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Water Sector Reform: Implementation and Economic Regulation of Water

This conference discusses the implementation of the Water Sector Reform Programme and the economic regulation of water services. It covers topics such as the emerging model of regulation, regulatory challenges, and the transition from a local authority model to a centralized model in the most cost-effective manner. The conference also addresses revenue regulation, service level agreements, the treatment of affordability, and the level of state funding and investments.

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Water Sector Reform: Implementation and Economic Regulation of Water

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  1. Water Services Training Group 16th Annual Conference Water Sector Reform Programme Implementation INEC, Killarney, 8th November 2012 1

  2. Water Sector Reform Programme Implementation Economic Regulation of Water Cathy Mannion Director Commission for Energy Regulation

  3. Overview • Background • The Emerging Model • Form of Regulation • Regulatory Challenges

  4. 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

  5. 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)

  6. 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%).

  7. Emerging Model • Centralised delivery of services in one utility, IW • IW 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 commencing in 2013 • Charging commences 2014 • Independent economic regulation of water services

  8. 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

  9. 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

  10. Building Blocks of the Price Control Allowed revenues = Depreciation Asset lives RAB + Return Cost of capital (WACC) + OPEX Opening RAB + CAPEX (+/-) Adjustments & Incentives – Depreciation – Disposals

  11. 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

  12. Regulation in the Initial Period • Service Level Agreements in place • Irish Water ability to make a detailed cost submission to CER? • Roll out of meters incomplete • Decisions required by year end/mid next year: • Universal allowance • Treatment of affordability • Level of state funding • Level of investments • Total opex • Enabling legislation • 2013, CER consults on tariff structures and levels • Publish rates in October Tariff revenue requirement

  13. Regulation in the 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 domestic and non-domestic 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

  14. Regulatory Challenges • Examples: • Bad timing for setting water charges • 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 state funding • Driving efficiency during period of transition (SLAs) • Significant capital expenditure required to bring infrastructure up to new standards

  15. Thank Youcmannion@cer.ie

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