1. To the Lord Mayor and Members of Dublin City Council Report No. 404/2013 Report of the Dublin City Manager Briefing on Transition on to Irish Water 1. Overview The purpose of this report is to brief Members on the current position in relation to the transition of responsibility for water and waste water services from local authorities to Irish Water. It is important to bear in mind that the arrangements for the transition are not determined yet. The required legislation has not been enacted and the proposed Service Level Agreement (SLA), under which Dublin City Council will provide services for Irish Water has not been finalised. From the Members perspective there are a number of elements of the transition that will be of interest. They are as follows: DCC Objectives Relating to the Transition, The Legislative Framework, The Regulatory Framework, The Irish Water Consultative Forum, The draft SLA including Annual Service Plans/Five Year Plans, Irish Water Protocols and Memoranda of Understanding, Other Risks to DCC and Service to Customer and Councillors. These issues are covered in Sections 2 to 8 below. Conclusions are presented in Section 9. Mr John Tierney, Managing Director of Irish Water and Mr Phil Hogan T.D., Minister for the Environment, Community & Local Government were requested to attend the Special Meeting of the City Council or to send a representative/representatives. John Tierney responded by e-mail on 10 December drawing attention to a letter dated 22 November 2013 (copy attached) and stating that it was Irish Waters intention to arrange regional briefings for Elected Member in early 2014. The Department replied by letter dated 13 December 2013 that they were not in a position to send a representative to the meeting due to pressure of work associated with the transition. 1

2. 2. DCC Objectives Relating to the Transition The following two key objectives have informed the City Council executives approach to all negotiations related to the transition: the City Council and its and ratepayers should not be negatively impacted by the transition of responsibility for water services to Irish Water. In particular the City Councils capacity to deliver non Irish Water services should not be adversely affected and as far as possible the SLA should follow the basic principles of a commercial agreement in which both parties are willing participants. In terms of protecting the interests of businesses the Councils position was that the financial arrangements associated with the transition should be such that at least the City Council would be able to compensate businesses for any increase in non domestic water charges as a consequence of a move to a uniform national water tariff. Net expenditure on water and waste water services by DCC in 2014 is forecast at 49.5m. This value is based on the total spend and income forecast for 2014, adjusted by the value of services retained by DCC. To date, this net funding has been provided by a combination of funding from the Local Government Fund allocation and commercial rates. Based on previous years funding profiles the element of funding from commercial rates represented in the net funding of water services of 49.5m is 40m. In an ideal world once responsibility for water and waste water services has been removed from the Council it would not be expected to continue to subsidise the provision of these services. While it was always acknowledged that this was unrealistic in the current fiscal climate there is a strong argument that part of the subsidy should be retained by DCC to enable it to compensate businesses in the City Council area for any increase in non domestic water charges in the event of the introduction a higher uniform national water tariff. 3. Legislative Framework Three pieces of legislation provide the framework for the transition as follows: Water Services (No. 1) Act, 2013 This was enacted in March 2013. It established Irish Water as a legal entity, it removed the prohibition on charging for domestic water and it gave the Commission for Energy Regulation (CER) the regulatory function in relation to Irish Water. Local Government Reform Bill, 2013 This Bill is currently going through the Oireachtas. Section 69 of the Bill amends Section 6 of the Local Government Act, 1998 relating to the Local Government Fund and makes provision for the Minister to make payments to Irish Water in respect of water services functions transferred to it from local authorities. 2

3. Water Service (No. 2) Bill, 2013 This Bill is currently going through the Oireachtas. It provides for the transfer of water service functions from 34 local authorities to Irish Water. A detailed note on the contents of this legislation prepared by John OShee Assistant Law Agent is attached. 4. Regulatory Framework In October 2013 the Commission for Energy Regulation published an Information Note entitled The CER and Water Regulation in Ireland and a Consultation Paper entitled Economic regulatory framework for the public Irish water services sector, in which it set out its proposals for the economic regulation of Irish Water. These papers are available on the Commissions web site. 5. Irish Water Consultative Forum The Irish Water Consultative Forum was set up under the Labour Relations Commission as a forum for national union/management negotiations relating to the transition. A recommendation was issued in June 2013 by the Chairman of the Forum, Mr Kevin Foley that provides for SLAs between individual local authorities and Irish Water to endure for a minimum period of 12 years with reviews after 2 years and after 7 years. This recommendation also provides that if a SLA comes to an end, the staff covered by the agreement will transfer to Irish Water and their terms and conditions of employment and superannuation arrangements will be guaranteed by legislation. 6. Draft Service Level Agreement (SLA) There have been intensive discussions in relation to the SLA over the past 10 months involving local authorities, the Water Services Transition Office (WSTO) representing the local government sector and Irish Water. The initial plan was that there would be an overall framework agreement and individual SLAs would be negotiated between each local authority and Irish Water. However, what is now proposed is a national generic SLA which the Manager of each authority will be expected to sign with Irish Water. A copy of the latest version of the draft SLA (dated 5 December 2013) is attached for the information of Members. Based of the latest draft SLA there are a number of areas of concern which I feel I should bring to the attention of Members as follows: Pension Liability There have been extensive discussions between Irish Water, the local authorities, WSTO and the Department of the Environment, Community & Local Government in relation to this matter. The Department has stated that at the end of the SLA 3

4. period (i.e. 12 years) individual local authorities may be responsible for legacy pensions (i.e. pensions of existing retired water services staff or any water services staff who retire over the course of the SLA). In the normal course of events one would expect that when a function transfers from one public service agency to another public service agency responsibility for legacy pensions associated with the function would also transfer. DCC will be transferring approximately 2bn worth of assets to Irish Water without any compensation. A proportion of the funding for these assets came from commercial ratepayers. It seems unreasonable that a major liability relating to these assets will remain with the Council notwithstanding the fact that the assets have transferred to Irish Water. The pension liability is directly related to the underlying water assets and was incurred in developing and maintaining those assets. The actuarial legacy pension liability in respect of DCC staff who were or are engaged in the provision of services under the SLA has been estimated by PwC at 330m. While this will reduce over the expected 12 year period of the SLA it will still constitute a potential major liability for the Council. Debtors An agreement still needs to be put in place in relation to the transfer of all existing DCC water service related debtors to Irish Water at a fair value. Recoupment by DCC of Full Costs Incurred under SLA As part of the Annual Service Plan a headcount plan and budget for 2014 were provided by DCC to Irish Water. Irish Water has confirmed that it will recoup DCC 1.7m less than the total costs it will incur. This would leave the City Council with a deficit of 1.7m in respect of the services it will provide to Irish Water in 2014. While the reduction of 1.7m on an overall operational SLA budget of 106.3m is relatively modest (it represents a cut of just over 1.5%), especially in the context of the current budgetary situation, it still represent a violation of the principle that the City Council should be recouped in full for the costs it incurs under the SLA. The Managed Cost protocol defines the mechanism through which a local authority invoices Irish Water. This protocol places the financial risk on the local authority by stating that additional costs over and above the agreed budget will only be recoupable if savings are made elsewhere. Given the nature of the service being provided and the acknowledged lack of investment in the infrastructure required to deliver the service, it is to be expected that additional costs will be incurred from time to time. Local authorities should not be in a position where they are providing services on behalf of Irish Water for which they will not be fully reimbursed. Role of the Local Government Management Association (LGMA) in Agreeing Changes to the SLA The draft SLA provides (Section 8.3.2) that changes to the SLA conditions, to any schedule, to protocols and material changes to the structure and format of the Annual Service Plan can be agreed between the Managing Director of Irish Water and the LGMA. 4

5. The LGMA is not a party to the SLA and therefore should not be in a position to agree changes at national level in relation to the SLA conditions, to any schedule, to protocols and material changes to the structure and format of the Annual Service Plan. The SLA is a legal agreement between the individual local authority and Irish Water and any subsequent changes should be agreed by these two parties. Suspension and Exit Arrangements There is no provision in the draft SLA for a local authority to exit the SLA within the specified 12 year period no matter how unfavourable its experience with the operation of the SLA is. Dispute Resolution Process A mechanism is defined in the SLA in relation to dispute avoidance and resolution. However, it is confined to commercial disputes. The definition of commercial disputes is limited to the following: a. an issue as to the amount to be paid by one party to the other under the agreement, b. whether or not an event constitutes force majeure, c. whether or not an instruction from Irish Water requires a local authority to act in breach of statutory requirements and d. whether or not there has been a significant failure giving rise to the need to terminate the SLA. There is a further provision in relation to technical disputes which states that ultimately, the resolution of technical issues will be the responsibility of Irish Water, whose decision shall be final and binding and not subject to review by conciliation or arbitration. A technical dispute is defined as follows: Any dispute or differences between the parties (including where this agreement provides for the parties to reach agreement on any matter and the parties have not been able to do so) other than a commercial issue. The only issues which the local authority can bring to arbitration are limited cases defined as commercial disputes. In all other disputes the decision of Irish Water is final. Central Management Charge (CMC)/Support Services While recoupment of CMC charges is provided for, Section 10 of the draft SLA contains a provision which will allow Irish Water take over a support service function. Should this arise, a mechanism needs to be put in place to allow local authorities to be compensated for CMC costs stranded with the local authority. No such mechanism is currently in place. 5

6. 7. Other Potential Risks to DCC There are a number of other risks to DCC as follows: Key Documentation not Complete The draft SLA makes reference to a Termination protocol and to Information and Records protocol which have yet to be developed. DCC was one of five pilot sites in relation to the validation of protocols. A significant number of risks and issues were documented as part of the process. The final versions of these protocols have not as yet been issued. Memoranda of Understanding In relation to functions which will remain with the local authority but in respect on which Irish Water will have an input, it is proposed to develop a series of Memoranda of Understanding. However, these are not available as yet. Important areas to be covered by MOUs include: Surface Water Drainage and Flood Management, River Basin Management and Major Emergency Management. Planning & Development Control The draft SLA states that Irish Water will undertake the role of statutory consultee in the planning process with respect to water service functions (Section 14.1.2). As the availability of water and waste water services are critical to proper planning and development, there was an expectation that the Water Services (No. 2) Bill, 2013 would define the role of Irish Water in relation to both the development control and the land use planning process. However, the Bill gives Irish Water no role and it is our understanding that this will be dealt with by Regulation prior to the actual transition. Uniform National Tariff It seems likely that a uniform national water tariff will be applied by Irish Water. Non domestic water charges are generally lower in Dublin than elsewhere in the State. This reflects the economies of scale which the regional operations of the Dublin local authorities have brought to the water network and also the investment in operational and capital aspects of the service over successive decades. Dublin is the engine for the national economy and water services are essential to the future development of the Dublin economy. At this stage it appears that there will be near full recoupment for the costs incurred by DCC in 2014 in supplying services to Irish Water under the SLA. The Council has been advised that its Local Government Fund allocation will be reduced from 52.6m in 2013 to 2.67m in 2014. This reduction exceeds the forecasted 2014 net expenditure by DCC on water and waste water services covered by the SLA. This means that the Council will be unable to compensate businesses for any increase in water charges in the event of the introduction a higher uniform national water tariff. 6

7. 8. Service to Customers and Councillors DCC will continue to deal with all customer queries and provide customer information via its website and social media accounts until April 2014. From April customers will contact Abtran, working on behalf of Irish Water and the Irish Water website will provide country wide information. As outlined in John Tierneys letter (copy attached) Irish Water is developing a programme of engagement with Councillors and the letter outlines some of the options they are considering. I am confident that customers and Councillors will continue to receive the high level of service to which they have become accustomed following the transition. 9. Conclusions Even allowing for the fact that the arrangements for the transition of responsibility for water and waste water services from local authorities to Irish Water still have to be finalised and matters that are currently unresolved may be determined in the City Councils favour prior to the actual transfer deadline it seems clear, based on the above analysis, that the likely outcome of the transition will involve very significant financial and operational risks to the City Council. The outcome will also fall well short of meeting the legitimate objectives set by the Councils executive. However, it is important to acknowledge that all parties have acted in good faith in seeking to negotiate arrangements for the transition. The City Council must recognise that the State is sovereign. The transition to Irish Water is also being undertaken at a time of continuing austerity and reduced resources. The reality is that individual local authorities, Irish Water and the Department had little room for manoeuvre. Against this background the City Councils legitimate aspirations to emerge unscathed from the transition process, while entirely reasonable, were always unrealistic. I am satisfied that the draft SLA, while it will undoubtedly involve very serious financial and operational risks and challenges for the Council also probably represents the best deal that can be negotiated given all the circumstances. Owen P Keegan Dublin City Manager 7

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