The Challenges of Ensuring Security,
Affordability and Equity
Economic Regulation of Water
Cathy Mannion
Director
Commission for Energy Regulation
Overview
1. Background
2. The Emerging Model
3. Form of Regulation
4. Regulatory Challenges
Background
• Water services currently provided by 5 city councils and 29 county
councils
• Annual financing costs: €1.2bn
• Opex: €715m
• Capex: €500m
• Non-domestic charges finance €200m
• State finances the €1bn balance
Background
• State has invested €5bn in infrastructure over 2000 – 2012.
• Rate of expenditure unlikely to decline in coming decade
due to:
- poor state of network – huge leakage etc.
- population growth
-business demands (Forfas Report 2008)
-EU obligations (Water Framework Directive)
Background
• Room for efficiencies
- Opex per connections is higher than UK by 50% - 100%
- Leakage levels (41%) are double UK average (20%)
- Employees per water connections/customer served are
higher than in U.K.
- Collection rates for non-domestics in Ireland (53%) lower
than U.K. average collection rate (78%).
Emerging Model
– Centralised delivery of services in one utility, Irish
Water
– Irish Water to operate service level agreements with
Local Authorities (tool for driving efficiencies in opex)
– All users charged for the provision of public water
services
– Universal free allowance
– Affordability measures
– Roll out of meters by [2014]
– Charging commences 2014
– Independent economic regulation of water services –
CER
Why Regulate Networks
• Monopoly Function
• Protection of Customers
• Efficient Operation
• Appropriate level and type of investment
• Sustainable development of the network
• Quality of service
• Transition from Local Authority model to centralised model at lowest cost
Overview of Revenue Regulation
• Opex and Capex
• Regulated Asset Base
– Asset values, lives and depreciation profile
– WACC - return on investment
• Incentives
– Cost reduction
– Outputs
– Service improvement
Building blocks of the price control
Allowed revenues =
Asset lives
Depreciation
RAB
Cost of capital (WACC)
Opening RAB
+ Return
+ OPEX
+ CAPEX
– Depreciation
(+/-) Adjustments
& Incentives
– Disposals
9
Revenue Regulation
• Multi-annual revenue control framework (electricity and gas)
– Provide certainty and flexibility to manage costs and gain efficiencies
• Strong incentives for efficiency
– Tariff revenue must be less than or equal to an approved amount, less an
efficiency factor
– Efficiency gains are shared with the customer
• Review of historic and future expenditures and revenues
• For Irish Water, the first revenue control would focus on setting the
appropriate baseline and key targets for coming years
standard approach when costs are known
Regulation in initial period
• Service Level Agreements not fully in place
• Irish Water unable to make a detailed cost submission to
CER
• Roll out of meters incomplete
• Decisions required by year end:
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Universal allowance
Treatment of affordability
Level of state funding
Level of investments
Total opex
Enabling legislation
• 2013, CER consults on tariff structures
Tariff revenue
requirement
Regulation in initial period
• Priorities
– Consult widely on domestic tariff structures and levels
for metered and unmetered supplies
– Require IW to put in place a Customer Charter
– Establish a dispute resolution service
– Give IW incentives to maximise recovery of nondomestic charges
– Review structure and level of non-domestic charges
and consult on approach to harmonise charges
– Establish a robust CER function for the economic
regulation of water with the necessary skill set
Regulatory Challenges
• Examples:
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–
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A new charge in bad times
Public acceptance that water charges are required
Communicate clearly and openly
Setting of charges for unmetered supplied
Universal allowance/affordability measures
Scale and duration of continued exchequer funding
Driving efficiency during period of reformation (SLAs)
Significant capital expenditure required to bring
infrastructure up to new standards
Thank You
cmannion@cer.ie