Official Report: Minutes of Evidence

The Chairperson (Mrs Erskine): I welcome John French, chief executive; Peter Russell, executive director for price controls (PCs), networks and energy futures; Elaine Cassidy, director of price controls; and Ciaran McCann, head of price controls for gas and water.

Are members agreed that the evidence be recorded by Hansard?

The Chairperson (Mrs Erskine): We have your written briefing in our pack and have taken a look at it. I invite you to make a brief opening statement of about five minutes, after which I am keen to go to members' questions.

Mr John French (Utility Regulator Northern Ireland): Good morning, everyone, and thanks for the opportunity to attend the Committee today to provide you with an update since we last met in April, including our overview of the final determination of our mid-term review of PC21.

As the Committee will be aware, as the independent economic regulator for water, the Utility Regulator's (UR) role is defined by statute, namely the Water and Sewerage Services (Northern Ireland) Order 2006. The Order sets us two principal statutory duties: to protect the interests of consumers and to ensure that the functions of Northern Ireland Water (NIW) are properly carried out and that Northern Ireland Water can finance them.

We undertake our role through four main statutory functions. The first is price controls, of which the mid-term review forms part. Price control is a formal process that determines, through benchmarking and economic modelling, the revenue that Northern Ireland Water needs to provide efficient water and waste water services. We also undertake licensing. Water and sewerage undertakings in Northern Ireland are prohibited activities under the legislation, and water and sewerage providers need a licence from the Utility Regulator in order to operate. We undertake disputes and appeals. We can make legal determinations on issues such as new connections and sewer adoptions. Finally, we undertake enforcement action to stop a breach of water and sewerage companies' licence conditions or statutory requirements. In addition, we monitor Northern Ireland Water's performance by analysing annual information returns and publishing annual cost and performance reports.

As mentioned, we must act within the 2006 Order when determining the price control. We must also be mindful of the Northern Ireland Executive-endorsed 'Sustainable Water' long-term water strategy for Northern Ireland, which runs from 2015 to 2040, as well as the short- and medium-term requirements of the Department for Infrastructure's social and environmental guidance. The Utility Regulator must therefore ensure that Northern Ireland Water is provided with the revenue allowances that allow it to meet its statutory and environmental obligations. The Utility Regulator has always supported a fully funded price control to provide Northern Ireland Water with an efficient allowance to enable it to comply with its statutory duties.

PC21 is our current and fourth price control for Northern Ireland Water and covers the six-year period to March 2027. In May 2021, we made the final determination for PC21, which was that Northern Ireland Water required £2·1 billion of capital investment to support and deliver an investment plan that was efficient and affordable from a tariff perspective. At the time of the final determination for PC21, we recognised that there was a degree of uncertainty about the allowances that were set, particularly for waste water and sewerage schemes, and a need to deliver environmental obligations to address capacity issues in the network and release development constraints. The mid-term review provided Northern Ireland Water with a further opportunity to clarify its investment needs during the price control on the basis of further investigations and studies that were completed in the first half of PC21.

In undertaking the mid-term review, we published the draft proposals in March 2023 and undertook a public consultation in May of that year. In September 2023, we published a document explaining our approach to the mid-term review, and we finally received Northern Ireland Water's mid-term review submission later that year. We undertook a detailed review of Northern Ireland Water's proposed changes across the waste water enhancement programme, and we assessed Northern Ireland Water's claims for the additional revenue that it needed for capital and operational expenditure. We made our draft determination on the additional revenue and assessed its impact. We also assessed any changes to the output targets.

We published our draft determination in May this year. The reporter, who is an independent adviser, provided us with technical support during the process to assess Northern Ireland Water's capital costs and ensure that our determination allowed for the appropriate levels of inflation across the UK water sector. We published the final determination of the mid-term review on 30 September. In it, we determined that there needed to be an increase in the capital allowance for Northern Ireland Water from £2·1 billion to £2·4 billion. That was needed to maintain existing services and deliver the upgrades required to meet its quality, environmental and service-level obligations. The increase of £300 million from the May 2021 final determination was necessary due to the significant increases in inflation that occurred following the cost-of-living crisis.

On capital expenditure, Northern Ireland Water requested an additional £320 million on top of the £300 million that I just mentioned for above-inflation capital increases. However, following our review, we could not see sufficient evidence to justify that claim. That accounts for the greatest proportion of the difference between our mid-term review final determination of £2·4 billion and Northern Ireland Water's submission of £2·75 billion.

In addition, we determined that average tariff increases of 4·5% were needed in the last two years of the PC21 period to March 2027. That was to account for the unprecedented increases that Northern Ireland has seen in electricity costs, which have occurred since Russia's invasion of Ukraine. That equates to an increase of £75 million compared with the final determination in May 2021 of PC21.

On the back of more up-to-date information, we also determined limited adjustments to Northern Ireland Water's output targets. The mid-term review process also identified that further analysis will be needed on the cost escalations to fully establish why some of Northern Ireland Water's capital costs are higher than predicted. That work is being undertaken, and it will be taken into account at the end of the PC21 period when we analyse Northern Ireland Water's costs and performance. It will also be used to inform the next price control, PC27. The independent reporter is also providing professional advice and technical support on that additional work.

Whilst ongoing government public expenditure constraints may affect the budget available to Northern Ireland Water, the Utility Regulator has no powers to legally take account of that potential impact when determining the mid-term review. Our statutory role is to ensure that Northern Ireland Water is set a revenue allowance that is effective and efficient and allows it to meet its statutory obligations, taking account of the Northern Ireland Executive's long-term water strategy and the Department for Infrastructure's social and environmental guidance. How that revenue is funded is, ultimately, a policy decision for government. Therefore, it is for Northern Ireland Water and its shareholder, the Department for Infrastructure, to determine how they will meet the revenue allowance that is needed for Northern Ireland to have clean drinking water and an environmentally compliant waste water system.

That was my overview, Chair. We are happy to take questions on that.

The Chairperson (Mrs Erskine): Thank you very much. Last week, we were at the Moyola water treatment works. The Committee is concerned about the funding and how it impacts on people in Northern Ireland.

I will kick things off by asking about the additional money that Northern Ireland Water requested and your determination, which was increased to £2·4 billion. What was Northern Ireland Water's rationale for the additional claim, and what evidence would the Utility Regulator need to see to be able to increase its determination to the amount that Northern Ireland Water asked for?

Mr Ciaran McCann (Utility Regulator Northern Ireland): We have already decided on the mid-term review on the basis of the evidence that we have seen. Basically, the issue was around cost pressures that are above inflation. We have allowed £300 million for inflation. We disallowed an additional increment from £2·3 billion to £2·75 billion. That is to do with the price inputs above inflation. Capital price increases above inflation are called "real price effects"; that is the jargon that we use. We decided that there is no evidence of real price effects, but we are undertaking further work with NI Water in order to understand the causes of that increase: the increment between the £2·4 billion that we allowed and the £2·75 billion.

We hope to conclude that early next year. We are still trying to understand the causes of that balance .

The Chairperson (Mrs Erskine): We have NI Water's annual report. I noted with concern Sara Venning's comment:

Is it likely that the Utility Regulator will move to enforcement? What does enforcement look like?

Ms Elaine Cassidy (Utility Regulator Northern Ireland): At a high level, the Utility Regulator has statutory duties for enforcement. If we are convinced that there is a breach or a potential contravention, we have a duty in statute to take enforcement action; it is not discretionary. At the minute, we are looking at a number of potential enforcement actions associated with the sector. Our enforcement role is statutory: it is quasi-judicial. That means that we have to be circumspect in giving evidence, but I can confirm that a number of potential enforcement actions are currently with our compliance and enforcement directorate, which is a separate directorate in the Utility Regulator with which those potential actions sit. That directorate will go through our published enforcement procedure, which starts with initial investigations and goes through to final determinations.

We have a number of statutory instruments in our enforcement toolkit, and we can apply those, if we come to the end of a process and conclude that there has been a breach. They range from voluntary undertakings to enforcement of statutory financial penalties — determined under secondary legislation on financial penalties — or the production of an enforcement order. An enforcement order is a legal document that, when put in place, outlines the potential contraventions that we see and sets a specific time frame within which those contraventions should come to an end. At the end of the day, that enforcement order is enforceable through the courts.

I have outlined the sphere within which we can act. A number of potential enforcement actions sit with the Utility Regulator's compliance and enforcement team at the minute, and the team is working through the published procedure for those actions to determine where they may end up.

The Chairperson (Mrs Erskine): What is the number? Can you detail that?

Ms Cassidy: Off the top of my head, without reverting to papers, I would say that we are sitting at about three batches. There could be a variety in those batches, but there are three high-level batches with the enforcement team.

The Chairperson (Mrs Erskine): Is enforcement on those three batches under way right now?

Ms Cassidy: They are being dealt with by the enforcement directorate, which is working through the enforcement procedure. The procedure has certain points. We would be happy to share the enforcement procedure with the Committee, if that would help. It is a detailed procedure, but there is a flow chart, and it flags at what point those actions will become public and we publicise them on our website. That procedure is the same across all the regulated sectors. If it would be helpful, we could forward that to the Committee to give it a better understanding of the process.

It might sound like I am being a bit vague, but, because it is judicial in nature, we have to be careful not to prejudice any stage of the investigation.

The Chairperson (Mrs Erskine): We understand. What is the timescale?

Ms Cassidy: The timescale for enforcements can range from six months to 24 months: it depends. We have done enforcements in all the regulated sectors over the years. I can tell the Committee that the majority of enforcements relating to NI Water are in their early stages. For example, if we send out initial enquiries and we get a quick response and can make an easy determination that there is a potential contravention, we can move quickly. If the facts or details of the situation are slightly more difficult, the process may be iterative, with toing and froing between us and the regulated company to determine whether we need more information. We can issue a statutory information request called an "article 51 notice" to demand the information, if it is not forthcoming. We have a wide range of statutory provisions that allow us to deal with enforcements and potential enforcements. That is the stage that we are going through.

The Chairperson (Mrs Erskine): OK. If you could provide the Committee with some evidence or more information on that, it would be greatly appreciated.

Ms Cassidy: Yes, absolutely.

The Chairperson (Mrs Erskine): That has such an impact on consumers, constituents and those of us in the room.

What is your assessment of the longer-term impacts of the underfunding of PC21 and future price controls? I assume that you are looking towards the next price control as well, so what are the longer-term impacts?

Mr French: As I said in my previous evidence session, PC21 was the first of two and a half price controls to get Northern Ireland Water up to where it needed to be, especially with its waste water systems. If the funding is not there, that process is delayed. I am sure that you heard about the impact in your evidence session with Northern Ireland Water. Clean water is OK; the issue is the impact on waste water systems. You will have seen that in Lough Neagh, Belfast lough and so on. The lack of funding is just delaying Northern Ireland Water in getting to where it needs to be, which is a modern and efficient waste water system. Does anyone else want to come in?

Mr Peter Russell (Utility Regulator Northern Ireland): Yes. PC21 is a process in which we have gone through the business plan of the company. It is a six-year plan for a large capital investment programme and the operational programme. We assessed that on whether it is economical and efficient, affordable and deliverable. We cannot do everything within the six-year window to get waste water and water where it needs to be to fulfil the legal obligations of the company. It will mean a couple of price controls.

At the start, the price controls were fully funded for the first couple of years, but that is not the case now. It is also not a case of just hitting "Pause" on the projects and then hitting "Play" again. The supply chain and the programme of work need to be in place, and, if that is stopped, there are a lot of knock-on effects. It is not simply a case of saying, "OK, we have had the monitoring round, we have x, y and z, and now we have the money"; it is a difficult process to stop in the middle of a six-year programme. You are absolutely right, Chair, that there will need to be a couple of price controls to get Northern Ireland to where it needs to be to meet its legal obligations.

The Chairperson (Mrs Erskine): Again, Northern Ireland Water's annual report states:

Do you agree with that?

Mr Russell: Yes. That would be three price control periods. It is a long-term process. As I said, it is just not possible, because of the supply chain, to deliver all of that within one price control period.

The Chairperson (Mrs Erskine): Lastly from me, before I hand over to the Deputy Chair, I noted what you said about adoptions. Unadopted sites are something that we have been discussing in the Assembly Chamber as well. In Northern Ireland, there are about 1,900 unadopted housing developments, which is an untenable situation for the homeowners and for our infrastructure in Northern Ireland. You said that you have powers related to unadopted sites: what powers do you have? Can you step in on behalf of a homeowner in Northern Ireland, and have you done that?

Ms Cassidy: It goes back to one of our four statutory key functions, which is the determination of complaints and disputes. The Utility Regulator can become involved in those situations, and we have done so in the past. We published a decision as recently as May. We have a quasi-judicial role in the determination of a complaint or dispute. If a developer or homeowner is having an issue with engagement with NI Water on adoption, they can submit a complaint and dispute to the Utility Regulator. It will follow a clear statutory process under which we will make a quasi-judicial decision in favour of NI Water or the developer or homeowner. That judicial decision is enforceable in the courts, so that is where the Utility Regulator can step in. Again, it is a statutorily driven process, but we have dealt with a number of those over the last 18 months, and all of our determinations will be published on our website.

We need to go through quite a structured process. It is like a mini court hearing, in that there is the submission of evidence, the production of a statement of case and arguments to and fro. We will then make a decision internally and publish that. That is where the regulator can become proactively involved in particular circumstances.

The Chairperson (Mrs Erskine): Is that just for Northern Ireland Water specifically? When there is an issue between a developer and Northern Ireland Water, can a determination find against the developer?

Ms Cassidy: Yes. In real terms, the developer submits a dispute or a complaint under our complaints and dispute process, and we follow the statutory process through to a determination in favour of the developer or NI Water, depending on the circumstances of the case.

Mr French: Going back to my opening statement, I repeat that we can deal only with companies that we give a licence to, which is why we cannot deal with developers. We can deal with Northern Ireland Water only because we give it a licence to operate water and sewerage services in Northern Ireland.

The Chairperson (Mrs Erskine): OK.

Mr Stewart: Thanks very much, folks, for coming along today and for the presentation. Like the Chair, all members have significant concerns about the long-term impacts of underfunding on economic development here and on key Executive priorities. We could wax lyrical about all of those issues.

The Utility Regulator report refers to the engagement with stakeholders outside of Northern Ireland Water and the Department. Will you outline who they are and the outcomes of those stakeholder engagements in terms of understanding the impact of underinvestment?

Mr French: It is on various levels. I will let Ciaran explain.

Mr McCann: It is on various levels and in various processes. As part of the mid-term review, which deals not with the impact of underfunding but with what is, we believe, a fair revenue allowance, we engaged with the Consumer Council NI (CCNI), which is the consumer voice, the Northern Ireland Environment Agency (NIEA), which is the environmental regulator, and the Drinking Water Inspectorate (DWI), which is the water quality regulator. There is, of course, DFI as well. We carried out a very intensive process of engagement through the mid-term review with those parties and others. We take account of other wider interests in our responses and determination. We engage with those stakeholders in other forums as well.

Mr Russell: The process for the price control is that we publish a draft determination once we have been through the business plan and gone and back forth with the company to make sure that we fully understand it. As we work through the benchmarking, we come up with the draft determination, which is published for consultation. We then assess and publish the responses that we get to that. I cannot remember the number of responses.

Ms Cassidy: We had five responses to the mid-term review, and we worked through those.

Mr Russell: There were a few more to the initial price control setting. We engage a lot through that process. In general, a lot of bodies and regulators are involved in this space. Ciaran mentioned DWI, NIEA and DFI. There are a lot of different parties working together in this space.

Mr Stewart: Do you get the sense from that engagement that people truly realise the terrible situation that Northern Ireland Water is in and the impact of that on economic development? Is how significant and big this crisis is recognised?

Mr French: I do not think that there are any stakeholders that do not realise that.

Ms Cassidy: A testament to that — just to follow through on that point — is the engagement that we have had with stakeholders on the issue of NI Water and the wider contextual position in the last 24 months, which has been an absolute step change compared with the engagement in my previous 12 years at the regulator. That is visible in the engagement and in potential enforcement. We talk to the other enforcement bodies about what everybody else is doing and what they are looking at, so that there is no wasted enforcement. There is a more strategic approach. More recently, we had proactive engagement with the Office for Environmental Protection (OEP), which has come into the sphere as another key stakeholder. The realm of stakeholder engagement on the issue in the last 24 months is absolutely visible across the entire organisation.

Mr Stewart: Thank you. I will move on to another issue. Last week, we raised with the chief executive of NI Water internal policy directives on restricting development at certain sites. I raised, for example, the like-for-like five-year rule and how that impacts on the development of brownfield sites and sites with economic potential. The chief executive was not able to tell me why it is five years and not 10, why that specific policy had been implemented and who had implemented it. I want to get your feeling on that. As the Utility Regulator, do you cover those internal directives? Have you looked at that?

Mr McCann: It is not something that we are familiar with in depth. It is not really part of our role.

Mr Stewart: I just want to talk you through the impact of that. A site sits there unused for six years. Someone wants to go in and develop it like for like, using the same amount of water turnover. It is an instant blanket ban. However, there is a chance that, had it been switched on again by the existing site, it would not have been a problem. It would open up the potential for those economic sites in key industrial areas where people want to invest with no additional impact on the system. However, there is just a carpet ban there. You can understand why people who want to develop those areas economically find that frustrating. They cannot seem to get answers.

Mr Russell: I understand, but assessment on that site-by-site basis is on the NIEA side. I guess that that policy would be for NIEA. I am not throwing that issue over the fence, but it is not part of our remit in terms of economic regulation and the price control process. I understand the point.

Mr Stewart: Yes. OK. I will move on to a point that, hopefully, is on your side. I raised with the chief executive the case-by-case basis, for example, of a special educational needs school in my constituency. That had another instant ban on it because of the impact on the capacity issue, despite the fact that those young people would be in the same town. If they were not at school, they would be at home, so there would be no additional impact. The chief executive said that that would potentially be a matter for both the NIEA and the Utility Regulator to work on with it hand in glove. Is that something that you do in those cases? Have you been approached by Northern Ireland Water, in conjunction with NIEA, to look at specific cases so that a flexible and not obtuse approach can be found on those applications?

Mr French: Yes, in a way, but it comes back to what we said earlier. We give Northern Ireland Water an allowance for its waste water systems. Northern Ireland Water will see where, in your constituency, the waste water system needs to be strengthened and improved, and we will give it an efficient allowance to improve that waste water plant. The problem is that we are not funding it to a level to allow Northern Ireland Water to undertake those works. That is the problem that we find ourselves in. It is not that the Utility Regulator is saying no to Northern Ireland Water on this; it is that the funding is not properly there for allowing that waste water system or plant to be upgraded to where it needs to be. I do not know the specifics, but that, I guess, is roughly the answer.

Mr Stewart: Yes. OK.

Mr Boylan: Thank you very much. John, I have listened to all that you said, and, before the Chair calls me for taking too much time to ask my question, I must say that this is a very important subject. We are where we are on PC21. We have done the review, and we have a few years left to run on it. We have to accept that. I appreciate that, as we all say, it is underfunded, but we are where we are on the terms we have agreed.

This is my first question. It follows from the development issue, because we get it as elected reps. In your assessment, are the environmental targets being prioritised over development? You may not be able to answer that, but I ask that because we received a presentation last week, and we are trying to meet our climate change targets 100%. However, is that being prioritised over development? More and more sites are sitting there. What is your assessment at this mid term?

Mr French: I do not have the data to give you a straight answer. I do not know whether any of the others do.

Mr McCann: No. Again, it is not information that we would have. It is as John said earlier. What happens under the price control is that we get the assessed need, and that covers things such as drinking water quality, the environment, constraints —.

Mr Boylan: I appreciate the point and what you say.

I will move on to the next question, because that is important. We cannot all operate in silos here. I appreciate that you have a job of work, but we have to get together on this.

Mr French: I agree with you.

Mr Boylan: My next question is this. We signed off on PC21 at £2·1 billion. In mid term, we have given another £300 million. What I read from the PC21, which was clearly identified following a determination from you, is that this is the programme of work. We have allowed for price inflation, so we have allowed another £300 million. Is that right? Is that just to meet inflation over the last number of years, or are there other factors?

Mr McCann: That is just for inflation. It has been updated for inflation: prices of the day.

Mr Boylan: OK. My reading of that is that the original programme, PC21, should then be the six-year programme. That is what your determination is, right?

Mr French: Yes.

Mr Boylan: The question is with when you say that it needs more funding. It came with a plan, you agreed a plan and that was the plan of action. Every Department has asked for more money. That is the way it is. From what you have allocated, it should be able to fulfil the programme under the original determination. Is that right or wrong?

Mr French: Yes, it is fully funded.

Mr Boylan: Is that fair enough?

Mr French: Yes.

Mr Boylan: This is my final question, Chair. I could ask loads.

The Chairperson (Mrs Erskine): You are grand.

Mr Boylan: In your assessment, has NIW got all of the data to do the proper modelling to present to you?

Mr Russell: On the price control plan?

Mr Boylan: Yes, on the price control. Are there any issues over the data?

Mr Russell: No. As I said, it is a long process going through that six-year business plan and saying, "This is going to deliver the long-term water strategy; this is going to take a couple of price controls to get us to where we need to be; and this is what is deliverable in the first six years". That is funded in the first couple of years.

On your earlier point about the mid-term review, that is a normal part of the process. We say six years, but, obviously, things change. A lot of that was energy costs going up. NI Water is the largest electricity user in the country, so that was factored in there as well.

Mr Boylan: I appreciate that. You noted the real price effects. Do you want to comment any further on that?

Mr McCann: We have made a final determination on the real price effects. There is an increment of money, which is the £300 million above the £2·4 billion. We have said that those are not real price effects and could be something else, and we are working with NI Water at the minute to understand what the cause of that increase is.

Mr Boylan: Chair, I have one final point. We have had three price controls since this started in 2007.

Mr McCann: This is the fourth one.

Mr Boylan: This is the fourth one, yes.

Mr French: Taking it back to the real price control, with the monitoring and modelling, we do not understand why Northern Ireland Water believes that it needs that additional money. The work with the reporter and the work with our team is to understand whether there are specific prices in the water industry that are rising at a higher level than normal inflation.

Mr Boylan: I understand the point, but it will inform the next PC.

Mr French: It will, yes.

Mr Boylan: That is my point. Fair enough. Thank you.

Mr McMurray: You mentioned the reporter. I am trying to get my head around that. Obviously, they have an expertise: how much expertise is that? Is it someone who has worked in the industry? Is it duplicating? Is it going through the operational procedures with a fine-tooth comb, or is it just a financial look at it? How are they analysing the data, and how does the reporter conduct their work?

Mr McCann: It is basically a technical audit. You have a team —.

Mr McMurray: Is it a team?

Mr McCann: Yes, there is a reporter and then people working for the reporter. They go into NI Water and understand NI Water's processes that underpin the increases in cost. It is quite a technical audit, basically, of NI Water's processes to make sure that they are accurate and efficient. It is one of the big tools that we have in our cost scrutiny and outputs toolbox to assist us in scrutinising NI Water. It is independent as well, and the reporter has a primary duty of care to us as a regulator.

Mr Russell: It is kind of an external auditor, essentially.

Mr McCann: Yes, it is an external audit.

Mr French: It is a common process in water regulation and rail regulation. It gives you that insider view of the organisation. It has access to all of Northern Ireland Water's data, and, as Ciaran and Peter said, it is like an auditor to make sure that, when Northern Ireland Water says that it needs x, it has independently checked that. The reporter has the engineering and industry expertise to look across to other jurisdictions and say that that is fair enough or is not fair enough or that what Northern Ireland Water proposes is efficient or is not efficient. It might say that there is better technology out there that it could use. It is that kind of insider within the organisation that is giving an independent view of what, Northern Ireland Water suggests, is needed.

Mr McMurray: We were with NI Water at Moyola water treatment works. They explained to us how efficient they were, but, according to the reporter, maybe there is a discrepancy in that regard. How are those differences resolved? What is the to and fro in the methodology to come to an understanding? It is obvious that there is a difference.

Ms Cassidy: Quite a lot of regulators across the water moved away from having a reporter but are now moving back. The reporter is like internal technical eyes and ears. One of their primary jobs is to help to inform the UR about NI Water's delivery of its statutory objectives. It is an internal view. One of their actions is to take a detailed look at NI Water's annual performance statement. They also take an internal detailed look at NI Water's mid-term review, business plan submission and all of those internal things, so that, when they get to the regulator, NI Water and the reporter have had their say. It comes to us, as an independent economic expert, to determine. It is not necessarily that an agreement has been reached at any point; we look at the evidence that is presented, with NI Water and the reporter having had the opportunity to say their piece. That is where our role adds value; we come in as the independent economic expert and look at that.

Mr Russell: In other regulated spaces, a third-party consultancy — one of the big four or an engineering consultancy — may come in, try to get up to speed with the company and answer our questions. Somebody who understands the processes and is embedded can take best practice from elsewhere and say, "Actually, this is not efficient". The Committee has heard evidence from NI Water about the closing of the 49% efficiency gap. Over the past couple of price controls, that has, essentially, gone; it is down to 6%. The reporter helps to understand the internal workings of the company and can then report to us with the detail.

There is a big asymmetric information problem in economic regulation: the company has all that information, and we are trying to get it. Instead of our having to go back and forward to request information, the reporter is embedded and can really get to the bottom of it a lot more quickly.

Mr McMurray: What do you anticipate happening in future price control periods? Will there be increased funding for Northern Ireland Water to fulfil its obligations under the Climate Change Act (Northern Ireland) 2022? That is something big that is coming down the road too. What is your opinion on that?

Ms Cassidy: We always set price controls on a forward-looking basis. We set a price control at the upper revenue allowance that, we believe, NI Water will need to fulfil its statutory duties.

Maybe it will be helpful if I go back slightly and talk about how we got to where we have got to. When the Water and Sewerage Services (Northern Ireland) Order 2006 was introduced on 1 January 2007, it set in legislation the vast majority of the obligations that NI Water has to comply with. That legislation envisaged domestic water charging coming into play within a three-year period. Those obligations and statutory duties were set in 2007 at that level but with the anticipation that, within three years, it would be fully funded via a different mechanism. Unlike other regulated entities, the vast majority of NI Water's obligations are in legislation. The vast majority of the obligations of other regulated entities are in licences. We, as a regulator, can amend the licences; we can, essentially, lower the bar on occasion if necessary. It is due to the different context here and the legislative framework that we have got to where we are.

On top of all those legislative obligations, you are adding the new climate change road to net zero targets. That adds a different level of obligation that we will have to consider when we set the price control at the upper revenue allowance to concur with statutory compliance. There is no choice but to factor in the Climate Change Act targets.

Mr Boylan: It is prioritising. That is the question that I asked. You are saying that it has prioritised its climate targets from day 1.

Ms Cassidy: It is prioritising the statutory obligations. Anything that is in statute has to be prioritised. That is how it is.

Mr Boylan: That is the question that I asked.

Mr K Buchanan: Thank you for coming along. My question relates to your document, which states:

Are you, John, as Utility Regulator, content that NI Water is doing that: providing consumers with sewerage services? What is the definition? When does a consumer become a consumer?

To pick up on John's point, NI Water is not providing sewerage connections. Are you, as the regulator, content? Obviously, it should be providing sewerage services, but at what point do you regulate? Is it when the connection becomes connected, or is it prior to that, or is it the whole piece?

Mr French: It is the whole piece, really. Sorry, I am trying to break down your question. Are we satisfied? Well, that is going through, as Elaine mentioned, the compliance and enforcement process. Northern Ireland Water directors have stated that they cannot meet their statutory obligations, so we will have to investigate that and come to a conclusion. That process is ongoing at the moment. Northern Ireland Water's directors are saying that they are not meeting their statutory targets, so that is clear.

On connections, as Elaine said, we have a legal duty to make sure that Northern Ireland customers can connect to the network. The problem is that we have a sewerage system that is unable to deal with those connections.

Mr K Buchanan: I am sorry to cut across you. Last week, Sara Venning made the point about rainfall, and I referred to the idea of there being no rain in Northern Ireland as a crazy idea. They are concerned with combined storm overflows. The system can cope today, theoretically, if it does not rain, so they are focusing on the rain to prevent the combined storm overflows, but that does not allow one more house or for John's point. People using the toilet in Carrickfergus, whether the toilet is in their house or the toilet is in the school, is not additional people.

The rules state "no more connections". The environment is important, but they are not looking at this sensibly. Can you do more policing of them and ask, "Why are you making that idea? Why are you making that decision?". It is fundamentally wrong. It is fundamentally breaking the provision of sewerage services. I appreciate that, if more people are being brought into the town and another 100 houses are being built, that is somewhat different. However, there is a house there, and you go by the five-year rule or do not let the school be built. They are saying a blanket "no more", but they are focusing solely on combined storm overflows and are saying no.

My question to you, on the basis that you are the police officer for that, is this: are they providing sewerage services?

Mr French: Clearly, they are not. Clearly, they —.

Mr K Buchanan: So, what can you do to them to, in other words, analyse —? For example, if you look back at 100 planning applications in different areas — sorry, Chair — you would see, "No, no, no", but you would say, "But that does not make sense". That no is a no because it is easy to say no. Never mind that the developer has to pay a fortune of money to get the no. Some of those noes could be a yes, so how do you police that, John, to look at the broader picture and say, "You are being too rigid here". You are the police officer.

We are pushing to say that we want environmental protection; we want development. We want both, which is difficult, but they are wooden. They are using the wooden no to beat us over the head and to beat development over the head, but there is no reason for the no.

Mr French: Could you explain the dispute process?

Ms Cassidy: Yes. I go back to your first point about when a consumer becomes a consumer. Article 6(3) of the Water and Sewerage Services Order deals with consumers. Consumers are dealt with in a slightly different context in Northern Ireland than they would be by Ofwat across the water, because a consumer is traditionally seen as somebody who pays for the services. That is when you become a consumer, but our legislation —.

Mr K Buchanan: Sorry. When you pay?

Ms Cassidy: Yes, but our legislation is different. "Consumers" are consumers who use the system in Northern Ireland. That is important. You do not become a consumer when you start to pay, so it is not —.

Mr K Buchanan: So, technically, just to get that clear, everybody in Northern Ireland is a consumer.

Ms Cassidy: Yes, and that is different from across the water.

Mr K Buchanan: Which is of benefit to us.

Ms Cassidy: There is, obviously, then, this: we all appreciate the context that we are in as regards funding and that wider social context. There is a pull between the legislation stating that everybody in Northern Ireland is a consumer and has a right and the real-life situation, where there is not enough funding. As the regulator, our duty is to ensure that, for the consumers defined in article 6, the price control that we allow sets an upper revenue allowance for them to receive every service that they should under the terms of the legislation. We set that allowance here. There is no obligation in law for that allowance to be mandated to be met. We look at it and say, "For all consumers in Northern Ireland, we believe that this is the level of revenue required for the next price control period to allow those services to be met". Once we set that upper revenue allowance, we do not have the ability to get in and determine exactly what NI Water does. We do not have the ability to produce legally binding outputs on the company, which, again, is different from England and Wales, where the regulator can place legally binding outputs on companies. We can come in if there is a complaint and dispute with a developer who is not receiving the services that, they believe, they are legally entitled to under legislation or if we are informed of a potential breach in enforcement.

The long answer to your question about where we can get involved is that we cannot get involved in individual instances, telling the company how it runs its business. However, when people come to us via a quasi-judicial complaint and dispute or a potential enforcement issue, we have statutory powers that mean that we can get involved.

Mr K Buchanan: On a last point, if I may, let us take John's example of the school. The school is obviously not a developer. However, let us say that whoever is building the school — the Education Authority (EA) or whoever — came to you and said, "We should be allowed to build this school. What is the reason for the no?". The EA could come to you, and you could have the conversation about that, and that is probably a good case to pick instead of a developer building an additional 100 houses. If the EA came to you and said, "Why are you stopping that?", could you, as the regulator, then have a conversation with NI Water?

Ms Cassidy: In short, yes, but it is slightly more complicated, because they would come to us and say, "This is the problem we have", and because we are a statutory creature, we would say, "Right, let us consider whether we have the statutory powers to deal with this". We would then go through quite a formal process with the school, the applicant from the school and NI Water to ascertain whether NI Water was delivering on the statutory obligations that, we said, it should have been fully funded for. We would then produce a determination.

Mr K Buchanan: A final question, if I may.

The Chairperson (Mrs Erskine): Final question.

Mr K Buchanan: Are you content that NI Water is doing all that it can with what it has and could be a bit more flexible? It is a wooden no, and, I think, it is wrong in some instances.

Mr French: We could not say for your constituency whether it was doing that. Overall, though, Northern Ireland Water has become more efficient. In 2007, for every pound that an efficient water company in GB was spending, Northern Ireland Water was spending virtually £2 to achieve the same thing. Now, for every pound that an efficient water company in GB spends, Northern Ireland Water spends £1·06 to get to the same level, so it is there or thereabouts in overall efficiency. We would not have the level of detail to know whether it is more efficient in other constituencies compared with your constituency. We would be looking at the overall Northern Ireland picture.

Mr Russell: Again, that goes back to its taking a couple of price controls. As the Chair said, it was 18 years, so that was three price controls to get all of Northern Ireland to where it needs to be. It is that big programme of work that has now been paused.

Mr K Buchanan: What can you do, John? What can you do to look at NI Water from a consumer point of view to see what decisions it is making? What can you do?

Mr French: Sorry, in terms of —.

Mr K Buchanan: In other words, you are looking at all consumers. Everybody in Northern Ireland is a consumer of NI Water technically. What can you do to protect those consumers on the basis of some of the decisions that NI Water is making to disadvantage some of those consumers?

Mr French: We set the revenue that it needs to meet the social and environmental guidance in the strategy and legislation. If it does not do that, we would then start slowly going through the enforcement and compliance procedures. If Northern Ireland Water was not achieving what it set out to achieve, it would eventually become a breach of licence, and we would have to go through the legal process with that.

Mr K Buchanan: Thank you.

Mr Boylan: Chair, this is vital.

The Chairperson (Mrs Erskine): Yes.

Mr Boylan: It is. You are saying that we have a PC programme that is predominantly achieving its climate targets as opposed to development, growth and economy, if you analyse it that way. You explained it: it has to meet its targets. That was the question that I asked you. That is why I say that we cannot operate in silos. We have to have the broader conversation on planning. Councils will not be able to give permission for planning, because they will not be able to connect to the system. Consumers do not seem to be getting a fair crack of the whip, because, under its obligations, NIW has to commit to climate targets. That is my reading of it.

Ms Cassidy: Just to clarify, I agree. It has to commit to the targets that are set in all legislation. Climate targets have no higher precedence than the company's statutory obligations for connections; they are all equal.

Mr Boylan: If you look at the PC programme, you will see that that is why it is running out. That is my outlook on it. That is all that I say. We have to include all that, because there is no development.

The Chairperson (Mrs Erskine): That is important, and it is a major issue that is affecting all our constituencies. We are all feeling it, and that is the thing.

I want to check something. What financial penalties can you enforce? Is there a range?

Ms Cassidy: Yes, a range is laid out in statute. It is in the regulations on financial penalties, which, I think, are from 2015. I can check that and come back to you. A statutory formula is in secondary legislation that we can work through to get to a point where we determine that a financial penalty is appropriate. We do not just make it up; we work through the statutory formula to get there.

The Chairperson (Mrs Erskine): OK. I do not see your hand up, Mark, but I want to check so that you are not feeling left out. Do you want in?

Mr Durkan: That is considerate of you, Chair. Thank you. Most, if not all, of the points that I was going to make have been made. I am sorry that I missed the start of the session, so I missed the names of all those who are giving evidence. What I have caught has been good, so I thank you for that.

You talked about setting an upper revenue allowance for Northern Ireland Water: do you also set a lower revenue allowance for Northern Ireland Water?

Ms Cassidy: No.

Mr French: The idea behind price controls is that the company should try to beat that upper limit. That is how efficiency is brought into price controls. Each time an upper limit is set, the company tries to beat that over the period of the price control. Those efficiencies are then baked into the next price control. That is how companies are meant to become more efficient over time. It is meant to be that you set the upper limit and the companies try to beat that. In the next price control, you swallow what they have beaten and make the companies more effective for the next price control. That is the process. You can see how, over time, companies can become more efficient through that process. You look at the —.

Mr Durkan: Yes, but do you understand what I mean about the lower allowance? Has a limit ever been identified as the bare minimum that would be required?

Ms Cassidy: No. I am sorry —.

Mr French: There is a question of terminology here.

Ms Cassidy: When we set the upper revenue allowance, we do not allow for any fat per se. We are not saying, "This is what we think the upper limit is, but there is a bit of scope there". We set the upper revenue allowance at what, we believe, is factually required to deliver the programme. We do not say, "It is factually that, but we will add another 5% or 10% just in case". The limit is set at what, we believe, are the parameters for delivery. In one way it is the upper limit while being the lower limit, if you know what I mean.

Mr Durkan: The limits? [Laughter.]

Mr Russell: Mark, do you mean setting the limit with the budget that is available? Are you talking about trying to set a lower limit that way?

Mr Durkan: Yes. I think that I have got it. I had it anyway, but I just wanted confirmation that there is no fat in what is set and that the limit is what is required to carry out statutory functions.

Mr French: The company is then trying to become more efficient over that five- or six-year period.

Mr Durkan: Yes. When it comes to improved efficiency, John, you made a comparison and did a read-across with efficient English companies. For every pound that an efficient English company would spend, I think that you said, Northern Ireland Water would spend maybe £1·06 to do the same. Northern Ireland Water has closed that gap and become more efficient. In that example, how is "efficient" defined relative to the English company? It is an English company that is doing the same thing or a similar thing, I presume. Is it about defining how effective it is or just how good it is at balancing the books?

Mr Russell: Mark, in England and Wales, which we are using for comparison, there are a lot of water companies, so the regulator there is able to compare the performance of them all. We are using that as the example, because we just have the one company here. We regulate the monopoly companies — energy and water — because competition is not there. If there were another water company in Northern Ireland competing with Northern Ireland Water, you would get that efficiency through competition. That is why we set the price controls. We are kind of the quasi-function for competition. We are driving down the prices through economic regulation.

Mr Durkan: Yes.

The Chairperson (Mrs Erskine): OK, Mark?

Mr Durkan: No. I have another question about commercial water rates. Do you have much of a role in or oversight of what Northern Ireland Water does with water rates for business customers?

Mr French: Do you want to explain the tariff process?

Mr McCann: Basically, we set the whole revenue allowance for the price control, and that is then split into tariffs. A proportion of that revenue goes to non-domestic consumers, and we set a non-domestic tariff. The rest of the revenue should be recovered from domestic consumers, but, obviously, there is no water charging. [Inaudible.]

Mr McCann: Yes. That is it. We set a tariff.

Mr Durkan: OK. Thank you, folks.

The Chairperson (Mrs Erskine): I do not see any other members — sorry.

Mr Stewart: Chair, may I come in with two final points?

The Chairperson (Mrs Erskine): Briefly, if you could.

Mr Stewart: On the reporter's engagement, you mentioned that he or she looks internally at the organisation and at how it operates logistically and maybe sometimes compares that with international models of best practice. Has there been any feedback from examples around the world about how well systems of processing water could be replicated here? How easy has that conversation been with Northern Ireland Water? Does that happen regularly?

Mr McCann: That is part of the reporter's job. As we explained, we have a reporter who has real auditing and technical engineering expertise, so they use their experience.

Mr Stewart: Do they compare models of best practice from around the world, apply them to how Northern Ireland Water does it and then say what it could do better?

Mr McCann: Exactly. They use expertise from looking at other companies across the water and elsewhere and applying that.

Mr Stewart: I just want to check that the comparison is with companies that are not just across the water but around the world. There are other examples from around the world where things are done differently and often much more efficiently. Is that fed back, yes?

Mr McCann: Yes.

Mr French: Although it is a reporter — singular — they are generally part of a bigger organisation that has that background.

Mr Stewart: This is my final, final point, Chair, if I may. When we heard from the Construction Employers Federation, it gave us chapter and verse on developers' frustrations with the delays with NIEA and Northern Ireland Water in developer-led solutions to waste water. Is there any feedback on or oversight that you can give on why that process takes so long and is so laborious and why, when there are statutory requirements to consult on planning applications, it still invariably takes an age? Is there something more from a regulation point of view that you can say to them to speed those things up so that they become more solution-friendly?

Mr French: We have no duties in terms of —.

Mr Stewart: None whatever?

Mr French: No. We look purely at the economics of the company.

Mr Stewart: That is fine. Thank you, Chair.

The Chairperson (Mrs Erskine): Thank you very much for coming to us. It would be great if we could get some more detail on that enforcement piece, because, as a Committee, we are really keen to see where that is heading and what happens with it. We will follow up with you on that.

Thank you very much for your time and evidence today. We really appreciate your coming in.