Irish Water Revenue Control 3 submission Operational Expenditure 2017 - 2019 (Look back)
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
November 2018 Irish Water Revenue Control 3 submission Operational Expenditure 2017 – 2019 (Look back) 1 | IW | [Type Document Title]
Contents
1. Executive Summary .............................................................................................. 3
2 Operating Expenditure 2017-2019 ....................................................................... 8
2.1 IRC2 Opex by Cost Category ........................................................................ 9
3 IRC2 Opex Profile ............................................................................................... 16
3.1 Efficiencies delivered in IRC2 ...................................................................... 16
3.2 Essential Cost Growth in IRC2 .................................................................... 20
4 IRC2 Service Improvements............................................................................... 28
4.1 Environmental Compliance and Incident Reporting ..................................... 28
4.2 Plant and Network Performance Improvement ............................................ 30
4.3 Incident Management .................................................................................. 30
4.4 Customer Interface Management ................................................................ 31
4.5 Work and Asset Management...................................................................... 32
4.6 Connections and Developer Services .......................................................... 32
4.7 Leakage Management ................................................................................. 33
4.8 Technology Advancement ........................................................................... 33
4.9 Health and Safety Management .................................................................. 34
4.10 Risk Management........................................................................................ 35
5. Conclusion .......................................................................................................... 37
6. Appendices ......................................................................................................... 40
Appendix A: 2016 Outturn ................................................................................... 40
Appendix B: Efficiency Case Study - Fleet .......................................................... 41
Appendix C: Essential Cost Growth 2017-2019 Detailed Table ........................... 44
1 | IW | Revenue Control 3 Operational Expenditure1 Executive
Summary
2 | IW | Revenue Control 3 Operational Expenditure1. Executive Summary
Irish Water (IW) is a publicly owned, regulated, commercial State body with responsibility
for the operation and maintenance of water and wastewater assets. It was established in
2014 to provide safe, clean, affordable and environmentally compliant water and
wastewater services to households and businesses connected to the public networks.
The first Interim Revenue Control period (IRC1) covered the period Q42014-2016. This
period represented a step change in the way drinking water and wastewater services
were delivered in Ireland. At a national level, IW introduced a new process for strategic
investment planning and commenced work on the delivery of a single streamlined
service to all customers across the country.
The second interim Revenue Control period (IRC2) originally covered the years 2017
and 2018, and was subsequently extended by one year to include 2019. In this period,
IW has accelerated capital investment and has continued improving operational and
service performance.
IW has delivered against very challenging efficiency targets while making real
improvements in service provision and environmental standards.
The establishment of IW as the water services utility has delivered real progress on the
most critical operational requirements. During IRC1 we delivered c.€70m savings in
Opex through procurement optimisation, spend rationalisation and process
improvement.
We have continued to drive efficiencies in the system over the IRC2 period. Between
2017 and 2019 we expect to achieve a further c.€90m in Opex savings, effectively
meeting our regulatory allowance. These savings are being delivered through initiatives
such as:
The consolidation and rationalisation of the Non-Domestic Billing process across
the 31 LAs;
The roll out of a national fleet strategy that will help to reduce fuel costs, fuel
consumption and carbon emissions;
A reduction in the cost of goods and services needed to operate the system
through National Multi-Supplier frameworks and mini tendering competitions;
Reducing contractor costs through optimising processes such as sludge disposal
and collection and rationalisation of maintenance programmes;
Competitive procurement of energy, including optimisation of tariffs in our water
and wastewater treatment plants, e.g. MIC, day/night rates; and
Driving enhanced performance on DBO contracts through setting challenging
targets and closely monitoring contractor delivery.
In parallel with the above, we delivered substantial customer and environmental benefits
such as the elimination of legacy long term boil water notices. By the end of 2019, we
expect to have removed another 85 public water supplies from the EPA’s Remedial
Action List and, to date, we have reduced the number of untreated agglomerations by
3 | IW | Revenue Control 3 Operational Expenditure12. Following deployment of the Maximo system to all LAs, we have nearly doubled work order activity since the start of 2017. We have also developed a new application to track and manage the high volume of information associated with incident management and reporting to the EPA. While we have maximised efficiency, we had to incur additional expenditure in meeting mandatory compliance, growth and external cost pressures in IRC2. These will continue into RC3. IW has effectively met the regulatory allowances for both IRC1 and IRC2 while delivering meaningful service improvements for customers. However, there remains a significant gap to the performance levels of mature, international peers. IW’s asset base still suffers from serious deficiencies and there is a clear compliance deficit across water and wastewater. In addition to service consequences for customers, this has resulted in EPA sanction and European Court of Justice action against Ireland. Even with the significant capital investment to date, we remain far behind our European peers on compliance standards and meeting the requirements of the Water Framework Directive (WFD) and the Urban Wastewater Treatment Directive (UWWTD). Investment to address these issues drives an increase in our operational cost base, known as ‘delta opex’. Our cost base has also increased over the IRC2 period as a result of Government policies. This includes the ‘Taking in Charge’ (TIC) programmes of residential estates and Group Water Schemes (GWS). The combined effect of policy directions in relation to residential estates and GWS will be to increase our asset base by c. 1,400kms by the end of 2019, with resultant increases in operation and maintenance costs. In addition, we face the unavoidable consequences of increasingly frequent severe weather events. The impact of Storm Ophelia in October 2017 and Storm Emma in March 2018, and the recent drought, have severely tested asset condition and service delivery and led to increased operational costs. Ireland’s economic and population growth has continued to gather momentum, leading to increasing pressure on water production and wastewater treatment to keep pace with demand. This has had a direct impact on our costs due to an increasing requirement for key variable inputs, such as energy and chemicals. The implementation of crucial Cybersecurity measures, General Data Protection Regulation (GDPR), and National Wage Agreements have all imposed additional, and unavoidable, cost pressures on IW in IRC2. Overall, we will incur additional Opex of c.€87m in the IRC2 period to meet such essential requirements. It is clear that these cost pressures will continue into the RC3 period. IW is projected to meet the CRU allowance for IRC2. Taking into account both efficiencies and essential growth, a high level summary of the projected IRC2 outturn versus CRU allowance is set out in the table below. The variance of outturn versus allowance is less than 1%. This performance has been enabled by IW’s efficiency initiatives, together with the CRU decision to provide 4 | IW | Revenue Control 3 Operational Expenditure
additional allowance in 2019 to fund compliance related activity and meet service
requirements. This decision has been crucial to IW’s ability to continue rolling out
essential work programmes. It is also consistent with international regulatory precedent
established by the England & Wales regulator, Ofwat, in allowing enhancement opex to
address quality deficits.
Allowed 2017 Outturn/Forecast Variance 3 years
1
Opex Cost Category - 2019 (a) 2017 - 2019 (b) (b) – (a) €m
€m €m
Controllable Opex 2,021 2,036 15
Uncontrollable Opex 23 14 -9
Opex Total 2,045 2,051 6
Table 1.1 Summary of Opex incurred relative to Allowed Opex 2017-2019.
As all expenditure in the period is both necessary and efficient, IW requests the CRU to
allow the recovery of the €15m shortfall in Controllable Opex through the k-factor
process.
Looking forward, RC3 performance is critically dependent on industry
transformation.
IW is maximising all available efficiency in IRC2. Year-on-year savings peaked in 2017
at c. 7%, reducing to c. 4%2 in 2018 and 2019 (projected). The declining trend is
explained by the reducing scope for savings in core operations as the economies of
scale and procurement benefits on a national level are realised.
As work delivered through LA partnership accounts for the large majority of IW’s
operational costs, deeper, sustainable efficiency levels can only be generated through
successful implementation of industry transformation. IW has designed the framework
for this transformation through a single public utility model. This will deliver both
substantial savings and, importantly, enable better delivery of water services
countrywide through a standardised approach.
This work is planned for implementation during the next revenue control cycle (RC3) but
is a very complex change programme which is subject to agreement with multiple
external stakeholders. The timeline for implementation of the single public utility is the
single most important dependency underpinning IW’s efficiency performance in RC3.
Full details of our Opex projections, including efficiency and growth, are set out in our
separate RC3 ‘Look Forward’ submission.
In this document, we provide full details of our Opex ‘Look Back’ expenditure during
IRC2, with reference to the CRU allowances provided for the period.
The remainder of this document is structured as follows:
1
Allowance is less reduced Domestic Customer Service costs for 2017 and 2018
2
Excluding DBO allowance from efficiency challenge across all years as per CRU IRC2 decision.
5 | IW | Revenue Control 3 Operational ExpenditureSection 2 sets out the Opex expenditure for the overall IRC2 period in each individual cost category versus the CRU allowance; Section 3 sets out the year-by-year profile of Opex expenditure for IRC2 and includes a detailed description of efficiency and growth drivers; Section 4 outlines the service improvements delivered; and Section 5 concludes and summarises the major points of our submission. 6 | IW | Revenue Control 3 Operational Expenditure
2 Operating
Expenditure
2017-2019
7 | IW | Revenue Control 3 Operational Expenditure2 Operating Expenditure 2017-2019
IW Opex is broken down into the following categories:
Operations and Maintenance;
Target Operating Model;
Shared Services;
Group Centre;
Irrecoverable VAT;
Insurance: and
Non-Controllable Costs.
Operations and Maintenance (O&M) relates to drinking water and wastewater
operations and maintenance activities delivered in partnership with the LAs through
Service Level Agreements (SLAs) and Annual Service Plans (ASPs). It also includes
Design, Build Operate (DBO) costs which are paid to external suppliers for the operation
of a significant number of plants on behalf of IW.
IW Target Operating Model (TOM) encompasses the organisational structure,
processes and systems to operate IW.
Shared Services is the centralised transactional support services hub to all Business
Units (BUs) of Ervia, IW and Gas Networks Ireland (GNI) in the areas of:
Finance;
Procurement;
Facilities;
HR; and
IT.
Group Centre costs cover the allocation of corporate services from the Ervia Group
centre, including governance, strategic oversight and approval and support of strategic
infrastructure and critical business projects, such as the Transformation Programme;
Irrecoverable VAT (Group & Shared Services): IW is exempt from Value Added Tax
(VAT). All costs in our management accounts and financial statements are VAT inclusive
with the exception of allocations from Ervia Group and the Shared Services Centre. As
these entities have VAT recoverability, the costs charged to IW are presented net of
VAT. The irrecoverable VAT on these allocations is included as a separate controllable
cost.
Insurance costs evolved early in IRC2 from a centralised combined IW / LA Employer
Liability / Public Liability Policy to a Self-Insured Retention (SIR) model which is
managed through the Ervia insurance programme.
8 | IW | Revenue Control 3 Operational ExpenditureNon-Controllable Costs are pass-through cost items which are not under IW’s direct
control. These include items such as rates, regulatory levies and licence fees.
Given the timing of this submission, outturn Opex expenditure is available up to
September 2018, and estimates are provided for the balance of the period to December
2019. Outturn 2016 expenditure, which was previously examined on a forecast basis, is
included in Appendix A.
2.1 IRC2 Opex by Cost Category
The following table sets out the Opex allowed, in each of the cost categories, against
actual and forecast costs to be incurred over the IRC2 period. All costs presented in this
paper are in 2017 monies, rounded. Variance above allowance is shown as a positive
number while variance below allowance is shown as a negative number.
Allowed 2017 Outturn/Forecast Variance 3 years
Opex Cost Category - 2019 (a) 2017 - 2019 (b) (b) – (a) €m
€m €m
Operations & Maintenance 1,549 1,559 10
(Including SLA and DBO)
Targeting Operating Model 310 301 -9
Group & Shared Services 110 118 8
VAT & Insurance 53 59 6
Non-controllable 23 14 -9
Opex Total 2,045 2,051 6
Table 2.1 Summary of Opex incurred relative to Allowed Opex 2017-2019.
IW expects to effectively meet the CRU allowance over the 2017-2019 period. The CRU
decision to provide additional allowance in 2019 to fund compliance related activity and
meet service requirements, will be essential in enabling IW to progress critical work
programmes.
A summary overview of performance in each Opex cost category is set out below.
2.1.1 Operations and Maintenance:
Operations and Maintenance is the largest category of IW’s operating costs and is
comprised of the following elements:
Payroll costs are those associated with LA staff involved in the delivery of O&M
activities through Service Level Agreements (SLAs) and Annual Service Plans
(ASPs);
9 | IW | Revenue Control 3 Operational Expenditure Goods & Services include materials and services - stores issues, chemicals,
plant hire and contractor costs – used in operating and maintaining the water and
wastewater systems, and procured mainly via IW systems;
Energy costs include energy purchased for the ongoing operation of the
network. They do not include energy procured by DBO contractors;
Overhead costs are those costs incurred in the operation of plants but which are
not attributed to an individual site. These include transport, training, and
telecommunications costs;
Central Management Costs (CMC) include costs incurred by the LAs in
managing and supporting the SLAs. The costs incurred are allocated to IW based
on a charge as prescribed by the Department. The charge includes LA
administrative costs including; pension costs, LA management costs, Finance,
HR and IT. As the CMC allocation is heavily weighted by headcount numbers,
changes in headcount under the SLA are proportionately reflected in CMC costs;
DBO costs are paid to external suppliers for the Design, Build and Operation of
plants on behalf of IW. Only the operating costs of these contracts are included
within Opex. Design and Build costs are captured under capital expenditure.
The breakdown of IRC2 O&M costs into each of these sub-categories is set out in the
table below.
Allowed 2017 Outturn/Forecast Variance 3 years
O&M Cost Sub Category - 2019 (a) 2017 - 2019 (b) (b) – (a) €m
€m €m
Payroll Costs 459 454 -5
Goods & Services 357 386 29
CMC 192 199 7
Energy 160 149 -10
Overheads 53 50 -3
Design, Build and Operate (DBO) 327 320 -7
O&M Total 1,549 1,559 10
Table 2.2 Total allowable and forecasted O&M expenditure over the 2017-2019 period
At an aggregate level, IW has effectively met the allowance for O&M Costs during IRC2.
Substantial efficiencies were achieved during the period, most notably in energy.
However, many of the savings were due to specific initiatives and are not repeatable on
the same scale within RC3. The implementation of the single public utility is therefore a
critical dependency to continue closing the efficiency gap to international peers.
Growth pressures have also impacted O&M costs during IRC2. This growth includes
costs relating to environmental and regulatory compliance, growth in our asset base,
10 | IW | Revenue Control 3 Operational Expenditureexternally driven costs, growth in the economy and government policy requirements.
These growth requirements are set out in detail in Section 3 of this submission.
2.1.2 Target Operating Model:
TOM costs are comprised of Labour costs and Non Labour costs. Labour costs are the
costs associated with staff resources for IW, both permanent and temporary. They
include all payroll costs and labour related costs such as training, recruitment and
travel/subsistence.
Non Labour costs are the other costs incurred by each TOM function in delivering their
activities.
Allowed 2017 Outturn/Forecast Variance 3 years
TOM Cost Sub Category - 2019 (a) 2017 - 2019 (b) (b) – (a) €m
€m €m
TOM Labour 164 159 -5
TOM Non-Labour 146 141 -5
TOM Total 310 300 -10
Table 2.3 Total allowable and forecasted Overall TOM expenditure over the 2017-2019 period
We are projecting a minor underspend (c. 3%) against allowance under the TOM cost
category. This is mainly due to the timing of recruitment, which has been phased to align
with business needs.
At the outset of IRC2, permanent headcount was lower than originally planned. Over the
course of the period, we have managed our recruitment to meet the strategic plans of
the IW business and to reduce reliance on temporary resources and external service
providers. As we move into 2019, we are also working to ensure that our organisation
design is aligned to the development of the single public utility model and optimised for
the delivery of services into the future.
2.1.3 Shared Services & Group
Shared Services provides the transactional services required by the Ervia Group in a
number of critical operational areas including finance, procurement, facilities, HR and IT.
The Group Centre currently provides governance, strategic direction and enterprise risk
management. In addition, it leads specific complex or transformational projects across
the Ervia Group, including within IW.
A breakdown of the allowable and forecasted Shared Services and Group expenditure in
the IRC2 period is outlined below.
11 | IW | Revenue Control 3 Operational ExpenditureAllowed 2017 Outturn/Forecast Variance 3 years
SS / Group Cost Sub Category - 2019 (a) 2017 - 2019 (b) (b) – (a) €m
€m €m
Shared Services 64 72 8
Group 46 46 0
SS/Group Total 110 118 8
Table 2.4 Total allowable and forecasted Shared Services & Group expenditure over the 2017-2019
period
Shared Services activity levels have been rising significantly over the period 2017-2019
and this trend has had a knock-on impact on costs. For example, the IRC2 submission
outlined that Shared Services IT supported c. 3,000 users of Asset Management
applications, such as Maximo, Click and Syclo. There are now c. 5,700 users – a near
doubling of the original number. Cybersecurity needs and measures to meet the
requirements of General Data Protection Regulation (GDPR) also impacted on costs in
the latter part of the period.
Group Centre is projected to meet the CRU allowance while supporting IW on critical
business projects such as the implementation of the single public utility.
2.1.4 Irrecoverable VAT & Insurance
The following table sets out the allowable and forecasted Irrecoverable VAT and
Insurance expenditure in the IRC2 period.
Allowed 2017 Outturn/Forecast Variance 3 years
VAT / Insurance Cost Category - 2019 (a) 2017 - 2019 (b) (b) – (a) €m
€m €m
Irrecoverable VAT 13 13 0
Insurance 40 46 6
VAT / Insurance Total 53 59 6
Table 2.5 Total allowable and forecasted VAT & Insurance over the 2017 – 2019 period
IW is exempt from Value Added Tax (VAT). As a result, we must incur VAT on most of
our purchases but cannot recover this cost from Revenue. All IW costs are VAT inclusive
with the exception of allocations from Ervia Group and the Shared Services centre. As
these entities have VAT recoverability, the costs charged to IW are presented net of
VAT.
A moderate overspend against allowance is forecast in the Insurance cost category. In
IRC1, the liability premiums (which are a subset of the overall programme) were
considerably understated due to a lack of insurer information on claims data specifically
relating to the water sector. As claims subsequently materialised, and sectoral risk data
was gathered in 2015 and 2016, a significant increase in premiums was anticipated for
IRC2.
12 | IW | Revenue Control 3 Operational ExpenditureFollowing assessment, in December 2016 IW determined that it was more cost effective
to move from a centralised combined IW/LA Employer Liability / Public Liability Policy to
a Self-Insured Retention (SIR) model.
Under this model, Ervia insures major risk and essentially self-insures for low value high
volume attritional claims. This enables IW, through the Ervia insurance programme, to
efficiently investigate, manage, and settle such claims whilst also gathering useful risk
data. This data is used to provide meaningful information to the operations team and
inform preventative maintenance programmes, with a view to reducing the issues which
can give rise to accidents in the first instance.
In general, there appears to be a trend of increasing claims in Ireland over the past
number of years. IW is endeavouring to reduce claims frequency and cost through a
number of key initiatives:
Establishment of a dedicated insurance claims investigation and handling
section;
Recording claims data for presentation to the business with a view to highlighting
key areas of concern; and
Close liaison with the IW regional leads and the LAs to drive awareness of claim
costs, causes, and the benefits that proactive measures can have in achieving
reductions.
The following principles ensure that all forms of insurance procured externally provide
the best available value:
The insurance programme is reviewed, and verified as being fit for purpose, at
regular intervals. This includes benchmarking rates and cover with other utilities.
The provision of insurance services (Brokers) is tendered to access specialist
markets;
The broadest available cover is purchased at commercially competitive rates;
and
All premiums are paid net of insurers’ commission and all insurers have a rating
of at least A-.
IW also established a number of statutory inspections programmes during IRC2 which
fall into the category of insurance costs. These programmes include the inspection and
maintenance of electrical, fire, gas, chemical and ATEX assets. Historically, this is an
area that has suffered from under investment and, in many instances, these
programmes will be the first time the statutory maintenance requirements of the relevant
assets will be met.
2.1.5 Non-Controllable Costs
Non-controllable costs refer to those which are beyond management control. We have
included the following costs in this category:
Regulatory Levies; and
13 | IW | Revenue Control 3 Operational Expenditure Commercial Rates
Uncontrollable Opex Allowed 2017 Outturn/Forecast Variance 3 years (b)
- 2019 (a) 2017 - 2019 (b) – (a) €m
Cost Category €m €m
Regulatory Levies 23 14 -9
Commercial Rates 0 0 0
Uncontrollable Opex Total 23 15 -9
Table 2.6 Total allowable and forecasted Uncontrollable Opex over 2017-2019
Regulatory Levies: In our submission for IRC2, IW submitted a best forecast of costs
for both the CRU levy and the EPA licence fees. The actual outturn costs were €8m
lower over the IRC2 period.
Commercial Rates: IW received confirmation from DHPLG that it will not be required to
pay commercial rates during the 2017-2019 period.
14 | IW | Revenue Control 3 Operational Expenditure3 IRC2 Opex
Profile
15 | IW | Revenue Control 3 Operational Expenditure3 IRC2 Opex Profile
IW’s total Opex expenditure for 2017-2019 is c. €2bn, after taking account of compliance
needs, growth pressures, external costs and the delivery of efficiency savings. This
effectively meets the IRC2 allowance, with a variance of less than 1%.
The table below sets out a year-by-year profile of our IRC2 controllable Opex
expenditure, split into Base, Growth and Efficiency components.
Opex Headline 2017 €m 2018 €m 2019 €m IRC2 Total €m
Base Controllable
683 674 682 2,039
Costs
Compliance, Growth &
30 33 25 87
External Costs
Efficiencies (39) (25) (26) (90)
Total Controllable 674 682 680 2,036
Non-Controllable
5 4 5 14
Opex
Total Opex 679 686 686 2,051
Table 3.1 Controllable and Non-Controllable Opex Expenditure for the 2017– 2019 period
Our 'Base Controllable Costs’ are the core expenditures needed to operate the
business in a steady state on an annual basis, i.e. prior to any additional efficiency
or cost drivers.
‘Compliance, Growth and External Costs’ combine all of the cost pressures we
have faced over the IRC2 period.
‘Efficiencies’ refers to the savings across all of our efficiency initiatives over the
IRC2 period.
In the following sections, we explain both the drivers of efficiencies and essential growth
in controllable expenditure over IRC2.
3.1 Efficiencies delivered in IRC2
Between 2017 and 2019 IW is projected to achieve €90m of in-year Opex savings
through efficiencies in contractor management, payroll, overheads, goods and services,
and energy efficiencies. A detailed breakdown is provided in the table below.
16 | IW | Revenue Control 3 Operational Expenditure2017 in 2018 in 2019 in year IRC2 in year
Efficiency Area
year €m year €m €m €m
Payroll Cost Reduction 15 11 1 27
Optimisation of Goods and
5 8 15 28
Services
Energy Cost Savings 12 1 3 16
CMC & Overhead Reductions 5 2 2 9
DBO Contract Management 2 3 1 6
Other 0 0 4 4
Total 39 25 26 90
Table 3.2 Summary table of efficiencies achieved in 2017–2019 period (2017 monies rounded)
Below, we provide a summary of each of these key sources of savings.
3.1.1 Payroll Cost Reduction – c. €27m
Payroll efficiencies of €27m are being delivered through a number of key initiatives,
including:
The consolidation and rationalisation of the Non Domestic Billing process across
the 31 LAs, including the systems and associated headcount;
Reductions in LA headcount and the containment of vacancies though effective
engagement and the optimisation of existing headcount;
Reductions in the number of Change Managers as projects are embedded; and
Utilisation of LA Operational staff on capital water network activities.
3.1.2 Optimisation of Goods & Services – c. €28m
€28m of in-year financial efficiencies are being delivered across the Goods & Services
category. Efficiency initiatives are listed by cost sub-category below.
1. Fleet & Plant Hire:
Roll out of an efficient IW owned fleet with short payback periods for
investment;
Optimised utilisation of existing fleet and plant;
Use of procurement strategies and frameworks to minimise fleet maintenance
costs; and
Negotiated reduction of the hire rates charged by LA machinery yards.
17 | IW | Revenue Control 3 Operational ExpenditureNote: A specific case study on Fleet efficiency is included in Appendix B.
2. Chemicals & Other Materials:
Optimisation of dosing and delivery methods for chemicals;
Reduction in unit costs through National Multi-Supplier frameworks and mini
tendering competitions; and
3. Mechanical and Electrical, Repairs and Maintenance, Civils Contractor &
Maintenance Costs:
Investment in efficient Plant & Equipment;
Use of Planned Capital Maintenance and rationalisation of Maintenance
Programmes where feasible;
Optimisation of the Road Re-instatements Process;
Rationalisation of Water and Wastewater Treatment plants; and
Contract review and optimisation.
4. Sludge and Jetting:
Optimised sludge collection and disposal;
Investment in efficient sludge equipment;
Use of Sludge reed beds; and
Changed LA jetting work practices and investment in CCTV and efficient
jetting equipment.
Scope for efficiencies has been diminishing over the IRC2 period as economies of scale
are being exhausted. The focus on targeting efficiencies in the broad area of Goods &
Services spend in 2019 reflects the deeper level of cost management required to identify
any remaining savings.
3.1.3 Energy Cost Savings – c. €16m
Energy efficiency initiatives are delivering cost savings of €16m over the IRC2 period.
These initiatives target a reduction in the unit rate charged or an intervention to lower
consumption, including:
A national electricity contract with reduced unit costs;
Optimisation of tariffs in IW plants e.g. MIC, day/night rates;
Investment in energy efficient machinery and equipment, e.g. High lifting pumps,
light and heat sources;
Continuous process improvements and implementation of energy efficiency
programmes; and
Improved meter reading management.
18 | IW | Revenue Control 3 Operational Expenditure3.1.4 CMC & Overheads Reductions – c. €9m
€9m of cost reductions are being delivered in Central Management Charge (CMC) and
Overheads costs during the IRC2 period. CMC costs reflect the apportionment of the LA
central costs to IW for the delivery of Operation and Maintenance activities. Reductions
in cost drivers used to apportion LA overhead costs, such as FTEs and LA systems,
have been key to reducing the CMC cost base. IW has undertaken rigorous challenge of
LA submissions through benchmarking and targeted reviews. These initiatives have all
helped to drive efficiencies in the period.
In addition, Overheads efficiencies are being delivered through focused reductions in
multiple areas, including travel costs, communications costs, insurance, professional
fees and fuel. Some costs have also been reduced through the transfer of activity to IW
e.g. non-domestic billing and insurance.
3.1.5 Design Build Operate (DBO) Contract Management – c. €6m
€6m of DBO efficiencies are being achieved from the following sources:
Review of contracts and elimination of scope where no longer deemed required,
or where technology now enables more efficient operation;
Contractor engagement and negotiation, leveraging a national view of each
contractor’s IW portfolio;
Reduction in Fixed Costs through application of Ervia policies in relation to
insurances and performance security and leveraging Ervia risk mitigation
approaches;
Application of contract price adjustments where contractors fail to achieve
stipulated performance targets;
Integration of the Employer’s Representative role into existing IW headcount and
removal of external and LA engineers from the role; and
Claims Mitigation - Mitigation and defence of contractor claims, leveraging IW
internal commercial and legal support.
Recognising the constraints of existing commercial contracts, the DBO area was not
included in the efficiency targets set by the CRU for IRC2. However, IW has sought to
contribute to the overall efficiency challenge through engaging with our supply chain
where possible. The efficiencies that have been achieved to date have been secured in
the context of strict contract conditions which provide limited scope for negotiation and
price reduction. This scope has now been exhausted for the current portfolio of
contracts.
3.1.6 Other – c. €4m
€4m of cost reductions are forecast across various areas of the business during IRC2,
including the following:
19 | IW | Revenue Control 3 Operational Expenditure Reduction in contractor costs by replacing contractors with in house expertise
where possible;
Management of the volume of insurance claims through targeted measures e.g.
replacement/repair of meter lids and faulty manhole covers, fixing trip hazards;
Specific efficiencies across professional services, facilities and IT; and
Travel & Subsistence efficiencies e.g. facilitating greater adoption of video-
conferencing.
3.1.7 Efficiencies Outlook
Substantial savings are being delivered by IW during IRC2, effectively meeting the
efficiency targets set by the CRU. Year-on-year gross savings peaked in 2017 at c.7%,
reducing to c.4% in 2018 and 2019 (projected). The declining trend is explained by the
reducing scope for efficiency in core operations as the economies of scale and
procurement benefits on a national level have been realised.
As work delivered through LA partnership accounts for the large majority of IW’s
operational costs, deeper, sustainable efficiency levels can only be generated through
the successful adoption and implementation of the single public utility model. This
transformation is critical to IW’s future performance targets, as set out in our Look
Forward submissions.
IW has already made clear progress, completing the design of the single public utility to
detailed level. Working with other stakeholders, we are seeking to move to
implementation as soon as possible. However, this is a very complex transformation
programme and is dependent on agreement with multiple external stakeholders.
Effective management of the pace of transformation is vital to mitigate potential service
risks.
3.2 Essential Cost Growth in IRC2
In reviewing IW’s 2019 revenue submission, the CRU acknowledged the significant
challenge that IW faces in managing costs as our asset base and workload grows.
Critically, an additional allowance was provided for 2019 to enable IW to meet essential
compliance and service requirements. Without this additional allowance, IW would not
be able to progress important programmes of work.
The main areas where we are experiencing additional costs in IRC2 are set out in the
table below and subsequently described in further detail.
20 | IW | Revenue Control 3 Operational ExpenditureGrowth Cost Driver 2017 €m 2018 €m 2019 €m IRC2 €m
Compliance 7 8 14 29
Policy 1 2 3 7
Externally Driven Costs 7 5 8 20
TOM / SS / Insurance 9 17 3 29
Extreme Weather Events 1 6 -4 3
Non Dom Post Go Live Support 5 -5 - -
Total 30 33 24 87
Table 3.3 Summary table of Additional Opex incurred in 2017 – 2019 period (2017 monies rounded)
A more detailed table of growth in Appendix C shows the annual cost increases at a sub
category level.
3.2.1 Compliance – c. €29m
Investment Plan “Delta Opex” and Lead Mitigation – €23m
IW is responsible for the provision and development of water services, including the
collection, treatment and discharge of urban wastewater. We are obliged to comply with
both European and national law and the requirements of all EPA wastewater discharge
authorisations. IW is subject to more stringent licensing standards than UK utilities which
results in comparably higher costs to reach compliance.
Achieving compliance with all European and national requirements remains a serious
challenge that we have begun to address though capital investment in our water and
wastewater infrastructure. Our investment to date has delivered significant benefits to
customers including:
Reducing the number of customers subject to Boil Water Notices (BWNs) to
2,651 by the end of October 2018 (from 23,000 in 2014);
Successfully removing 51 water supply zones from the EPA’s remedial action list
between Q1 2017 and Q3 2018, benefiting a population of over 290,000, with a
further 34 schemes targeted by end 2019; and
Reducing the population equivalent related to untreated agglomerations by 44%
from 2014 to August 2018.
‘Delta opex’ is driven by capital investment and reflects the cost of operating and
maintaining upgraded or new assets. This has been a source of additional operating
costs across all three years of the IRC2 period.
An additional compliance concern relates to the public health risks associated with the
consumption of lead in drinking water. Following World Health Organisation (WHO)
advice, the European lead limit was reduced to 10 μg/l in December 2013. In response,
IW developed a national Lead in Drinking Water Mitigation Plan. The longer term plan of
removing and replacing lead service connections has begun. In addition, to address lead
21 | IW | Revenue Control 3 Operational Expenditurein drinking water in the short to medium term, IW began implementing a programme of orthophosphate dosing in line with international best practice during IRC2. This drove additional operational costs in the period that were not foreseen in the initial revenue control submission. In addition, as some DBO contracts preceded the introduction of certain statutory license requirements, additional expenditure is required to bring these into compliance. Indexation changes have also resulted in some DBO cost increases in IRC2. Sludge Management – €5m Sludge Management is another environmental compliance activity that has increased our Opex cost during IRC2. There is some concern over whether current sludge treatment practice is sufficient to meet the relevant code of good practice. If adequate treatment facilities and controls are not in place, there is a risk that the current agricultural outlet will become unavailable. With the allowance provided by the CRU for 2019, IW will begin improving compliance towards a target of 99% by 2024. In addition to treatment challenges, the quantity of sludge which must be managed by IW is increasing year-on-year. Approximately 60,000 tonnes of wastewater sludge are generated by IW assets every year and this continues to grow in line with new and upgraded plants and increased desludging activity. The volume of residual sludge from water treatment plants is also increasing. These factors have combined to increase Sludge Management expenditure in IRC2. 3.2.2 Policy – c. €7m Taking in Charge – €5m Legislative requirements relating to water services impacted our cost base over the 2017-2019 period. These include the ‘Taking in Charge’ programmes of residential estates and Group Schemes. By September 2018, IW had taken in charge c.420 residential estates since the beginning of 2017. We estimate that an additional 500 residential estates will be taken in charge by the end of 2019. The associated increase in the IW network is c.700kms over the total IRC2 period. In addition, we anticipate c. 110 Group Scheme transfers to IW to be completed over IRC2, with an associated network increase of c. 700kms. The combined effect of both policy directions will increase our asset base by c.1,400km. These additions to our network, and the state of the assets being taken over, necessitate an increase in operational and maintenance expenditure. GDPR – €1m During the IRC2 period, IW adopted measures to meet the requirements of General Data Protection Regulation (GDPR) which came into force in May 2018. This ensures that customer and employee data is appropriately protected in line with EU law. This has been a significant undertaking, the cost of which was not included in our original IRC2 submission. These costs have mainly impacted our Group and Shared Services categories. 22 | IW | Revenue Control 3 Operational Expenditure
Excess Usage Charging – €1m
In 2020, IW must implement the government’s policy on charging for excessive water
usage. In preparation for this, additional costs will be incurred in 2019.
IW will communicate with identified customers who are consuming, or at risk of
consuming, in excess of their annual allowance. This is necessary to;
Educate customers on the need to reduce excessive consumption;
Encourage customers to identify potential sources of leakage (internal / external);
and
Inform customers of their liability if corrective action is not taken.
3.2.3 Externally Driven Costs – c. €20m
Economic Growth – €3m
Ireland’s economic and population growth has continued to gather momentum, leading
to increasing pressure on water production and wastewater treatment to keep pace with
demand. This has had a direct impact on IW’s operating costs due to an increasing
requirement for key variable inputs such as energy and chemicals. The impact of this
cost driver in IRC2 has been an annual incremental increase in Opex of c. €1m.
Energy – €8m
Energy costs are a significant element of the IW cost base and represent c.10% of the
annual €500m O&M cost category. Water services provision is, by its nature, energy
intensive and IW assets use in excess of 570GWh of energy annually. During the 2017-
2018 period, IW achieved substantial savings in this cost category through efficient
procurement and usage, however energy costs are subject to international fossil fuel
trends and these continue to rise.
In addition to the impact of increasing energy prices, IW does not have any control over
the electricity pass through charges, namely network charges and the Public Service
Obligation levy. Together, these factors have combined to significantly increase IW’s
energy costs during the latter part of IRC2.
National Wage Agreements – €9m
The majority of SLA payroll costs are subject to National Wage Agreements over which
IW has no discretion. These agreements helped to manage the water services cost base
during the economic downturn. However, they also contain commitments which IW is
now obliged to meet. The implementation of these National Wage Agreements has
increased IW’s SLA payroll expenditure above the forecast originally submitted for IRC2.
3.2.4 TOM / Shared Services / Insurance – c. €29m
TOM Permanent Headcount Increases – €15m
At the beginning of IRC2, IW was operating to a lower permanent headcount than
originally planned due to the phasing of recruitment to align with business needs. Over
the course of IRC2, recruitment has increased to meet the strategic needs of the IW
23 | IW | Revenue Control 3 Operational Expenditurebusiness and to reduce reliance on temporary resourcing. As we move into 2019, we are ensuring that the organisation design is aligned to the development to the single public utility model. The increase in headcount has also required a moderate increase in facilities cost during the period. The key areas of recruitment in IRC2 are set out below: Connections and Developer Services (CDS): In 2017, IW became the direct point of contact for all customer connections and enquiries. A national process for entering into a connection agreement was developed in 2018, further supported by a new online connection interface on the IW website. As the level of development activity rises significantly (e.g. to meet housing needs), there is an associated requirement for additional supervision and engineering support in CDS to keep pace with customer connection demand. The development of a Code of Practice and CDS Policy has also required additional resources to ensure that connections are compliant with agreed quality standards. Leakage: IW has faced significant challenges in managing leakage levels nationally, but particularly in the Greater Dublin Area. In time, IW’s capital investment will address the headroom and capacity limitations across the country. In the interim, we are focusing on operational management approaches to actively identify and repair leaks and manage water pressure. Additional headcount requirements in this area are focused on ensuring that IW meets targets for leakage reduction and minimises impacts on customers. Waste Water Source Control & Discharge Licensing (WWSCDL): This IW function is developing and implementing strategy on the management, governance, and licensing of commercial customer discharge into the wastewater collection network. Activities include surveys of the wastewater treatment loads and operational practices of our industrial customers and the provision of associated advice. This supports greater IW control of waste loads to prevent corrosion of assets, failure of treatment processes, and issues with extreme odours. Environmental Regulation: The Environmental Regulation function was created in IW in IRC2 and combines policy, licensing, and additional testing capability. It is responsible for environmental regulation governance and policy, and for interacting with key stakeholders (such as EPA, HSE) on regulation and legislation. Resources have been allocated to meet EPA regulatory reporting requirements, which was identified as a critical need in IRC1. The enhancement of the team has led to significantly improved reporting performance with a 60% increase in the overall number of incidents reported to the EPA. Marketing – €3m During 2016, marketing costs were lower than originally anticipated as the suspension of domestic water charges resulted in the postponement of a number of public communication campaigns. In IRC2, marketing costs returned to expected levels and direct communications to customers on the quality of water supplies, and the public awareness campaign on water conservation, are some of the main activities being undertaken. 24 | IW | Revenue Control 3 Operational Expenditure
Shared Services / Group – €5m Shared Services provides the transactional services required by the Ervia Group and its subsidiaries in a number of critical operational areas including finance, procurement, facilities, HR and IT. Activity levels in Shared Services have been rising significantly as IW ramps up both capital investment and operational support. As outlined earlier, the number of Maximo, Click and Syclo users has almost doubled from the original projection. Separately, Cybersecurity is an issue that continues to be of the highest priority for IW. As a crucial utility provider for households and business, we must protect essential IT infrastructure, networks, and data from attack, damage or unauthorised access. The critical need to implement more robust cybersecurity arrangements across IW has also impacted on our operational cost base in IRC2. Insurance & Statutory Inspections – €6m Insurance: As noted earlier, IW has developed its insurance model with the aim of implementing the most cost effective approach. While we are taking a robust management approach, we do expect a projected increase of €4m in our insurance costs over IRC2. Statutory Inspections: During IRC2, IW established a number of statutory inspections programmes covering the inspection and maintenance of electrical, fire, gas, chemical and ATEX assets. An additional Opex spend of €2m by 2019 is necessary in order to meet IW’s statutory requirements in this regard. 3.2.5 Extreme Weather Events – c. €3m Since the commencement of IRC2, Ireland has experienced a range of extreme weather events including two major storms (Ophelia and Emma) and the drought conditions of Summer 2018. These events had a sudden and significant impact on the provision of water services. IW had to respond immediately and effectively to these crises to safeguard critical infrastructure and supplies for customers. The associated additional costs, which were beyond IW control and could not have been foreseen, are c. €1m in 2017 with a further increase of €6m in 2018. We do not currently anticipate the same level of weather impacted incidents to be experienced again in 2019 and the reduction in growth reflects this. In the event that unexpected incidents do occur in the future, we will engage with the CRU to set out the expected impact. 3.2.6 Non Domestic Billing Support – c. €5m (only in 2017) Following the migration of Non Domestic Billing Services to IW in 2017, the expertise of staff in LAs was utilised to provide support services during the transition. The cost of this Post Go Live Support (PGLS) is included in the 2017 Opex cost only. 3.2.7 Growth Outlook Even with significant capital investment to date, IW remains far behind our European peers on compliance standards and meeting the requirements of the Water Framework Directive (WFD) and the Urban Wastewater Treatment Directive (UWWTD). 25 | IW | Revenue Control 3 Operational Expenditure
IW incurred essential additional expenditure over the IRC2 period in order to make progress in addressing compliance issues, to meet national policy requirements, and to deal with the impact of externally driven costs. Many of these cost drivers will continue into RC3 and are addressed again in IW’s Look Forward submission. Note: These Opex growth factors are key differentiating factors when comparing IW’s cost base to international comparators. This important consideration is addressed in further detail in the benchmarking analysis which supports our RC3 submission. 26 | IW | Revenue Control 3 Operational Expenditure
4 IRC2 Service
Improvements
27 | IW | Revenue Control 3 Operational Expenditure4 IRC2 Service Improvements
During the IRC2 period, IW continued to improve the delivery of Ireland’s water and
wastewater services – enhancing the health and quality of life of the people of Ireland,
protecting the environment, and enabling economic development. Each day, we
provided services to over 1.7 million customers, delivered 1.7 billion litres of clean
drinking water, and treated 1.2 billion litres of wastewater before returning it safely to our
environment.
Key highlights in IRC2 include;
Removing 85 public water supplies from the EPA’s Remedial Action List serving
a population of over 580,000;
Removing 12 agglomerations from the list of those discharging untreated sewage
to the environment;
Removal of legacy and long term Boil Water Notices3 for over 20,000 people;
Launching the Environmental Information Management system (EIMS) project to
deliver a vital tool for managing drinking water and wastewater environmental
information for our business and regulators;
Successfully managing a number of significant national weather and crisis
events, ensuring that all customers were kept informed via our online channels;
Successfully refunding domestic water charges to over 94% of customers in line
with the Water Services Act 2017;
Rolling out the Leakage Reduction Programme with a target of reducing the
volume of drinking water lost by approximately 106 million litres per day over the
IRC2 period;
Developing and launching the National Leakage Management System which will
allow IW to prioritise leakage management activity to achieve targets; and,
Introducing a National Telemetry System to enable regional monitoring and
remote support of water and wastewater treatment.
Below we set out in more detail some of the key initiatives undertaken in the period to
improve service performance and deliver benefits to households and businesses across
Ireland.
4.1 Environmental Compliance and Incident Reporting
Compliance levels have increased across both drinking water and wastewater over the
IRC2 period. This has had a direct impact on activity levels and operational needs over
IRC2, which in turn will impact our operational needs for the RC3 period.
3
In place in 2014 for more than 200 days
28 | IW | Revenue Control 3 Operational ExpenditureWater RAL: The Remedial Action List (RAL) is a register of public water supplies which the EPA deem to have certain treatment deficiencies. For each supply on the RAL, the EPA requires IW to take corrective action to ensure the safety and security of the drinking water being supplied. Since the start of 2017, 51 water supply zones have successfully been removed from the RAL, benefiting a population of over 290,000. An additional 34 supplies are projected to be removed by the end of 2019, bringing the total number of supplies to be removed from the RAL during IRC2 to 85. BWNs: In 2014, 23,000 people were on long-term Boil Water Notices (BWN) in Ireland, including c. 16,000 customers which were remaining from inherited BWNs in place before the establishment of IW. IW prioritised investment in these schemes and, at the end of December 2017, the population affected was less than 20. Although significant progress has been made by IW to remove all inherited BWNs, new issues continue to emerge creating both short term and long term notices. At the end of October 2018, the population affected by BWNs was 2,651, reflecting 10 individual notices. During 2018 a BWN was in place for almost 9 Months on the Lough Talt water supply in Co Sligo. This notice affected a population of more than 12,000. To remove the risk of further notices on this supply, a new treatment plant is required. Construction of the new plant is subject to complex planning requirements. Other high profile BWNs during IRC2 were related to extreme weather events such as Storms Ophelia and Emma. IW continues to liaise with the HSE to identify any potential risks to public health and takes swift action when problems are identified. Reporting: In June 2017, the IW website was updated to expand on the number of parameter results available to the public: www.water.ie/water-supply/water-quality/. Water quality results for over 70 individual parameters are published to this website. Members of the public can search for their water supply zone using a property search on google maps. Results are updated on a daily basis and information is also provided to assist the public in understanding the data. This is a service that is not provided in many other water utilities. Wastewater PAL: The Priority Action List (PAL) is a register of Wastewater Treatment Plants which the EPA deems to have certain deficiencies. For each WWTP on the PAL, the EPA requires IW to take corrective action. Year-on-year, IW has been working to address these issues and, since the start of 2017, 67 agglomerations have been successfully removed from the PAL. As of Q2 2018, the PAL number stands at 132. IW has targeted to have further reduced this total to 111 by the end of 2019. Untreated sewage: The 2013 EPA report on Urban Wastewater Treatment identified 44 agglomerations discharging untreated sewage to the environment (baseline figure). IW has set a target of reducing this number to zero by 2021. While this represents a major challenge, steady progress has been made, with a reduction of 12 by mid-2018. Most significantly, the population equivalent affected by untreated agglomerations has reduced by 44% since 2014. Incident Reporting: IW had identified incident reporting as a key area of concern in IRC1. During IRC2, the provision of additional incident training, together with the 29 | IW | Revenue Control 3 Operational Expenditure
development of an IW incident management system, were identified as important requirements to enable improved reporting practices. Actions have been taken by IW to address both issues and, as a result, the overall number of incidents reported to the EPA has significantly increased during the period (60% increase in the number of incidents recorded in 2017). Environmental Information Management System (EIMS) The EIMS (Environmental Information Management System) is currently being expanded to act as a central repository of environmental information generated throughout the IW business. It will provide support to the management of key environmental activities such as sampling, compliance, trade effluent, and licensing. In addition to collecting key environmental data, the system will collate data from existing IT systems. This will provide management and reporting support to enable IW to satisfy its regulatory and national environmental objectives. Enhanced management information will also facilitate improved prioritisation and decision making. 4.2 Plant and Network Performance Improvement Process optimisation focuses on driving operational improvements, meeting compliance standards, and the efficient use of energy across all water and wastewater sites nationally. Priority is given to evaluating and addressing problems on sites that have adequate capacity but which are failing due to operational issues. The IW Process Optimisation team, working with Asset Operations and LA partners, has already contributed to significant improvements at our water and wastewater treatment plants. This is evidenced in IW’s improved compliance performance in IRC2. Over 4,000 operational recommendations have been proposed since 2014. Over half of these have been completed by June 2018 with the remainder in progress, many of which require capital investment. The Asset Operations Standard Operating Procedures (SOPs) project was also initiated during IRC2. 20 priority SOPs have been drafted and the majority are being trialled at Water and Wastewater Treatment Plants in c. 30 locations across the country. Full rollout across all plants and networks will follow during 2019/2020, including incorporation of SOPs into staff training courses. This will facilitate standardised, best- practice ways of working across plant and network operation. 4.3 Incident Management Since establishment, IW has been challenged with a variety of incidents which have tested our readiness, capability and resilience in delivering water services. During Storm Ophelia, we played a key role in executing National Emergency Response Plans in partnership with the LAs and the ESB, demonstrating the vital role of incident management in guaranteeing security of supply and continuity of service for customers. 30 | IW | Revenue Control 3 Operational Expenditure
You can also read
