Irish Water Interim Revenue Control (IRC2)

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Wesley Gibson
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1 Irish Water Interim Revenue Control (IRC2) Public Water Forum 31 st August 2016 James Enright Commission for Energy Regulation

2 Presentation Overview Functions of the CER Revenue Controls why? Irish Water s first interim revenue control Some achievements in IRC1 Recent developments Interim Revenue Control 2 Process to date and next steps

3 Functions of the CER CER s role as economic regulator includes: Advisory role to Minister Approval of IW Water Charges Plan Approval of IW Codes of Practice/Customer dispute resolution Establish and provide support to Public Water Forum Duty to comply with Ministerial policy directions The CER must perform functions in manner that best serves interests of customers of Irish Water: IW operate in an economical and efficient manner Customers of IW provided with appropriate quality of service IW operates in a commercially viable manner Continuity, safety, security and sustainability of water services IW performs functions in open and transparent manner

4 Revenue controls why? Revenue controls set an allowed revenue to cover the costs of utilities usually network utilities: ESB Networks and EirGrid Gas Network Ireland Irish Water The allowed revenue is then recovered through: Charges to generators, suppliers, customers, etc. For water some revenue comes from Government Revenue controls: Ensure appropriate costs for customers Monitor utilities and hold them to account Improve quality of service and customer satisfaction Incentivise the company in relation to targets

5 Revenue controls CER regulates electricity, gas and water utilities using revenue-cap regulation (RPI-X) Under this method the CER sets overall allowed revenue for a utility Allowed revenues = Opex Allowance + Return on Capital + Depreciation Charge +/- Incentives Tariffs are set to recover that amount (exception for water) Financial incentives can be used to encourage increased performance by the utility, e.g. response times to customers Usually there is an annual adjustments (k-factor) of utility revenue Usually adjustments generally feed into tariffs in the upcoming year, i.e. bill increase/decrease (not the case for water)

6 Background IRC1 and IRC2 The first interim revenue control, IRC1, set overall revenue for Irish Water for 1 Oct 2014 to 31 Dec 2016 period. Led to approval of Water Charges Plan IRC2 project sets an overall level of revenue for 1 Jan 2017 to 31 Dec This will lead to approval of a Water Charges Plan for that period, as required under legislation 6

7 First Revenue Control IRC1: Operational Expenditure Irish Water proposed opex of 2.5bn and average efficiency of 2.2% for 2015 and 2016 CER imposed 7% efficiency challenge year-on-year Regulated Asset Base Set at 1,037m (NPV 2013 prices) Inclusive of liabilities transferred from Local Authorities Capital Expenditure CER allowance of 1,383m (NPV 2013 prices) Restricted to 75% recoverable in first review period If Irish Water achieve 100% of funding, efficiently incurred expenditure allowed at next review 7% annual capex efficiency challenge to non-committed capital costs, excl. capital maintenance Weighted Average Cost of Capital 5.1%, real, pre-tax

8 Review of IRC1 ( ) Operational Expenditure Review indicates Irish Water largely met the efficiency targets set by the CER for operating expenditure (7% per annum) Capital Expenditure Review indicates that the overall capital expenditure was within allowance Significant investment in capital infrastructure over the period E.g. Cork Lower Harbour, Ringsend, Vartry Reservoir upgrades in train Irish Water plans to invest 5.5 billion in water services infrastructure for the period to 2021 (subject to CER approval)

9 Sample of IRC1 achievements As of Dec 2015, the number of people on boil water notices has been reduced from over 23,000 to circa 6, million litres per day (Ml/day) of drinking water saved in first eight months of operation of the First Fix Leak Repair Scheme The headroom of water treatment plants in the Greater Dublin Area has increased from a margin of approx. 1-2% to approximately 8-10% currently Over 500km of existing poor quality water mains has been replaced/rehabilitated Major water and wastewater treatment plant upgrades are in train at Ringsend, Vartry Reservoir and Cork Lower Harbour A reduction in the number of water treatment plants on the EPA Remedial Action List (RAL) from 140 (Q1 2014) to 115 (Q4 2015) Irish Water has provided customers with water usage and customer-side water wastage information from the meter reading process 9

10 Recent developments New legislation from Government Water Services Act 2016 Suspension of domestic charges for nine months Suspension of water conservation grant External advisory board put in place Expert commission to look at funding model The CER continues its role as economic regulator of Irish Water Suspension of domestic charges will not impact on the CER s role Continue to monitor Irish Water and challenge it to deliver on objectives for the benefit of its customers

11 Interim Revenue Control 2 Second Interim Revenue Control for (IRC2) Challenge IW to achieve an efficient level of costs and set an allowed revenue to fund its activities efficiently Determining Revenue Requirement required to underpin investment and deliver efficiencies in operations and capital investments Revenue control will decide: Operating costs (i.e. day-to-day running of IW, e.g. fixing leaks, maintenance to network) Capital expenditure (new infrastructure, major projects, non-network capex) Incentives and monitoring of performance

12 IRC2 process to date Activity Date CER discussion paper published April 2015 Engagement re questionnaires & lookback data Mid 2015 to March 2016 Future submissions received from IW April 2016 Engagement between CER and IW re IRC2 forecast Ongoing Consultation period (6-week consultation) September Review of consultation responses October-November Decision Q

13 Thank you.

14 Legislation: Water Services Act 2013 (available here) Water Services Act (No. 2) 2013 (available here) Water Services Act 2014 (available here) CER Water Charges Decision 2014 Ref: CER/14/746 CER Water Charges Decision 2015 Ref: CER/15/005 CER Customer Handbook Ref: CER15/010 Irish Water Business Plan (available here) Irish Water Strategic Plan (available here) Additional reading

Water Charges Plan Decision Paper (Executive Summary)

Water Charges Plan Decision Paper (Executive Summary) DOCUMENT TYPE: REFERENCE: DATE PUBLISHED: QUERIES TO: Decision Paper CER/14/746 30 September 2014 waterchargesplan@cer.ie The Commission for Energy