Ms Sheenagh Rooney:

I will go into a little bit more detail about how we actually do our job with regard to the economic regulation of Irish Water. As Dr. Paul McGowan said, as economic regulator of Irish Water, we are responsible for all of Irish Water's charges and a key part of that process is assessing and forming a view on Irish Water's costs behind those charges. We do that after Irish Water makes a submission to us, as the regulator. A key part of our ongoing challenge is to get Irish Water essentially to deliver efficiencies, reducing the cost of its operation and the day-to-day running costs of Irish Water. That should help facilitate greater investment, which is much needed, in the capital expenditure and the water service infrastructure on the ground. Ultimately, this should lead to improvements for customers.

We have completed two revenue controls to date, which were two-year revenue controls. Normally with gas and electricity, we conduct five-year revenue controls. The two-year revenue controls reflect Irish Water essentially being in start-up phase and discovering more data. We have felt up to now that the two two-year revenue controls have been appropriate but we will look at the length of the revenue control going forward. When we have assessed the operational costs and appropriate amount of capital expenditure, as proposed by Irish Water, and formed a view on that and the right amount of efficiency challenge to put on Irish Water, we then calculate the revenue requirement, which essentially is the income that Irish Water should be allowed in any given year to cover its operational costs, depreciation and return on the capital investment to date. As part of the revenue review process, we are always looking at what Irish Water is seeking to deliver for the money invested, both in terms of output and outcomes. We work on the basis that the income will be there to meet the revenue requirement. That is met from a variety of sources at the moment. As part of the water charges plan, we also approved the charges for non-domestic customers and connection charges. At present, they are those that were already being levied by the local authorities but Irish Water is working on proposals for enduring policies in this regard which would be consulted in the future.

I will move on to the most recent revenue control we submitted. The first revenue control target from 2014 to 2016 was set on Irish Water to reduce its operational costs by 14%. It did this and has sufficiently outlined the service improvements for customers arising out of that. Focusing on the recent revenue control, on which we published a decision paper in December last year, for the forthcoming period 2017 to 2018, the challenge for Irish Water is to continue to reduce costs whilst improving service, but also to facilitate growth at the same time.

One of the key points in terms of the savings we are requesting from Irish Water over the next two years is that a total of €165 million savings has been pointed out.

That comes from a €128 million reduction in operational costs and a €136 million decrease in capital investment that were sought. We will continue to monitor Irish Water's performance vis-à-visthese targets.

Some of the detail in the breakdown of Irish Water's operational costs and capital expenditure is relevant when we come to judging what is an appropriate savings target to set for Irish Water. There is a little more detail on that in the slides provided to the committee. There is a chart, on the left hand side, on operating costs proposed by Irish Water from 2017 and 2018. One key point in this slide is that, as has already been alluded to, there is an amount of legacy costs associated with Irish Water and over 70% of the operational costs of Irish Water are associated either with the costs of the service level agreements, which is the cost of the local authorities delivering the services on the ground, or the design, build and operating costs of contracts that were in place and novated to Irish Water to design, build and operate water infrastructure on the ground. That 70% is a large proportion of the overall operating costs.

We have approved a €1.1 billion capital investment programme on the capital side for 2017-18. That came from our review of Irish Water's most recent capital investment plan which covered the period 2017-2021. As has been outlined in relation to the compliance challenge in the water sector, over 50% of those costs are concentrated on projects.

To concentrate a little more on what we do, our process and the level of detail we get into in determining the savings challenge that should be put on Irish Water, we follow a standard regulatory approach. It is the same as that adopted for years in relation to electricity and gas, and which is adopted by independent regulators throughout the world regarding water regulation. We have a lot of experience in revenue reviews of network companies. We regulate EirGrid, ESB Networks, and Gas Networks Ireland, and we have seen the benefits that are there for consumers in terms of regulation leading to decreases in operational costs. This leads to greater investment on the capital side, particularly in, for example, the electricity networks where continuity of supply targets have improved greatly over the years through the investment that has been facilitated by network regulation. That is what we will be hoping to do in Irish Water.

We use a number of techniques to determine the appropriate challenge or saving that we should require from Irish Water in the forthcoming two years. We are always focused on challenging but achievable targets. We want to focus on targets that challenge Irish Water to reduce costs but also that it cannot compromise the level of service customers who are receiving water services already receive. That is particularly challenging in the current environment.

We benchmark Irish Water against other water utility companies elsewhere - I will cover that in a little more detail in a moment - but we also look in detail at Irish Water's costs on a bottom-up basis. For example, if we were looking at a capital submission, we would be looking at how Irish Water determined the right priorities for investment and how those decisions were made, the process behind them and how the costs were built up. This is part of the analysis that goes into determining whether the costs are reasonable.

A key part of the CER process is consultation. We are required under legislation to consult and we do so on all the decisions that we make. As has been said, we engage with the Public Water Forum and all our documentation is published and in the public domain.

Another key issue for us in the revenue review, as Dr. McGowan stated, is monitoring thereafter the performance of Irish Water on the targets that it states it will achieve. We do that in a number of ways, be it on the customer side or on the capital investment programme side, by putting in place a framework in that regard or through the performance assessment framework. That was mentioned already and will form a good basis of data over time.

On benchmarking and our point of view on it, benchmarking is a key piece of the jigsaw in determining the right target to put on Irish Water. We are able to look at the efficiency of Irish Water relative to English and Welsh utilities, looking at all its operational costing, including the costs that I have pointed out. These are mature water utilities which have been in existence for years and they have a particularly good data set. Looking at that analysis, we can look a the gap between where Irish Water is now in terms of efficiency, and obviously there are inefficiencies in Irish Water and it has a lot of legacy costs in place, and where we would like it to get to over time and the standard we would like it to achieve. We then have to determine what it is capable of achieving. One way in which we do that is looking at neighbouring jurisdictions, for example, Scottish Water and Northern Ireland Water, and what they were able to achieve in terms of efficiency at a similar stage of evolution to Irish Water.

After that we look at the particular characteristics of Irish Water, be it the scale of the compliance challenge, the fact it is a two-year revenue review and not a five-year revenue review, or the operating model that is in place. That is how we determine what we believe to be an appropriate target for Irish Water for that period in terms of savings for the customer. As Dr. McGowan has summarised, where that has left us with the revenue review for 2017-2018 is a request for Irish Water to reduce costs by 20% as a global target between 2015 and 2018.