has been estimated that there may be as many as 40,000 private wells on New Providence alone.
7
Ministry of the Environment. In some cases, such as for the WSC, the
responsibility for these regulatory functions is misplaced and should be
transferred to another entity. In other cases, such as for Environmental
Monitoring and Risk Assessment Division (EMRAD) and the Department of
Environmental Health Services (DEHS), agencies have not been provided with
the adequate human and financial resources to carry out their respective
responsibilities.
As a result, the Government does not have in place the capabilities required to
effectively address the environmental threats to the groundwater supply (SENES
2005, WMC 2003, Hadwen and Cant 1980). There are four key threats that affect
the groundwater supply. The first key threat, salt water intrusion, results from
over pumping of aquifers is a chronic threat. Past studies have indicated that
overexploitation is more likely to be a potentially critical problem on New
Providence and Bimini (Cant 1980).
The second key threat is improper disposal of sewerage and sanitation. The
WMC study (2003) indicated that over 65 percent of the groundwater samples
collected in the Bahamas showed signs of microbial contamination, most likely
from septic and other sources of sanitary wastewater. This is evidence of a
significant threat to aquifer water quality and, potentially, to human health.
The third key threat is problems with wastewater disposal and discharge wells. In
The Bahamas, the most common way to dispose of wastewater from wastewater
treatment plants is to inject it into deep, saline aquifers below the shallow
freshwater and brackish aquifers which are the source of potable water. Poorly
installed, maintained, or operated deep disposal wells represent a significant,
potential source of contamination to groundwater resources.
The fourth key threat is problems resulting from excavations below water table.
Excavations below the water table have the potential to cause the pollution of
groundwater by causing sea water intrusion and exposing the aquifers directly to
surface derived pollution. The most significant instance of below water table
excavation occurred with the construction of the Grand Lucayan Waterway
across Grand Bahama. This man made canal bifurcated one of the largest
freshwater lenses in The Bahamas and caused partial sea water intrusion (WMC
2003).
Additional, lesser threats to groundwater protection result from industrial and
commercial activities, solid waste disposal, agriculture, and storm surge.
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Recommendations for Environmental
Protection and Pollution Control
Regulation
of
Groundwater
The current legal and regulatory framework allows for and perpetuates poor
results in the water and sanitation sector. In order for environmental regulation to
work properly, it must account for the context in which it will be applied.
There are five key factors to consider for the environmental regulation of the
water and sanitation sector in The Bahamas. First, fresh water resources in The
Bahamas occur only as groundwater and the fresh groundwater floats as lenses
on brackish groundwater, which increases in salinity with depth. Thus, freshwater
lenses are extremely vulnerable to pollution. Secondly, reverse osmosis plants
have become a key source of potable water. Only Andros, Abaco, and Grand
Bahama have adequate water resources to meet current demands. Thirdly, there
are a large number of private wells in The Bahamas, which has led to concerns
about over abstraction and salt water intrusion. Fourthly, the provision of
sewerage services is limited in The Bahamas. Over 50 percent of the wastewater
produced on New Providence goes to individual septic systems; on the Family
Islands septic systems are the predominant wastewater treatment practice for
residences. Fifthly, industrial and commercial activities as well as agricultural
activities are limited in The Bahamas. However, there have still been spills and
problems resulting from improper disposal of wastes.
The regulatory framework in place for protecting groundwater and controlling
pollution must be significantly improved to address the serious environmental
threats faced by The Bahamas. In order to improve the environmental regulation
of groundwater protection and pollution control, it is recommended that the
Government make three key changes to the environmental regulation of the
sector. Each of these recommendations is described in further detail below.
Environmental Recommendation 1: Create an Environmental Regulator and
Groundwater Protection Unit
The quality of the fresh groundwater resources of The Bahamas are under threat
due to the lack of a comprehensive regulatory regime and resource
management, and the lack of a monitoring and pollution prevention program. In
order to develop and implement an effective program, it is recommended that an
Environmental Regulator for Groundwater Protection Unit be created as a new
section within the Environmental Monitoring and Risk Assessment Division
(EMRAD) within the Department of Environmental Health Services. Creating the
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Environmental Regulator as a new section in EMRAD is beneficial for several
reasons. First, experience has shown that it is more effective and efficient to
transform an existing entity than it is to create a new entity. Secondly, EMRAD’s
functions are already closely aligned with the role and responsibilities
recommended for the Environmental Regulator. Thirdly, two key agencies with
which the Environmental Regulator must coordinate, the Bahamas Environment
Science and Technology Commission (“the BEST Commission) and the
Department of Physical Planning (“the DPP”), are located in the Ministry of
Environment.
The Unit should have two sub-sections: the Groundwater Resource Management
subsection, which monitors and manages groundwater resources, and the
Groundwater Quality and Pollution Control subsection, which reviews and
approves applications for discharging groundwater. The other key responsibility
of the Environmental Regulator is to provide support for all relevant Government
entities with functions related to water management, including land use planning,
building regulations, product controls, solid waste management, the prosecution
of environmental offenses, environmental impact assessments, clean-up order,
and environmental education and public awareness.
In order to ensure the effectiveness of the Environmental Regulator, it is
recommended that the Government should do three things. First, the
Government should strengthen the regulatory enforcement of existing laws.
There are existing laws and codes in place that could be used to enforce good
management of and control certain threats to the groundwater resources.
Secondly, the Government should expand and codify the draft Wastewater Policy
prepared by the WSC, which would provide an excellent basis for a national
sanitation policy. Thirdly, the Government should publicize major offences related
to the environment in general and groundwater resources. Experience in many
countries has shown that raising public awareness, and garnering grass roots
public support and “policing” are key to building the political and corporate will to
proactively protect and manage environmental resources (Cable and Benson,
1993)
Environmental Recommendation 2: Institute the Phased Development of the
Environmental Regulator
The creation of the Environmental Regulator and the staffing process should be
phased over a three-year period for budgetary and institutional development
purposes. In its first two years, the Environmental Regulator should focus on New
Providence, where the risks and challenges are greatest. Then, in the third year,
the Environmental Regulator should expand its focus to Grand Bahama. In
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ensuing years, the Environmental Regulatory should focus on the remaining
Family Islands.
Environmental Recommendation 3: License all non-residential entities
Licensing of all non-residential entities that abstract groundwater, including
commercial enterprises and utilities, is recommended. However, the
Environmental Regulator should not license properties, such as gated
communities, if they do not abstract a volume of water above a minimum
threshold. The licensees should be charged an annual licensing fee to cover the
Environmental Regulator’s costs of licensing and monitoring the groundwater.
In addition, all non-residential entities that discharge wastewater into
groundwater disposal wells should be licensed and charged an annual licensing
fee for covering the Environmental Regulator’s costs of licensing and monitoring
the groundwater disposal wells.
Conclusion
Establishing an effective regulatory framework for WSC will not be sufficient for
transforming the utility into an efficient and financially sustainable water utility.
Experience in other countries has shown that regulatory authorities face
particular challenges when trying to regulate a company that is owned and
controlled by the Government.6 This means that, in addition to improving the
economic regulation of the WSC, the Government will have to consider actions,
such as incorporating incentives that may only be binding through private
investment in and management of WSC, to achieve its objectives.
6
Ehrhardt, D. and Janson, N., Can regulation improve the performance of government-controlled water utilities?, Water Policy, Vol 12
No S1 pp 23-40, 2010
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Presenter’s Biography – Mr. Nils Janson





Mr. Janson is an economist and financial specialist who advises
governments, financial institutions, and private investors on strategies for
developing, financing, governance, restructuring, and regulation of
infrastructure.
Mr. Janson has over 20 years of experience in the field, and over 10 years
of internationally recognized experience in water sector reform, the
regulation of the water sector, and tariff restructuring.
Mr. Janson specializes in business valuation, financial analysis, due
diligence, and pro forma financial modeling of companies and investment
vehicles in the water and energy sectors.
Mr. Janson’s experience also includes designing and implementing PPP
transactions in the sector.
Mr. Janson has worked in more than 30 countries in Latin America and the
Caribbean, Africa, Eastern Europe, and the Middle East. In the Caribbean,
Mr. Janson has worked with utilities in Antigua and Barbuda, The
Bahamas, Barbados, Belize, Dominica, Grenada, Saint Lucia, St Kitts and
Nevis, and St. Vincent and the Grenadines.
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Contact Information for Authors
Mr. Nils Janson
Senior Vice President
Castalia Strategic Advisors LLC.
1747 Pennsylvania Avenue, NW 12th Floor
Washington, DC 20006
+1 (202) 466 - 6790
Nils.Janson@Castalia-Advisors.com
Mr. Glen Laville
General Manager
Water and Sewerage Corporation
Thompson Boulevard
PO Box N-3905
Nassau, Bahamas
wcglaville@wsc.com.bs
Traci Kuratomi
Senior Analyst
Castalia Strategic Advisors LLC.
1747 Pennsylvania Avenue, NW 12th Floor
Washington, DC 20006
+1 (202) 466 - 6790
Traci.Kuratomi@Castalia-Advisors.com
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