Irish Water. Benchmarking. Interim Price Control Submission Document No: IW-IPC-010

Transcription

1 Irish Water Benchmarking Interim Price Control Submission Document No: IW-IPC-010

2 1 Introduction The purpose of this paper is to outline how Irish Water (IW) and the Commission for Energy Regulation (CER) can develop a joint approach to benchmarking which would satisfy both parties. Coordinating an aligned approach would reduce the need for external benchmarking assistance, therefore reducing costs, and would eliminate the administrative burden of reconciling different methodologies and/or results. IW understands that the CER intends to use benchmarking as an aid in determining the efficient levels of operational expenditure for Irish Water, along with efficiency trends and advice from industry experts 1. Benchmarking is an important element of the proposed regulatory framework and has been used successfully by the CER in setting allowed revenues for other Irish utilities. However while there is significant precedent to guide its implementation, the unique circumstances of IW will present certain challenges that are outlined in this paper. Benchmarking is also a key tool which IW can use to assist in (a) setting appropriate performance targets as part of overall business planning and (b) identifying those areas where specific improvement programmes can yield the greatest results in the shortest period of time. Although it will take time and investment from IW to develop the efficiency levels achieved in other jurisdictions, benchmarking will be a useful input to the prioritisation and targeting areas for investment, operational and efficiency improvements. 1 CER consultation paper: Economic regulatory framework for the public Irish water services sector. 2 Irish Water

3 2 Challenges Benchmarking any company is a complex process which involves a selection of reasonable comparator companies, while allowing for differentiating factors such as network age and complexity, geographical distribution, labour rates, etc. This task is made more difficult however by factors unique to IW: IW is still in an embryonic state having assumed responsibility for water and waste water assets on January 1 st, The amount of robust data currently available on assets and performance is extremely limited and cost data is not available in sufficient granularity. The definition, collation, systemisation and collection of sufficient levels of data will require both time and effort. Until the full roll out of Work and Asset Management systems to Local Authorities (LAs) is achieved, performance monitoring will rely heavily on manual reporting. As with any manual process, this brings associated risk of error and delay, making it extremely difficult for IW to establish a reliable baseline of performance data for use in the Interim Price Control process. The CER has highlighted that benchmarking in Ireland is more difficult than in Great Britain due to the lack of local comparator companies 1. Benchmarking against Ofwat regulated companies presents additional difficulties caused by the disparity in historic investment levels, variations in scale and connections density and differing ownership structures; levels of market maturity and environmental compliance challenges. IW, through Service Level Agreements (SLAs), will manage the local delivery and operation of water services by LA staff. IW will work to standardise procedures and processes across the LAs who until now have used many different working methods and practices. As the operational costs and efficiency levels will vary between LAs initially, a national level benchmark can be of only limited value. The constraints imposed by the SLA model limit the ability of IW to impact significant change in the short term and the absence of a direct comparator for the SLA model at national and international level is challenging. 3 Irish Water

4 IW is fully supportive of the benchmarking process however the above challenges would impact the reliability of a benchmarking process during the Interim Price Control period. IW is keen to work with the CER over the coming months to agree an approach for the next full price control period from This will allow IW to begin building the agreed benchmarking requirements into its data collection and reporting systems so that a robust baseline can be generated in the future. 4 Irish Water

5 3 Proposed Approach 3.1 Dataset IW believes that the data sought in the Business Planning Questionnaire for the Interim Price Control is not appropriate to the current level of maturity of IW. IW has very little robust asset or performance data at present and until Work and Asset Management Systems are rolled out, IW will be relying on largely manual monthly reporting from LAs. IW would like to work with the CER to agree a benchmarking approach and develop a dataset that would be collated for the first full price control period (which begins in 2017). This dataset would be applicable to the water sector in Ireland and should align with existing statutory reporting requirements (e.g. EPA environmental data reporting). IW proposes the establishment of an internal working group comprising representatives of the Assets, Operations, Customer, Finance and Regulation functions to propose a dataset that could be reliably collected and used for both performance monitoring and price control purposes. IW envisages that a draft revision of the Business Planning Questionnaire would be available in Q IW is eager to work closely with the CER throughout this process and recommend that the IW Regulation function would meet with a CER project team on a regular basis to review progress and discuss any emerging issues. Once agreed, this dataset would be built into IW s data collection and reporting systems. 5 Irish Water

6 3.2 Benchmarking Methodology From the Interim Business Planning Questionnaire, IW understands that the CER is keen to utilise benchmarking methodologies and data available for the water industry in Great Britain. The appropriateness of this approach is dependent on the extent of directly comparable data that will be collected for IW. As noted by the CER, care needs to be taken to ensure that the inputs used result in a like for like comparison and appropriate interpretation of the results is needed to ensure that the correct conclusions are drawn by the regulator 1. Other benchmarking approaches also worthy of consideration include: Benchmarking between Irish Local Authority Operations At present LAs vary considerably across a number of dimensions including costs; number of schemes; levels of outsourcing (e.g. Design, Build, Operate contracts); daily work outputs; and the number of personnel and their mix of grades and skill sets. Capturing data on all of these variables will allow IW to better understand the existing cost base while benchmarking LAs will allow IW better understand the range of existing practice and efficiency. This analysis would not only identify efficiency programmes for IW but could be used in discussions with the CER to set a realistic transition path to greater efficiency. Forward Looking Benchmarking of Irish Water A number of benchmarking techniques take the historic evolution of comparator cost bases into account in their analysis. This approach would not only take into account relative efficiency, but the rate of relative improvement over time. While the historic data available to IW is very limited, it may be possible to benchmark IW s forward looking plan to demonstrate the relative rates of efficiency improvement. Capex Unit Cost Benchmarking Given the scale of IW s future investment requirements, it is important to show that efficiency is embedded within capital plans. An approach used by other regulators is the unit cost benchmarking of certain capital assets (e.g. cost per km of pipe), to look at relative efficiency improvements over time. This would be applicable to the first full revenue cycle as the majority of interim capital projects have already been committed under the framework of the Water Services Investment Programme (WSIP). 6 Irish Water

7 Rather than propose a single methodology at this early stage, IW would like to work with the CER to assess the advantages and disadvantages of each option, giving equal representation to the requirements of both parties. Once a methodology is agreed, an independent party could undertake the benchmarking analysis for the full price control cycle on an impartial basis. 7 Irish Water

8 4 Summary This paper outlines some of the difficulties associated with benchmarking analysis for the Interim Price Control period. IW therefore proposes to work with the CER to reach agreement on the dataset and benchmarking methodology which should be put in place for the full price control period which begins in Given that IW is still in an early stage of development and has not yet finalised its own business performance reporting, the Interim Price Control period offers an ideal opportunity to define an efficient approach to data collection and benchmarking for the future. This approach would enhance transparency and shared understanding of data, and would reduce the costs associated with separate analyses and subsequent reconciliations. IW would welcome the opportunity to discuss this proposal with the CER during the Interim Price Control engagement. 8 Irish Water