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The Challenges of Ensuring Security, Affordability and Equity Economic Regulation of Water. Cathy Mannion Director Commission for Energy Regulation. Overview. Background The Emerging Model Form of Regulation Regulatory Challenges. Background.

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the challenges of ensuring security affordability and equity economic regulation of water

The Challenges of Ensuring Security, Affordability and EquityEconomic Regulation of Water

Cathy Mannion

Director

Commission for Energy Regulation

overview
Overview
  • Background
  • The Emerging Model
  • Form of Regulation
  • Regulatory Challenges
background
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
background1
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)
background2
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
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
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
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
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

revenue regulation
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
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:
    • 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 period1
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 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
regulatory challenges
Regulatory Challenges
  • Examples:
    • 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