COMMITTEE FOR REGIONAL DEVELOPMENT

OFFICIAL REPORT
(Hansard)

Reapportionment of water and sewerage costs

12 March 2008

Members present for all or part of the proceedings:
Mr Fred Cobain (Chairperson)
Mr Jim Wells (Deputy Chairperson)
Mr Cathal Boylan
Mr Willie Clarke
Mr John Dallat
Mr John McCallister
Mr Raymond McCartney
Mr George Robinson
Mr Brian Wilson

Witnesses:
Mrs Barbara Faloona )
Mr John Mills ) Department for Regional Development
Mr Paul Priestly )
Mrs Katharine Bryan )
Mr Mark Ellesmere ) Northern Ireland Water
Mr Ronan Larkin )
Mr Chris Mellor )
Ms Jo Aston )
Mr Sean Lyons ) Northern Ireland Authority for Utility Regulation
Mr Iain Osborne )

The Chairperson (Mr Cobain):
I welcome the witnesses to this morning’s meeting.

As far as possible, we are trying to track the chronology of the matter from when the Department for Regional Development (DRD) discovered that there was a problem through to the current situation. It is hoped that we will gain some information that will comfort consumers somewhat that this debacle will not recur in six months’ time. You can therefore lay the groundwork first, and then the Committee will ask you questions.

Mr Paul Priestly (Department for Regional Development):
The Department for Regional Development and the Minister realise that an unfortunate set of circumstances has arisen. The Minister is doing what he can, with the Department, to address the problem with Northern Ireland Water and to seek action to mitigate the impact that the misapportionment may have. We may get into discussing the action that we are taking and the impact that that might have.

We wrote to the Committee Clerk on 22 February, setting out the chronology of events up to that date. On 14 January, Northern Ireland Water informally advised the Department’s water policy division of inaccuracies in the data. The division wrote to Northern Ireland Water on 18 January seeking formal confirmation of the position. At the quarterly shareholders’ meeting on 20 January, the company advised that it was working on a detailed response to that request. On 4 February, the company responded, explaining that there had been a historical misapportionment of costs between the domestic and non-domestic sectors. The company also set out some of the implications that would arise when the costs between those sectors had to be rebalanced. It is worth saying at this point that we considered that, when it discovered a problem, the company was right to bring that to the attention of the Department.

On 5 February, the Minister was advised informally that the problem existed. On 12 February, we briefed him formally on what had happened and what the problem was. On 14 February, the Minister wrote to Northern Ireland Water requesting a meeting. At that meeting, he asked the company, through the chairman, Chris Mellor, the chief executive, Katharine Bryan, and the finance director, Ronan Larkin, to explain the issue to him. He asked them what action could be taken to mitigate the problems that had arisen. He then had a separate meeting with the chairman on 19 February to ask him to consider what further action ought to be taken in response to the difficulty.

On 22 February, the Minister was in the Netherlands, and I think that he spoke to you about the problem. On that date, our departmental liaison officer wrote to the Committee Clerk explaining what had happened. The story went public at that point. On 25 February, DRD officials were asked to attend a meeting of the Committee for Regional Development to give a first explanation of events. That brings the chronology up to date.

The Department has held a number of internal meetings and has met representatives of Northern Ireland Water and the utility regulator to discuss various steps that might be taken in the next couple of years to mitigate the problem. That work is ongoing, and we can provide a little more detail on where it stands.

The Minister made it clear to Northern Ireland Water that the matter had put him in a difficult position, especially at a time when the Executive are addressing the scheme of charges that needs to be agreed in time for introduction by 1 April 2009. The situation has had an impact on the Minister’s confidence and on public confidence in Northern Ireland Water, which is very unfortunate.

The Chairperson:
Am I correct in saying that the figures first appeared in the strategic business plan, which the water policy unit and the Department drew up?

Mrs Barbara Faloona (Department for Regional Development):

The Department worked with the company and the data that it provided. At that stage, we had no reason to suspect that there was any fault with the data that the company was using.

The Chairperson:
My point is that the Department was involved in drawing up the strategic business plan that produced those financial projections; they were not produced solely by Northern Ireland Water.

Mrs Faloona:
Water Service was the entity that we worked with.

The Chairperson:
Is Water Service part of DRD?

Mrs Faloona:
Water Service was in the DRD at that time.

The Chairperson:
In that case, did the Department draw up those figures, in conjunction with the water policy unit of Northern Ireland Water?

Mrs Faloona:
The strategic business plan was agreed between DRD and Water Service, as it was at that time.

The Chairperson:
Rather than continuing on this torturous route, I want to make the point that the strategic business plan from which those financial projections came was drawn up by the Department, the water policy unit and Northern Ireland Water.

Mrs Faloona:
Yes, the water reform unit, as it was then, was involved. Northern Ireland Water did not exist until 1 April 2007; it was Water Service before that.

The Chairperson:
I know that. I do not want to labour the point, but the Department had a role in drawing up the financial projections that led to this debacle. Is that correct?

Mrs Faloona:
Water Service provided the data that were used.

The Chairperson:
We need to get this into perspective. Am I right to assume that people pay in arrears for the non-domestic metered water that they use?

Mrs Faloona:
Yes.

The Chairperson:
If people pay for the water that they have used, surely that would give a benchmark or some indication as to the projected income over the next three years. No guesswork should be involved; at the end of each year, you should know exactly how much non-domestic customers have paid for water.

Mrs Faloona:
For a number of years, Water Service billed non-domestic customers on the basis of consumption.

The Chairperson:
Therefore, is your answer yes?

Mrs Faloona:
That was identified in the figures that were provided to the Department at that time. However, direct rule proposals resulted in an extension in the non-domestic sector, and new charges would have been introduced —

The Chairperson:
I know all that. I am trying to find whether non-domestic customers are metered.

Mrs Faloona:
Not all of them are metered.

The Chairperson:
As far as Northern Ireland Water is concerned, the majority of customers are metered.

Mrs Faloona:
A significant proportion of them are metered, but not all of them.

The Chairperson:
I did not say all of them. Is it correct to say that a significant proportion of non-domestic customers are metered? The largest share of the income that comes from the non-domestic sector has been metered.

Mrs Faloona:
Yes.

The Chairperson:
Therefore, at the end of each financial year, you know exactly how much non-domestic water has been used and how much has been paid.

Mr John Mills (Department for Regional Development):
My understanding is that the problem arises —

The Chairperson:
I will get to the problem shortly, John. I am trying to clarify matters.

Mr Mills:
I am trying to address that, Chairman. You can correct me if I am wrong, but I think that you are asking how such a mistake could have been made when non-domestic customers were already paying for water.

The Chairperson:
That is not what I was going to ask.

Mr Mills:
My apologies.

The Chairperson:
I am trying to find out how the projections could have been that far out, given that customers were metered and that the data for the past three years were available.

Mr Mills:
My understanding is that Northern Ireland Water included trade effluent volumes, which is sewage discharges, into the volume of water that was being estimated.

The Chairperson:
Where did they get that from?

Mr Mills:
That is my understanding.

The Chairperson:
Therefore, did they not use the projections in the strategic business plan?

Mr Mills:
I do not know what the projections for non-domestic consumption were.

The Chairperson:
I will tell you what they were. In the strategic business plan, for 2008-09, the figure was £109 million, which was revised to £118 million; for 2009-10, it was £116 million, which was revised to £128 million.

Mr Mills:
I understand that those estimates would have been based on the miscalculation, which contained the double counting of trade effluent discharges, thereby falsely inflating the volume of water that was consumed.

The Chairperson:
Are you telling me that Northern Ireland Water — not the water policy unit in the Department — miscalculated the figures in the strategic business plan?

Mr Mills:
That depends on when the strategic business plan was drawn up. Water Service, as an agency of the Department —

The Chairperson:
John, hold on. DRD is responsible for Water Service, which is part of that Department. Is that right?

Mr Mills:
Yes.

The Chairperson:
Let us not get into this type of discussion, suffice it to say that the Department for Regional Development was responsible for this matter originally. Officials in DRD calculated the figures and drew up and paid for the strategic business plan. The Department is responsible for this, not Water Service. Water Service is an element of DRD.

Mr Mills:
That is correct.

The Chairperson:
We are going round in circles on this matter.

Mr Wells:
What prompted Northern Ireland Water, Water Service or the Department to investigate those figures? Did something trigger your concern? Or, did someone simply wake up one morning and decide to investigate the domestic and non-domestic water supply and sewage disposal?

Mr Priestly:
Based on information from the company, my understanding is that in preparing for the introduction of water charges, the company undertook a quality assurance check on the data and discovered an historic underestimation, or double counting, if you like. The company was right to bring the matter to attention after it made the discovery.

Mr Wells:
I accept that, but it strikes me that the timing was flawed, because something as fundamental as that should have been considered years ago, particularly when the Department’s strategic plan was being formulated. A core aspect of the Department’s role is to check how much water is supplied domestically and non-domestically, how much should be metered and how much waste water is being treated and paid for. However, the Committee received notice of the figures completely out of the blue when we were on a trip to a bus-manufacturing plant in Eindhoven, after the review panel had already reported twice. That is the problem. Of course those figures should have been made public, but why did the Committee not know about it until the end of February?

Mr Priestly:
Do not forget that water charges have yet to be introduced. Therefore, the company carried out the quality assurance for the right reason, that is, to get the figures right. The gap between the Department’s finding out on 14 January and attempting to clarify the issues, receiving a response from Northern Ireland Water on 4 February, and telling the Committee a fortnight later is not, in my opinion, unreasonable.

Mr Wells:
The Department knew years ago that a Go-co would be established and that the possibility of water charges was in the pipeline. The Department knew that major changes to Northern Ireland’s water provision were inevitable, regardless of the method of implementation and the payment process, yet it did not check the fundamental issue of how much water was being supplied to each customer until late in the day. That is an obvious flaw in the process.

Mr Priestly:
I cannot account for that.

Mr Wells:
I am trying to be reasonable, and I do not want to shoot the messenger, but you cannot hide behind the fact that Northern Ireland Water was formed on 1 April 2007. The people who were in charge of the Water Service, which was an integral part of DRD, were transferred to Northern Ireland Water, which is a Government-controlled Go-co. Although the composition of the board may be different, it is run by the same staff that I have been dealing with since my election to the Assembly over 10 years ago. After 1 April 2007, the same people continued to make the same decisions under a different structure, and the same Department continued to watch over them; there was no question of its being a complete clean sweep. Therefore, what has happened should not have come as a surprise to anyone.

Mrs Faloona:
One of the things that we have —

The Chairperson:
What is this? Does nobody know?

Mr Mills:
Mr Wells asked why the error was not discovered earlier. That is a valid point, but I do not know the answer. However, the error occurred in another unit, but I accept that DRD should accept some of the responsibility. Representatives of the company are meeting with the Committee later, so perhaps they will be able to offer a better explanation. However, that elementary miscalculation should have been discovered earlier.

Mr Wells:
By accepting any form of water charge, the people of Northern Ireland are already swallowing a bitter pill. That is where the politics come into the matter. It now appears that another element may be heaped on to the water bill, and some people are wondering why the Department knew about water charges all along, but are stealthily adding extras for which the consumer will have to pay.

I will repeat a question that I have asked previously: will any other issues come up and bite us? Is the Department checking for issues that could impact on the overall water bill? Are we going to be mugged by new issues in the next few weeks? Is the Department looking for any more smoking guns?

Mr Priestly:
On the first point, I sought to acknowledge in my opening remarks how difficult the situation is. We recognise the impact that this situation has had on confidence, and we recognise that people are not looking forward to paying water charges, given that they will have another household bill to deal with.

There is no doubt that the situation will have shaken confidence, and it is very unfortunate. I still think that the company was right to draw attention to the matter as soon as it learned of it. It is unfortunate that it was not discovered earlier. However, we are where we are.

If we look forward, I cannot put my hand on my heart and say that there will not be more similar issues: I would be lying if I said that. However, I am not aware — and I do not think that my colleagues are — of any other similar issues at the moment.

Mr Wells:
Are you aware that a £5 million shortfall has been identified? You allocated that element of expenditure to capital rather than to revenue.

Mr Mills:
I am aware of that; it was raised by the utility regulator. I understand that that figure will not be moved from capital.

Mr Wells:
It is wrongly apportioned to capital at the moment. Accounting procedures should be met by the customer, rather than by the shareholder. Will you get round that by increasing the subsidy? How will you avoid passing it on to the customer? I welcome any moves to do that, if that is what is happening.

Mr Mills:
That money is allocated to capital and, therefore, does not transfer immediately into operational costs. Obviously, there is a cost of capital, which is much less than £5 million, and I have no idea what that will be in a year’s time. My understanding of that element of capital maintenance is that it was identified as backlog maintenance that might have accrued through previous underinvestment. There was logic in including it in capital. Why would one ask people in any given year to pay all that backlog, given that it had accumulated over several years? Therefore, it has been spread out over several years. The utility regulator takes a different view, but I am not sure that I agree that it has been wrongly allocated. There is a difference of opinion as to how it should be allocated. If it were moved to operational costs, there would be a further increase in bills.

Mr Wells:
The utility regulator indicates that, on standard accounting principles, it should have been allocated to revenue and that it would pass straight through to the bottom line, which is to the customer. It is good news if a legitimate way can be found to keep it in capital. However, we are not inspired to hear that, having dealt with that issue, another £5 million has appeared like a rabbit out of a hat. Mr Priestly’s statement that he cannot guarantee that there are not more issues that could come back and haunt us is not reassuring. If we face a similar situation in a few months, and you are back before the Committee when another major hole is found in the accounts, it could be a very rough session for all of us. The public would not forgive us if we miss anything. That is why I had to ask that question.

The Chairperson:
The licence is the Department for Regional Development’s instrument of appointment. It does not refer to the water policy unit; it states:

“Instrument of Appointment by the Department for Regional Development of Northern Ireland Water Limited as a water and sewerage undertaker”.

All the information is contained in that document.

Mr Mills:
Right.

The Chairperson:
What do you mean by “right”?

Mr Mills:
I am sorry; I do not understand the question.

The Chairperson:
Northern Ireland Water has drawn its extrapolations on the issues from the licence.

Mr Mills:
That is correct.

The Chairperson:
Northern Ireland Water got its information on domestic and non-domestic customers from the licence.

Mr Mills:
Yes; I think that is correct.

The Chairperson:
As Jim Wells said, these figures did not come out of the air; they were agreed by the Department. The Department for Regional Development and Northern Ireland Water bear equal responsibility for the situation.

Mr Mills:
I am not sure how the Department and the handful of people who work in policy units can be expected to know how much water is consumed by the non-domestic customers of either Water Service or Northern Ireland Water. Other than by requesting it from the water company or agency, I am not sure how we could know that operational information.

The Chairperson:
Considering that the water company had not been established, from where did you get your information?

Mr Mills:
We received it from the Water Service.

The Chairperson:
Water Service was part of DRD.

Mr Mills:
Yes.

Mr Dallat:
Do you accept that this mess will most likely affect the most vulnerable, poorest people in society?

Mr Mills:
As Mr Priestly said, it will have an unfortunate impact on domestic bills, but not if the Executive adopt the affordability tariff on foot of the strand two recommendations. The people who qualify for the affordability tariff will pay the lower tariff; therefore, the 160,000 people who are on that tariff will not be affected.

Mr Dallat:
Mr Mills, you know as well as I do that affordability tariffs are a farce, because they do not the alleviate poverty of the people who can least afford to pay.

You said that you could not possibly know the figures on domestic and non-domestic customers. I am wracking my brains to think of the most basic private-sector business that would embark on a venture without having researched what could happen if something went awry. A feeble excuse was given about the loss of £1 million or £5 million in revenue arising from the closure of Seagate, but we do not know where those figures came from — it was as though they dropped out of the sky. Were any projections made that might arise from changes in the marketplace?

Mr Priestly:
All organisations that I have worked in, both in the private and public sector, have been vulnerable to, first, the quality of their information flows and, secondly, to changes in the market. Irrespective of whether this situation arose when Water Service was part of DRD or when it was in its current Go-co form, we are still vulnerable to the quality of information flows and of the underlying data. We have acknowledged and accepted that there was a problem with the quality of the data.

If you want an acknowledgement that that happened in the context of the figures that were set in the strategic business plan when it was all part of DRD, I am happy to give that.

The Chairperson:
I am glad that somebody is giving something.

Mr Priestly:
We are all vulnerable to the quality of the information.

The Chairperson:
I am not interested in people being vulnerable to the quality of the information; I am concerned about people taking responsibility for issues within their remit.

Mr Priestly:
Any business, in either the public or private sector, is vulnerable to changes in the market. It might be prudent to make contingency plans and consider what would happen if there were a sudden change in demand.

I must again emphasise that we are only moving towards the introduction of charges, so when those matters become relevant they will be considered because they affect the cost base of a company. In the past, they did not have that impact.

Mr Dallat:
You spent £40 million on consultants, yet you did not have the most basic of information. Not only that, at least a year ago, I attended an event in the Long Gallery that was organised by the Consumer Council at which those imponderables were raised. Was no one from the Department there to listen?

Mr Mills:
I am not sure whether it was advised of the event.

Mr Dallat:
Obviously, no one here today is taking responsibility for anything. It is my belief that, when it gets to that stage, people should consider their future — and I will say the same to the water company’s representatives when they arrive. We really need to know who created this shambles, who let the situation get out of control and who has embarrassed everybody from the Minister down, including this Committee. That would be my advice. If it were me, I would seriously consider what role I had to play in this matter in the future, because public confidence is completely shattered — there is none left. As I said, the people who will be most affected are the vulnerable and poorest in society, and that is a shame and a disgrace.

Mr W Clarke:
I agree with John’s point about public confidence, which is the most important factor. We are all elected representatives, and we entered into a pact with the electorate that we would deliver a solution. We gave that commitment, and it is us who will have to go back to the people and present an honest deal. Every one of us, and every party, entered into this process as honest brokers.

Do you agree that, before the company became self-financing, there was no accountability whatsoever and no knowledge of the actual domestic usage? The figures that you have come up with do not stack up. The types of errors that have been made have occurred in other water companies. In particular, Scottish Water experienced similar problems when it adopted a self-financing model. However, nobody thought it worthwhile to check with that company to learn more about its experiences and the problems that it had encountered. That information could have been passed on to the new water company to ensure that it did not experience the same problems. I find it very strange that nobody contacted a water company that had engaged in the same process to identify potential pitfalls.

Everybody thinks that it is glaringly obvious that this matter should have been sorted out years in advance. As Jim Wells said, exactly the same staff are involved in the new company as were involved in the Water Service. Nobody thought to take a look at experiences elsewhere. At the end of the day, devolution has occurred, people have put their faith and trust in us, and we are all being left out of the process.

Mrs Faloona:
In the past, Water Service compiled part returns to OFWAT. They were called the June returns, and they are part of the normal kind of reporting requirements of any water company. The company failed to provide complete returns because of the quality of its data, and the Department was aware that it was not easy for the company to complete those returns. Northern Ireland Water can explain in its session about its efforts to improve the quality of its data. When the company was the Water Service, it was not a regulated business. However, a regulator is now in place, and Northern Ireland Water has worked with that regulator over the past year to try to improve the systems. That obviously takes time, and the information was not there previously to provide all the data that was required.

Mr Priestly:
Again, I acknowledge that the Department accepts the difficulty that this creates politically for Committee members, the Assembly and for our own Minister. He has made it very clear to the company that he has been placed in a difficult situation. He has been working assiduously to try to introduce a set of proposals through the Executive and the Assembly that can settle the issue on a basis that can command community confidence.

The Minister’s confidence has been undermined, just as the confidence of this Committee and the public has been. We are where we are, and we have to try and restore that confidence. I do not want to describe it as a mess, but it is very unfortunate that we are in this situation. However, that is where we are, and we have to work our way out of it. We are working with the company to try to mitigate those costs, and minimise their impact on future bills. We have a shared interest with the Committee and the Assembly in trying to keep future water bills to a minimum.

Mr W Clarke:
Have you established the size of the shortfall? Do you have an accurate figure?

Mr Mills:
In 2008-09, £18 million that was expected to be collected from the non-domestic sector will instead transfer to the domestic sector. That translates into subsidy in 2008-09, and it is hoped that mitigation measures will be able to deal with that shortfall in the subsidy.

Mr W Clarke:
Is that in the dividend?

Mr Mills:
No.

Mr W Clarke:
Can you explain that again?

Mr Mills:
In 2008-09, before the reapportionment, it was expected that something like £85 million would have been collected from the non-domestic sector. After reapportionment, the actual figure is reckoned to be £64 million. Therefore, £20 million will not be collected. That figure, because of the reapportionment, is reallocated to the domestic side, because domestic charges will be subsidised in 2008-09. That £20 million falls on the subsidy, and creates a £12 million gap in it. It is hoped that mitigation measures will be able to close that gap.

The Chairperson:
OK. What happens in 2009-10, 2010-11, and so on? Is this a recurring cost? Will Joe Public pay for that cost in 2009-10?

Mr Mills:
Yes.

The Chairperson:
Before we go any further, it must be noted that many people think that this is a one-off payment — only to be paid this year. Nobody has told the public that this is a recurring cost and that the domestic customer will pay for this mistake every year. Is that the case?

Mr Mills:
That is correct. However, if there are mitigation measures such as additional efficiencies or other savings that mitigate that cost, they will also accumulate year by year.

The Chairperson:
If pigs had wings, they could fly, John.

Mr McCartney:
I do not want to repeat some of the questions, but you can see where we are coming from on this issue. There are questions that need to be asked, and answers that need to be given. When should the shortfall have been discovered? That is an important issue for us for the future. Now that we have poured over the analysis that has been done, who should have discovered it? If the Water Service was aware that it was handing poor quality information to the new body, is there a document that states that? In all the evidence that we have gathered or in the strand-one and strand two independent reports, nobody told this Committee that poor quality information was given to the new body. If there is evidence that that happened, who provided that evidence?

Mr Priestly:
In an ideal world, it should never have happened.

Mr McCartney:
We are not in an ideal world — it did happen. People are examining the circumstances of how it happened. When should the problem have been discovered? That needs to be highlighted. Should it have been when the information was being handed to the new body or when the charging system was being examined? From that minute on, someone must be held responsible for not informing anyone else that it had been discovered.

Mr Priestly:
I am not in a position to identify the answer to that question.

Mr McCartney:
Who should have been able to tell us that people were acting on information that, as Barbara Faloona said, is now accepted to have been of poor quality? People knew that it was of poor quality. Who should have identified that?

Mrs Faloona:
On 1 April 2007, the Department transferred all of the assets and liabilities that had previously attached to DRD whenever DRD owned Water Service. That included any assets and liabilities that had accrued to the Department during the time that Water Service was in existence within the Department. The information and data held by the Water Service transferred at that date to the company. The company was involved in identifying whatever information and whatever assets and liabilities it had at that time, along with the Department. The information that was used in Water Service now belongs to Northern Ireland Water, and it has undertaken this exercise and identified at this point that the information that it had been using was flawed.

Mr McCartney:
If I heard you correctly, you said earlier that it is now accepted that some data that the company was working with was of poor quality.

Mrs Faloona:
It was produced by the Water Service.

Mr McCartney:
Nevertheless, it was accepted to have been of poor quality.

Mrs Faloona:
On a number of occasions, the company has identified that the information had been of poor quality.

Mr McCartney:
Given that an independent panel was set up to consider the whole issue and that people had outlined the wider politics of the matter, surely someone should have put up a flag and said that the information was of poor quality and that we might come out with the wrong answer?

Mrs Faloona:
At that time, before the strategic plan was finalised, the Water Service did not identify that to the Department.

Mr McCartney:
That is precisely my point. The Water Service is on record somewhere as saying that the data was of poor quality.

Mrs Faloona:
The Water Service had the evidence from the June returns that it was not able to —

Mr Priestly:
If I may interject, and I am trying to help; forgive me if my understanding is not as deep and broad as it might be, because I have only been with the Department since December 2007. I understand that when the Water Service became a Government-owned company, its information systems and data were not of the highest quality. Since then, the water Go-co has been working to improve the quality of those information systems. We accept and acknowledge that the information and data given to the Go-co was not of sufficient quality for it to do its future job. However, it has been working to improve those information and data systems, and the misappropriation was discovered as part of that process. When you question Northern Ireland Water, I hope that its replies will be consistent with that.

Mr McCartney:
In the middle of all that, there was a handover from the old regime to the new regime. For weeks, we took evidence from the independent panel, NIW and the Department for Regional Development, and, throughout that investigation, no one mentioned working with poor quality information and data. As has been mentioned, we were then dealing with the hot potato of how much people were to be charged. Someone might have flagged up to us that Scottish Water had previously met that problem. People involved in setting up water companies must have known that Scottish Water had encountered that problem. No one said that the figures that we were planning to take to the public — which is a difficult task in itself — might be wrong because we had been working with poor-quality information. If someone knew that, we should have been told, and that is the important point that I am making. My questions are not about who is culpable, but about who is responsible for not telling us what everyone else seemed to know. Has the water company informed you precisely when it found out about this issue?

Mr Priestly:
I cannot answer that. What I can say is that we were informally advised on 14 January 2008. That is the first time that we —

Mr McCartney:
At that informal briefing, did you ask the water company when it discovered that the information was of poor quality?

Mr Priestly:
I will hand over to John, because that was passed to him.

Mr Mills:
I do not recall asking that. On 14 January 2008, the information was passed to the head of charging branch in my division, Andrew Greave. He escalated the matter. I informed the then deputy Secretary, David Sterling, and we agreed that we needed to write to the company as soon as possible to establish the facts.

Mr McCartney:
To your recollection, did you, or the other two people you have mentioned, suggest finding out when the company first became aware of this?

Mr Mills:
I do not recall that, because our major concern would have been with the impact.

Mr McCartney:
Would your concern not have been how long the company had sat on that information? The Budget was imminent and was being agreed. Did the company sit on the information for a day, a week, a fortnight, a month, six weeks? You might have stopped people from worming their way out of it by saying, “You knew that three weeks ago; why did you not tell us?”

Mr Priestly:
I agree with the point that you are making. We have answered the question factually.

Mr McCartney:
It has not been answered factually. Mr Mills has not said whether he asked.

Mr Mills:
I am sorry, Mr McCartney, I did not ask how long the company had known. I assumed, rightly or wrongly, that it had come to light recently. The fact that Northern Ireland Water took a couple of weeks to confirm the reapportionment by formal letter suggests to me that it brought it to our attention fairly promptly.

Mr McCartney:
But you do not know that?

Mr Mills:
No, I do not know that. The answer to your question is that I did not ask.

Mr McCartney:
On reflection, would you not say that you should have asked how long the company had known that, or when it had realised that that was a possibility? It strikes me that when, in December 2007, it re-examined data assumptions, it did so because it thought the assumptions might be way out. The water company has now accepted that it started to re-examine data assumptions at that time, so somewhere along the line, between a date unspecified in December 2007 — which is the only event for which there is not a specific date — until 14 January 2008, it found out that it was facing a crisis. You should have asked when precisely it found out that that was so. Had you done that, this might have been addressed before the Budget.

The Chairperson:
In November 2004, consultants were commissioned to carry out work on the strategic and financial review. Almost four years passed before someone identified that there is something wrong with the data. The Department for Regional Development was involved throughout: it was involved with the consultants who carried out the review; it published the strategic and financial review; it announced the introduction of the Go-co; it agreed a financial framework; and it set up the board. That has been ongoing from November 2004, but the first indication that there is a glitch came in December 2007.

Barbara, you said that all the liabilities were handed over to Northern Ireland Water. If the figures are wrong, who bears the risk? Who pays for it at the end of the day?

Mrs Faloona:
The risk is borne either by the customer or by the Department as the shareholder.

The Chairperson:
At the end of the day, the consumer bears almost all of the risk. It has been stated that the risk has been passed to Northern Ireland Water. However, DRD has passed on the risk to the consumer. Northern Ireland Water is not a private company that trades on the stock exchange and in which people can buy and sell shares. Every time a mistake is made, the consumers are at risk.

The Department miscalculated its non-domestic revenue by £20 million. Figures of £1 million and £5 million have been mentioned in relation to the loss of revenue due to the closure of Seagate — the correct figure is between £800,000 and £900,000. Even if Seagate’s closure were taken into account, the Department still miscalculated by almost £20 million. The closure of 20 such companies would still not account for such a miscalculation — that demonstrates the level of inaccuracy of the information. As John Dallat said, taxpayers paid many millions of pounds for consultants to carry out this work, and it has taken three and a half years for someone to blow the whistle. That is astounding.

Mr McCallister:
Barbara mentioned that the new water company would take over any liability. However, the current problem goes back to March 2003, and Northern Ireland Water is not even a year old. Therefore, the problem was ongoing for four years before Northern Ireland Water came into being. Given that the company is still finding its feet, it seems a tad unfair to blame it.

Paul Priestly spoke about not having any experience of charging for water, and I accept that that is true on a mass scale. However, the Department, through the Water Service for many years, and now as Northern Ireland Water, charged thousands of customers. The Department has significant experience of charging customers and managing meters and, therefore, that was not a fair comment.

Can people in the non-domestic sector have confidence in what they have been paying?

Mr Mills:
Yes. Northern Ireland Water assures me, and everything is based on its figures, that they have not been overcharged. Most of the misapportionment was as a result of adding trade effluent, a sewerage discharge, to the total calculated volume of water that was being consumed.

Mr McCallister:
Was that a problem when the Water Service was in charge and people queried how much they had to pay?

Mr Mills:
No. You could put that question to Northern Ireland Water, but my clear understanding is that people in the non-domestic sector have not been overcharged due to this misapportionment.

Mr B Wilson:
The development of the tariff model represented a significant change in the structure and funding of the Water Service. On the basis that the tariff model was new, advice was taken from consultants with experience of other water companies and similar transfer processes in England. What role did the consultants play in drawing up the tariff model?

Mr Mills:
I am sorry; I do not know where the tariff model originated. My guess is that it was constructed by Water Service officials.

Mr B Wilson:
Were the consultants not involved?

Mr Mills:
I do not know.

Mr B Wilson:
I thought that the Department employed experts to decide how the service would be funded. What were the outside experts being paid for, on that basis?

Mrs Faloona:
During the water reform project, Water Service employed its own consultants and the Department also employed consultants. My understanding is that Water Service’s consultants would have provided advice on the tariff model.

Mr B Wilson:
When you actually got the tariff model, was it defective, or were the figures that were put into the model defective?

Mr Mills:
It was the latter, in that figures from several sources were fed into the tariff model. One of those sources was an operational unit which estimated how much water non-domestic consumers use. That figure was fed into the tariff model, but it was overestimated.

Mr B Wilson:
So the actual figures that were fed into the model by Water Service caused the problem, rather than the actual model?

Mr Mills:
Yes. It was the figures. The tariff model does not calculate water volumes, so that figure was an assumed figure that was provided and put into the model. The tariff model would simply have said that water consumption was x.

Mr Boylan:
The member stole my thunder on that point. Between November 2004 and the projections being made in October 2006 there was ample opportunity to get the model right. I will not go down that road. We need assurance from the Department that it is looking seriously at the strategic business plan. The Department must also assure the Committee and the public that there are no more skeletons in the cupboard, and it must raise public confidence. The projections that were made at the start set the whole project on the wrong track, and there must be other financial knock-on effects. This situation has been going on for four or five weeks, and I am astounded that you have not looked into that matter and that you cannot tell us whether there are any other skeletons in the cupboard.

Mr Mills:
That is something that could be picked up by the regulator. My understanding is that the utility regulator called in an independent technical auditor to examine all the tariff-model assumptions. Obviously, that is something that the regulator has done with the company.

Mr Boylan:
What has the Department been doing in response? The wrong projection at the start caused all this trouble, and it has only just come to light. There was ample time to get it right. A private company would not have got off the ground. No one starts a non-profit-making company. The Department should have come to us with the answers. If there is anything else out there, the Department should be looking at it now, in the interim, and it should come to the Committee to give us answers. It is all very well to say what the regulator is doing; the Department should have known as well, and it should have been examining the issues.

There was a two-year period in which to get the projections right, especially in the light of what happened in Scotland. There are other models, and issues with them were identified.

Surely to God, Water Service and the policy grouping between them could have ensured that the projections were correct. Would you not take that on board? Would you not agree that they had a certain responsibility?

Mr Mills:
As Paul has already made clear on your point that the error should have been discovered earlier, responsibility for that has been accepted. If the question is whether we should launch checks and take action, I should say that DRD is not legally responsible for overseeing the workings of the water company. The water company is independently responsible for delivering water and sewerage services, and the regulator oversees those operations. The Department has only a remaining operational role in fairly narrow areas, such as drinking water. Given that the Department has no such legal responsibility, it is not necessarily its role to audit or operationally manage those functions.

Mr Boylan:
Do you not think that something should have been done in the public interest?

Mr Mills:
I was going to go on to say that if the Committee concludes that some such action should be taken, I am sure that the Minister will consider that carefully and work with you to deal with the issues of public confidence to which you referred. I acknowledge that we have been talking about the technical matters that the legislation covers, but I accept the general point that public confidence has been harmed.

Mr W Clarke:
Who is the water company accountable to, John? Did you say that it was accountable to the regulator?

Mr Mills:
The legislation is complex, but under the Water and Sewerage Services ( Northern Ireland) Order 2006, the water company is legally responsible for delivering water and sewerage services. That requirement is different from that under the legislation that was in effect before April 2007, which stated that the Department shall deliver water and sewerage services to the people of Northern Ireland. The current set-up, which is based on the English legislation, requires a water undertaker. Northern Ireland Water is that water undertaker, and it shall deliver water and sewerage services. The Minister has various specific roles, principally concerning drinking water, as does the Consumer Council for Northern Ireland where complaints are concerned. The regulator has various specific roles, as does the Environment and Heritage Service of the Department of the Environment in relation to water and sewerage quality and pollution.

Mr Priestly:
The Department has another important role to play in the shareholder interest.

Mrs Faloona:
To add to what John said, the water company is a separate legal entity, and its directors are legally liable for the operations of Northern Ireland Water. The Minister for Regional Development appoints the board, but after that, the company is an entity like any other. It is a private company limited by shares; therefore, it has to adhere to company law. In law, however, the company and the board are responsible.

We hold the company to account as a shareholder through the quarterly shareholder mechanism, which examines its financial performance and whether it will be in a position to pay dividends to the Department. That is how the company has been set up and how the Treasury indicated that it should be set up. Our equity interest in the company means that we have to show the dividend in our accounts. That is the capital charge for the use of the assets that the Department transfers to it, and it must then be returned to the Department.

Mr W Clarke:
Does the buck stop with the head of the water company?

Mrs Faloona:
If the company were to act illegally, the board of the company would be taken to court.

The Chairperson:
How many shareholders does the company have?

Mrs Faloona:
It has one shareholder.

The Chairperson:
Who is the shareholder?

Mrs Faloona:
The shareholder is the Department for Regional Development, through the Minister.

Mr G Robinson:
What lessons have been learnt, and what actions have been taken since the situation arose? It is a good job that we now have an Assembly and a local Minister; the situation might have been brushed under the carpet if direct rule had remained. The Committee is here to scrutinise the Department, and the Minister also has a scrutiny role. I hope that such a situation will never happen again.

Mr Priestly:
I agree wholeheartedly with the second part of what you said — I took it as a statement rather than a question.

If you are asking what lessons need to be learnt, the Department is still working through dealing with the situation and of mitigating any impact that it will have. The Department shares the Committee’s interest in minimising future water bills, and we are working on ensuring that that happens. The Minister met with the chairman and chief executive of Northern Ireland Water and explained the difficult position in which he has been put. He has asked the chairman for a report on the appropriate action that should be taken, and that report is expected in the next couple of weeks. We will see where we go from there; however, I do not want to pre-empt what might come out of the report.

Once we are through the situation, I agree that we need to learn lessons. Cathal Boylan made the useful suggestion that an independent audit be carried out to provide assurances on the projections in the strategic business plan.

The Chairperson:
The unfortunate thing is that either the taxpayer or the consumer will pay; however, people in those groups are the same individuals. If the money were to come out of the block grant, there would be less money to spend on public services, which the people to whom John Dallat referred and who are at the lower end of the economic scale depend on. People at the lower end of that scale would also suffer if the customer had to pay to make up the shortfall. The money will not come out of thin air; the taxpayer will have to pay for the shortfall.

Mr Priestly:
I agree 100%. For as long as Northern Ireland Water is a wholly Government-owned company, it has only two sources of money: first, public subsidy, which is taxpayers’ public money; and secondly, receiving money from its consumers.

Mr Mills:
It is worth pointing out that a reapportionment between the non-domestic and domestic sectors is proposed; an increase in overall cost has not been proposed.

The Chairperson:
I do not understand; will you explain that to me?

Mr Mills:
The reapportionment would come about because of moving liabilities between the non-domestic and domestic sectors.

The Chairperson:
The domestic customer will pay more.

Mr Mills:
That is correct.

The Chairperson:
The people who are at the poorest end of the scale will have to pay 3% of their income. Pensioners who receive £87 or £107 a week will have to pay for the shortfall.

Mr Mills:
That is true, but equally, businesses will not be wrongly charged.

The Chairperson:
The people to whom I referred can ill afford to pay for some of the services that they currently require, never mind paying for additional services.

Mr Dallat:
Mrs Faloona, you confirmed that the Department is the sole shareholder in the water company. Therefore, you are the only people who are in a position to do anything about the situation. When will you sack the chairman, the chief executive and the chief accountant? I mean it.

Mrs Faloona:
I cannot comment on that.

The Chairperson:
That is not a question that this Committee can ask. Thank you very much.

The Chairperson:
I welcome Mrs Katharine Bryan, Mr Chris Mellor, Mr Mark Ellesmere and Mr Ronan Larkin from Northern Ireland Water. This is a public session, and it is being recorded by Hansard. I ask everyone to please ensure that their mobile phones are switched off.

Mrs Bryan, you presented a paper to the Committee last week. Do you have any additional information to share with the Committee?

Mrs Katharine Bryan ( Northern Ireland Water):
We have provided the Committee with a short presentation, and the answers to the questions it asked last week.

Mr Chris Mellor ( Northern Ireland Water):
First of all, Katharine will go through the answers and explanations. The board and I are very well aware of the political problems that this has caused, particularly for Minister Murphy. I have apologised to him personally. I have also apologised to the regulator and other stakeholders. Since I became aware of the issue, I, along with my colleagues, have been working very hard to try to find solutions to it, and Katharine will talk about some of the ideas that we have come up with.

The Chairperson:
Before we move on to that, can we make it absolutely clear that this is a recurring cost? A lot of people are giving the impression that it is a one-off payment, and if we can find the money for this year — for example, from the block grant or from the efficiencies — then we are alright. That is not the case.

Mr Mellor:
We focused on the coming year, 2008-09, but we agree absolutely that there are issues that we have to face up to for 2009-10 and beyond. That is very much work in progress.

Mrs Bryan:
The Committee will be familiar with the background to the issue because we spoke to you 10 days or so ago. The Committee will be aware that we are bound by an operating licence, which we take very seriously, so we cannot discriminate against or favour any type of customer.

The original assumptions of the tariff model were inaccurate due to inherited systems and data. That should not come as a huge shock, because Water Service and Northern Ireland Water had highlighted previously in their risk registers that we have issues about management information. I will return to that point later.

DRD and NI Water uncovered significant imbalance between domestic and non-domestic customer account allocation, and notified the Minister. The Committee is aware of that, because we discussed it in the last meeting. We acted correctly within the terms of our operating licence: the scheme of charges was issued on 31 January, and we highlighted the issue with the regulator’s technical reporter. We were in discussions with the Department and the Minister at the time of the media leak, and then we had difficulty — as did the Committee — as a result of the media speculation at that time.

Where have we got to in the meantime? We are very much committed to finding a balanced, sustainable approach but, most importantly, to delivering the most effective measures to mitigate the impact on customers. That has been at the forefront of our concerns. We have looked at a range of options and have met the Department and the regulator in order to review and consider those options. We cannot act unilaterally on the issue; we need to work within the system – that is, with our owner, our shareholder and with our regulator to come up with those options.

The board and the executive team are also conducting an internal review for lessons learned, because none of us — and I am sure the Committee will agree — wants to go through this sort of process again. Meanwhile, we have kept the Committee informed and have submitted further information.

One of the things that the Committee may be concerned about is that a lot of figures are bandied about in relation to the issue. We are also concerned about that. The first thing to settle is what the gap is. I was listening to the news this morning, and a figure of £20 million was discussed, apparently, by the BBC. As we understand it, the gap is £18 million, and that is agreed with the Department. With regard to the £18 million, it was a revenue gap that was less than anticipated to be collected from the non-domestic sector, hence the rebalancing. We have reduced that to £12 million by the removal of domestic bad debt, which amounted to £5·8 million —that provision was put in for that year, but was ultimately not needed because domestic charging was not taking place, so it was removed. We have been working hard to close the remaining gap, to bring the £12 million down to nought, and I want to talk to the Committee about that now.

We have suggested a number of options to the Minister, the Department, and the utility regulator. We proposed that we absorb the bulk of the revenue gap by appropriate adjustments to assumptions, within the tolerances and within propriety, by phasing the effects of the major customer closures that we talked about at the last meeting, by absorbing additional operational cuts and efficiencies, and by reducing the infrastructure renewal charge on maintenance-related expenditure. We cannot say that the matter is cut and dried, because we have not had final agreement from the Department or the regulator, but those are our proposals. As indicated to the Committee and to the Minister, we have sought to resolve the issue in ways that do not impact on the customer, so this pain is being absorbed by the organisation itself.

In more detail, the proposed solutions will involve a £3·2million reduction in phasing subsidy to Northern Ireland Water in 2008-09; and a reduction of £3·7 million in capital maintenance spend profile, which will have a limited impact on customer outputs. Northern Ireland Water will also seek to deliver additional operational expenditure (opex) efficiencies, part of which will reflect a reduction of £2·8 million in our retained earnings in 2008-09. There will be an additional borrowing of £7·4 million, funded through our working capital facility, which will result in a marginal reduction of £1·7 million in our reserves at the end of 2008-09.

Those options in combination would close the £12 million gap. You cannot add up those figures and come to another figure. They work in combination through our accounts to close the gap. The development of those solutions has not been easy, but we believe that they will have minimal impact on customers.

Looking ahead, as you were in your introductory remarks, Chairman, what is the process for setting tariffs in 2009-10? That process depends on a number of parties, not just Northern Ireland Water. The Assembly Executive discussions are ongoing; we anticipate — but we do not know — that there will be consultation on the review panel’s strand-one and strand-two recommendations. The plan is for that consultation to begin in April and conclude some time in the summer. At that time, the Assembly and the Executive will make decisions. Part of that consultation will include a number of variables, such as the amount of road drainage, dividend waiver, efficiencies, subsidy-phasing pegging — a number of issues.

The point I am making is that this is not cut and dried, and it would be wrong for people to speculate on what the domestic charge will be in 2009-10, because of the process that I have outlined and the variables that still have to be decided. However, we are 100% committed to working with stakeholders, to work through the figures in order to minimise the impact on households in 2009-10 and beyond. Meanwhile, we are hoping to conclude our discussions with the Department and the utility regulator on our proposals for removing the gap in 2008-09. We are in the process of requesting that the regulator’s reporter —the technical auditor — implement those recommendations.

We will continue to press for approval of our business improvement programme, because that is the key to addressing some of the problems with data assurance and management information and systems; it is needed in order to secure our systems and data for the future. We will be taking part in the board and executive team review, where we will be learning the lessons from the investigations that are ongoing.

In conclusion, we have set out the reason for the problem. The original assumption was inaccurate due to the inherited systems and data. It is our duty not to favour one group of customers above another. We need to get balanced and sustainable solutions that do not contravene our legal framework. We have explained how the issues arose, but would acknowledge that the communication channels need to be clearer, and we will be learning our lessons from the investigations that we are carrying out. Finally, we have proposed a potential solution to next year’s gap, and are beginning to work, hopefully with others, to ensure that there is minimal impact on customers in 2009-10 and beyond. Thank you.

The Chairperson:
Thank you very much. What will the solutions mean? Do they apply only to the financial year 2008-09?

Mrs Bryan:
They do.

The Chairperson:
The reductions in the reserves or the opex efficiencies would only be for that particular year?

Mrs Bryan:
The opex efficiencies would carry on, year on year.

The Chairperson:
How do you intend to make those efficiencies? Will it involve job losses?

Mrs Bryan:
To be absolutely frank, at the moment we are still working through that, but we recognise that there is a problem that is for us to solve, so we are doing that in the way that we have set out in the presentation. However, we cannot say that it will definitely be this or it will be that.

The Chairperson:
Is that in addition to those efficiencies that you have already identified?

Mrs Bryan:
Yes.

The Chairperson:
Are those long-term efficiencies?

Mrs Bryan:
Yes, they are.

The Chairperson:
What concerned the Committee is that people have been aware of much of this information in dealing with the Department since 2004. A lot of the information about which you spoke today was deficient, and we got a flavour of that from the Department. There have been difficulties in water companies across the United Kingdom in taking a public company into a private company. Was no one aware of the risk, when those projections were made, that there might be difficulties in achieving some of the objectives because some are way out of kilter?

Mrs Bryan:
No one who was involved in taking Water Service from being a Civil Service agency into becoming a Government-owned company still in the public sector was under any illusion that that would be a simple and straightforward process because of the risks that were identified in our risk registers. The Department, to assist the company in the early days, employed something called a panel of experts which was a group of people that I met only once and which helped the Department at the time of setting up. There is a lot to do, and if I think about my counterparts we are aware that it took private companies in England and Wales many years to remove their risks. We are trying to face those risks in a very short space of time.

The Chairperson:
The point that I am making is that some of the forecasting information in the strategic business plan is so flawed. One wonders, since this was discussed at the start of 2004, that it is being flagged up only in 2007 that there is a major difficulty.

Mrs Bryan:
The strategic business plan was put together for the start of the company. There have been a lot of changes which, to be frank and speaking personally, we do need to review because it is very difficult for the company to plan and deliver in changing circumstances.

Mr Mellor:
To give you my perspective, having worked for a long time for one of the more efficient companies, this company has inherited a legacy of poor systems and poor data. That is a fact of life. We have been working very hard to improve that, and it will take a number of months, if not years, to solve some of those problems.

When we took on the job of trying to convert what was a Civil Service agency into a company, we recognised that there were lots of risks that needed to be managed. This one has surfaced very quickly. It was always there, but this data was never used before to calculate tariffs. Therefore, the degree of scrutiny that we have put on it — and our people have, quite rightly, brought the issue to the surface — was never done before. I would defend to the hilt what our people have done to bring this issue to the surface and we must, however painful the answer, promote a culture of openness and transparency in the company whereby if people do discover errors, they put their hand up. Where we went wrong in this instance was that the issue was not elevated to a sufficiently high level, first of all in the company. We failed to communicate the scale of the problem to a number of stakeholders, including the Minister, quickly enough and, at the same time, to propose solutions.

The Chairperson:
There is no guarantee that over the year, in the course of that work, we will not find another difficulty.

Mr Mellor:
There is no guarantee with any of the data, frankly. However, we are in the business of managing risk, and we have to take a view on such things.

The Chairperson:
I know that, but the Committee wants to ensure that the public are aware that this is just not a one-off incident and that everything may not be fine after we get over this hurdle.

Mr Mellor:
It will take years before Northern Ireland Water is in a robust state with set systems and assets.

The Chairperson:
How much did the closure of the Seagate plant cost the Northern Ireland Water?

Mr Ronan Larkin ( Northern Ireland Water):
It will cost between £850,000 and £950,000.

The Chairperson:
I just wanted to clarify that.

Mr Dallat:
Chris, you said that you would defend to the hilt what has been done — you are very brave.

Mr Mellor:
You have to be brave to do this job.

Mr Dallat:
You certainly do — I would not do it.

Northern Ireland Water spent £40 million on consultants, received huge back-up from the Civil Service and flew in new directors from, let us say, other islands. Despite all that, at the very last minute it discovered that the most elementary arithmetic was wrong. That begs the question: when will the people responsible realise that their time is up, that it is time to go?

Mrs Bryan:
On a point of correction, you said that £40 million had been spent on consultants, and it is important to clarify who spent what. The £40 million was not spent by the Water Service or Northern Ireland Water — I think that you are referring to the amount that was spent on water reform, much of which related to the legislation and consultants who were employed by the Department. It is important to establish that.

Mr Mellor:
Thank you for that, Katharine.

Mr Dallat, you can describe it as an elementary error. When I said I defend to the hilt what was done, I mean that the people who were diligent enough to identify that there was an error in the data did exactly the right thing. We will continue to encourage our people to identify things that are wrong, which is how we improve them. In this case, we have worked very hard, since we discovered the error, to solve the problem.

Mr Dallat:
Millions of pounds may be spoken about in this Committee, but the poorest and most vulnerable people in our society are the ones who will pay for this comedy of errors and the pass the parcel of blame that is now happening. Those are the people who have lost confidence in the whole system. Chris, you said that this whole thing could go on for years.

Mr Mellor:
No, that is not quite what I said.

Mr Dallat:
I wrote it down.

Mr Mellor:
I said that there will be consequences for 2009-10 and beyond, which is certainly true, and that we will seek to address those issues in the coming year. I absolutely share your concern: our avowed intent is to try to keep the cost down as much as we can for customers. However, the other side of the coin is that non-domestic customers will be charged the corresponding amount less in the current year. Therefore, there is no overall increase in cost. Instead, there will be a redistribution of cost from one group of customers to another.

Mrs Bryan:
The customers that Mr Dallat referred to would not be affected by this because, as I said at the last Committee meeting, the affordability tariff would be unaffected. It is also important to remind the Committee our answers to your questions that detailed the amount of consultancy spend that we did use, which is around £150,000. That is not the same as £40 million.

Mr Dallat:
The only change that I am making to my life is that I am not going to the Netherlands again.

Mr B Wilson:
Did the company receive advice on the tariff model from the consultants?

Mr Larkin:
Two pieces of work were done. Cambridge Economic Policy Associates (CEPA) was commissioned in 2005 to examine tariff models, and it came up with several observations. First, given the state of Water Service at that time, and given the fact that it was not a commercialised company with a charging regime or a charging methodology for all its customers, any recommendations that it considered could be made primarily only when full charging — and a system for doing so — was implemented. In other words, any recommendations could be implemented only when a regime of charging had been established.

Secondly, CEPA said that it did not have the data and systems that the water company — Water Service — would have to develop for the transition to Northern Ireland Water.

Mr B Wilson:
I am concerned about the tariff model. Was it the case that the model was OK, but the data were wrong?

Mr Larkin:
Ernst and Young carried out other work on the matter. We asked them to test the tariff model and the integrated financial model for its ability to compute properly and to ensure that it treats properly the various matters that it works out — whether that is margins or the taxation regime that is in place in the UK. Arithmetically and according to the formulas that are contained in the models, those systems work correctly.

Mr B Wilson:
Does that mean that, basically, the data were wrong?

Mr Larkin:
The assumptions that were made on the data were wrong. Ernst and Young signed off the integrated financial model and the tariff model and said that those models —

Mr B Wilson:
Who made the assumptions?

Mr Larkin:
The assumptions, as Katharine said, were made around 2004. If you trace back to the work that the water reform division of the Department was carrying out in those days, assumptions were made that, if there was to be a split, it would be broadly of those proportions, and it would come through in the charging. Those assumptions would have been made by the panel of experts and others that were working with that division of the Department at that time.

Mr McCartney:
I have several questions to ask, and I hope some of them are factual.

Departmental officials said this morning that the information that Water Service gave was of a poor quality, and you have confirmed that. Nowhere in either evidence that the Committee has heard or in the strands 1 and 2 reports did anyone say that the Water Service and NIW were working on poor-quality data. The Consumer Council perhaps raised that issue in 2006, but the Minister at the time dismissed it as scaremongering or playing to the gallery. I am no expert on the matter, and I am not trying to be, but if someone told me that I was working with poor-quality data, I would tell them that my outcomes would be suspect.

Mr Larkin:
Northern Ireland Water has certainly flagged a significant risk on its corporate risk register around our information systems, where we derive our data from and the accuracy of those data, to the point that we have included in the business improvement programme several projects that are designed to address some of those issues. I think that possibly the same applied to Water Service, but we can confirm that.

Mr McCartney:
That has not been flagged up anywhere. When Katharine first addressed the Committee, she talked about the need for buy-in from the Committee and the Assembly and about political legitimacy, which will come through confidence. Public confidence has been dealt a massive blow. The public do not know what they will be charged when the process comes to an end. The question is begging to be asked: when should the problem have been discovered? When we find out the answer, we will ask why it was not discovered sooner.

Mrs Bryan:
You have raised some very important issues, and they are dear to my heart. I can answer them in a couple of ways, hopefully briefly.

On the issue of information, we corporately cannot blame Water Service for not having information that is absolutely 100% A1 OK. Water Service was a Civil Service agency that was not expected to produce the sort of information about which we are talking now. There was no charging, there was no regulation: it was unable to do that work. If you compare that with what Chris has just told the Committee, getting shipshape information cannot be done overnight. One cannot suddenly spend a huge amount of money so that overnight it all comes right. That must be worked at. That is part of our business improvement programme. We recognise the issues about confidence, money and customer services that inadequate data can create. We have not hidden these matters under a bushel and tried to avoid them: we have been flagging them up as a huge risk.

This is my final response about the issue of trust. It is very important to me that the Committee understands the organisation, its good and bad points, and that we talk to you about how we get better — something that the whole of Northern Ireland wants. I stress that this is something that cannot be addressed overnight. It is something that the company has to work at. In answer to your question, as a result of our investigations, we will look back to when this happened.

We will also consider the other risks. At our last session, we looked at leakage, because water balance has a relationship to some of these data. As part of our work, we have looked at that and satisfied ourselves that it is all right. We will look at other risks, even without our business improvement programme, because it is important to us.

Mr McCartney:
The previous witnesses discussed the chronology of events. Do you have a record of the date when this was discovered?

Mr Mellor:
It was discovered in early January. I have instituted an internal inquiry to establish precisely who knew what and when and to learn the lessons from it. Given the degree of scrutiny that these data have been subjected to by many different people, one could have argued that our people in the tariff section were entitled to rely on the numbers that they had inherited. Instead, when they came to set tariffs for the first time — they started this work in December, which was late, not through their fault — they, quite rightly, said that they had better check all the numbers in the data. They did not want to perpetuate any mistakes that might exist. That was when the error was discovered. It came to the attention of senior people in the company early in January. That is as accurate as I can be at this stage.

Mr McCartney:
It is very important that we establish that date. Somewhere along the line, someone has said:

“ Houston, we’ve had a problem.”

Mr Mellor:
I agree.

Mr McCartney:
It was very clear: it was not a case of “maybe” or “perhaps”. We need to identify the point at which the problem was identified, and the length of the gap between that and when it was reported to the Department. “Early January” can be up to 10 January, mid-January can start on—

Mrs Bryan:
Discussions took place between 4 and 14 January.

Mr Larkin:
The key period is from 4 and 14 January. I want to address the point that Raymond raised about what we could or could not have done. As people started to look at this, they realised that not just one piece of information was affected, but many: water balance; leakage information; consumption; the number of customers and so on. A series of elements had to be considered. As they started to put those together, they started to check them individually and to think about the correlation of one with the other. When they were all put into the model together, the tariff was calculated, the effect on the charges became clear to make the revenue norm — the revenue norm does not change, but the tariff does — it was at that point, that those individuals were able to confirm that there was a problem.

Mr McCartney:
That is my point. There is a time when it happened. I am not saying that you are being evasive, but there is a time when it happened. In my opinion “early January” does not identify it: it happened, for example, at Tuesday afternoon at 4.00 pm, when someone went into Katharine’s office and said, “This is a problem” because it turned out that there was a problem. People are now trying to identify it precisely. Somewhere along the line, there was an exact time when people said that there was a problem that now must be attended to. I am interested in identifying the gap.

Mr Mellor:
We are going through all the records rigorously and interviewing all the people who are involved. We will establish that fairly shortly.

The Chairperson:
Will the Committee be able to look at that when it is drawn up?

Mr Mellor:
We will be very happy to share the results with the Committee.

Mr McCartney:
I am conscious of time, but I must ask whether the regulator has been in contact. Later this afternoon, the regulator will make a presentation describing his intention to conduct an investigation into false information. Do you have any comment to make on that?

Mr Mellor:
I accept that we could have brought the matter to the regulator’s attention sooner than we did — that was a failure on our part. However, there was absolutely no attempt to deceive anyone; we tried to be open. On the evidence that I have at the moment, it is clear that we failed to communicate with the regulator at the right level. However, there was no attempt at all to deceive anyone; quite the opposite.

Mrs Bryan:
All the relevant numbers were given to the regulator within the specified time. The real problem was with high-level communication.

Mr Larkin:
The supporting models of the detail and our invitation to the regulator to talk to us about some of the significant differences within those models — to establish its process through the technical audited report — shows that there was no intention to deceive anyone.

Mr McCartney:
The Committee will be speaking to the regulator, and there may be issues that we need to discuss further with you.

Mr Mellor:
Indeed, and I have spoken personally to the regulator and apologised for any embarrassment or difficulty that we have caused him.

The Chairperson:
We are running short of time, but other members want to contribute.

Mr McCallister:
I will be very brief. You mentioned that you have reduced charges for the non-domestic sector. Can people who receive those bills now be confident that they are not being overcharged, and that they have not been overcharged in the past number of years?

Mr Mellor:
There has been a great degree of scrutiny of this matter, and, of course, the regulator has to agree that the tariffs are not unduly discriminatory. We are as confident as we can be that the tariffs — to be agreed in the next couple of days — will be fair. Indeed, it is the regulator’s job to ensure that they are fair.

Mr Boylan:
This process has been mooted since 2003, so there has been ample opportunity to implement a proper model. Was a sensitivity analysis carried out on the process of transferring figures from Water Service to the business plan? Can you guarantee that the £18 million extra will not be absorbed by the customer? What is the bad debt percentage? Have you examined it independently, and can you assure me that you have set it at the correct level?

Mrs Bryan:
I will ask Ronan to answer your first and third questions, Cathal; I will answer your second. No, I cannot guarantee that none of that burden will be passed to the customer in 2009-10. However, I can say that there are a lot of variables that need to be considered before a decision is made on the domestic tariffs for 2009-10. We will play our part in trying to minimise any impact that that will have on household customers.

The Chairperson:
We are going to run short of time.

Mr Boylan:
I have two other points still to make.

Mr Larkin:
Regarding the sensitivity analysis, an exercise was carried out to settle how Northern Ireland Water would deal with financial shocks. That work considered a series of issues, but did not include the data assumptions that had been made. It addressed potential problems so that pressure would be taken off the company if they were to arise; for example, what would happen if there were an environmental disaster that the company was liable to put right or what would happen if the company were unable to send bills on time. That exercise was designed to model the level of headroom within which any company can operate, above and beyond its normal cash and working capital requirements. Therefore, the sensitivity analysis took the form of an assessment of the company’s headroom. That work was carried out, and the headroom, which is known as the revolving credit line, was established as part and parcel of the formation of Northern Ireland Water.

Mr Boylan:
The only reason that I brought that up was because although we need to feed that information into the business plan, we must also recognise that everyone will have to pay for their water at some point, regardless of their circumstances. If the projections are wrong from the start, a lot of skeletons may come out of the cupboard. Fortunately, we have not reached that point yet. We need assurances that those projections were analysed.

Mr Larkin:
During the formation of the business plan, we developed lines on deprivation. We studied the English and Welsh models, and we spoke to people who were engaged in those processes. We also worked with the Department for Regional Development on the appropriate estimates that Northern Ireland Water should include in its profit and loss account.

Mr Boylan:
You said that you studied the models in England and Wales, but why did you not look at the trouble that Scottish Water had with its projections? Did you seek independent advice when you forecast your projections?

Mr Larkin:
Are you talking about bad debt again?

Mr Boylan:
Yes. You said that you examined the bad debt in England and Wales, but why did you not consider the estimates, especially in the light of what happened in Scotland?

Mr Larkin:
I will answer the bad debt question first, and then I will address the second question.

The Chairperson:
We are running out of time. Another Committee has booked this room, so please be brief.

Mr Larkin:
With regard to bad debt, Northern Ireland Water was being assessed against an England and Wales average at the time, because there was a view that our charge should be no greater than England’s average. Therefore, we were asked to set our parameters against those of England and Wales.

Mr Boylan:
I am not denying that; all I am saying is that part of the process should have involved the examination of other models.

Mr Larkin:
That is one of the lessons that has been learnt.

The Chairperson:
If your projections on bad debt are wrong, the customer will have to pay for your mistake. That is our main concern. We think that 5% is too low.

Direct rule Ministers were keen to have the Go-co and to privatise water provision in some form. Do you think that it all happened too soon?

Mr Mellor:
That is a judgement call. There was always going to be a risk, given the inherited state of the assets and data. We tried to carry out a sensitivity analysis. The public purse was the other pressure. In 2006, there were a lot of discussions as to whether we got the balance right. The board took the view that, on balance, it was appropriate to try to launch the company.

The Chairperson:
That is a good politician’s answer.

Mr Mellor:
I still believe that it was the right thing to do. The important thing is to make the company as efficient and customer focused as possible. That is our aim.

The Chairperson:
Thank you very much.

The Chairperson:
We shall now reconvene the meeting, so I welcome Iain Osborne, Sean Lyons and Jo Aston from the Northern Ireland Authority for Utility Regulation. Before we begin, do you have anything to add to the information that you provided last week?

Mr Iain Osborne ( Northern Ireland Authority for Utility Regulation):
Not really. The Committee will have heard the explanations from Northern Ireland Water and the Department, and we are happy to give our perspective, if you would like to begin by asking questions.

The Chairperson:
The Committee had long discussions this morning with the water company and the Department. It is fair to say that the Committee has huge reservations about some of the information that was correlated by the Department at the early stages and passed to the water company for it to make projections in the strategic business plan, which is where some of this work has come from.

We had difficulties with that information, and we still have difficulties with some of the other matters, including the persistence of the 5% bad debt level. The big concern for us is that any of the forecasts that are wrong — and there may be more, although I hope not — will affect consumers. The current difficulty may be a one-off problem, or it may be the start of other difficulties for the consumer. That is what we are really worried about. Similar to the credit crunch in America, no one knows where it will end. That is our big worry.

Mr Osborne:
I am sure that you are right; there will be bumps in the road. In the evidence that we gave to the Committee last week, we consistently focused on process, because whenever one takes a business activity and commercialises it, one hits bumps in the road. By that I mean things that happen on a properly commercial basis, which need to be fixed. It is important that that is not done behind closed doors, non-transparently; it must be done transparently and robustly under scrutiny from a regulator that is not working under short-term pressures but is aiming for a long-term sustainable process.

The Chairperson:
We seek clarification on two other points. The first was clarified this morning, but we must re-emphasise the point, which is that the process of cross-subsidisation between the non-domestic and domestic sectors cannot happen.

Mr Osborne:
We agree with that. The utility regulator believes that Northern Ireland Water’s proposals do not cross-subsidise between sectors.

The Chairperson:
Therefore, cross-subsidisation is not an issue.

Mr Osborne:
It would not be acceptable to the utility regulator.

The Chairperson:
Does that mean, therefore, that it cannot happen?

Mr Osborne:
That is correct.

The Chairperson:
The other point that I want to raise is one that was discussed earlier: Northern Ireland Water has suggested ways that it will try to alleviate customers’ concerns. However, they would be one-off measures. The issue is that water charges will be a recurring cost. Is that how you see it?

Mr Osborne:
Yes. The costs will be incurred every year for the amount of water that is consumed. Some of Northern Ireland Water’s mitigation proposals are about increasing the operating efficiency of the company, which is a permanent gain. In 2009, we expect to see more operating efficiencies being delivered than the company had planned. We have not approached the Minister with our advice about future years. However, I anticipate that as time goes on, we will turn the screw harder. Therefore, on the efficiency side, the gain will be permanent, not for one year.

With regard to the extent that the company is reducing base maintenance, when you know the right level of maintenance at the start, reducing it from there is not the most sustainable course of action; it cannot be done every year. Given that we do not have much belief in the strategic business plan, the figure from which the company is subtracting the infrastructure-renewables charge is not one in which we have much confidence. Therefore, at present, I do not know whether that was the right level — in which case we are shaving from it — or whether the level was too high, and that, therefore, the existing level was fine. The amount that the company proposes to shave off is relatively small. The areas of work that it expects not to do will be effective only in the long term.

The Chairperson:
With regard to capital maintenance, are you talking about £4 million?

Mr Osborne:
That is not an enormous amount on the scale of what the company spends on capital maintenance. Our intention is to ensure that it does not have a short-term effect on service levels. That ought to be deliverable. Whether the new level — the strategic business plan minus £4 million — is sustainable, we do not know. That must be analysed from the ground up during periodic review in order to determine what maintenance levels are needed.

The other main element is the reduction in net profit. The company could exist permanently at that low level of profit as long as it were reflected in the dividend. However, if the company’s debt is increased year by year, eventually that will become unsustainable.

The Chairperson:
I believe that that is the proposal.

Mr Osborne:
We will wait and see what the Executive say about dividend waivers and the whole piece.

Mr Wells:
The last time that you appeared before the Committee, you indicated that you had discovered £5 million that had been sitting in assets, which should have been allocated to revenue. This morning, the Committee raised that issue with the Department. Officials said that it could be treated either way — it does not necessarily need to be transferred. Obviously, the significance of the transfer is that it adds to the problem that we have identified already. Is there an accounting procedure that can be used so that that £5 million charge does not pass to the customer?

Mr Osborne:
We recognise the Department’s leadership role in the matter in that it is providing subsidy. We maintain our view about the appropriate way to treat that in the long run. However, we have told the Department that as long as that fits into an overall mitigation package that does not have a negative impact on the consumer, and which is sustainable, we will accept the accounting treatment’s being carried out the way that the Department would like it to be done for the next two years — being treated as capital expenditure (capex) rather than opex.

Mr Wells:
Yes, but that process only puts it off. Surely, at some stage, that will appear on the balance sheet and be charged to the customer.

Mr Osborne:
A fundamental review needs to be carried out to determine how best to deal with the method of charging in the long term. We believe that the opex system is most appropriate, and that is consistent with the GB accounting guidelines. We will produce accounting guidelines specific to Northern Ireland, and we will take into account the opinions of departmental officials — and they are not fools — and decide whether they have a point. If we are persuaded by the Department’s reasoning, the capex system will remain, and that £5 million will not materialise. However, if we decide, as we enter the first price review period, that we will use the opex system, that sum will pass through to tariffs.

Mr Wells:
That £5 million first came to light as a result of a question that I asked you, and given that several weeks have elapsed since then, I will ask it again. To mix my metaphors, are you aware of any other skeletons in the cupboard that could come out to bite us? This morning, the Committee received information that indicates that more bad news is on the way. Do any other issues worry you?

Mr Osborne:
I will answer on my own behalf and allow my two colleagues, who are more engaged with the detail, to continue. Given that the process involves the commercialisation of a former Civil Service agency, bumps in the road are inevitable and are, to some extent, what Donald Rumsfeld described as “unknown unknowns”. It would be foolish to think that everything has been discovered already.

With regard to “known unknowns”, during our previous meeting, I informed the Committee that our technical auditor had considered the methodologies that were used to construct the tariff model and had made 17 recommendations. Northern Ireland Water has made a fair attempt to address those recommendations. However, several require reviews that cannot be conducted in a couple of weeks. None are £20 million issues, but six or eight must be examined.

Ms Jo Aston ( Northern Ireland Authority for Utility Regulation):
The company’s data were poor, but further work is required to determine the extent of and reasons behind those poor data. We receive an annual information return from the company, and last year we received a partial return, from which we identified, line by line, the shortfalls. Confidence gradings apply to those data, and we required the company to outline the manner and time frame in which it would address the shortfalls. However, no one can guarantee whether there are more skeletons in the cupboard. Therefore, that annual return is crucial in determining information and data.

We are also examining and attempting to get a handle on monitoring the company’s input and the nature of its delivery. We are establishing robust templates that are properly populated with data that we can trust. Through that, we can see what is delivered. Those are some of the measures that we have taken to identify robustly any shortfalls and to address the fact that the company must supply better data consistently.

Mr Wells:
You have an agent — an officer rather — behind the lines —

The Chairperson:
Agent is probably the correct word. [Laughter.]

Mr Wells:
What is the correct term?

Mr Osborne:
A reporter.

Mr Wells:
The role is similar to that of an agent behind the lines in a camp. The reporter keeps a close eye on affairs in Northern Ireland and reports back to you. That is an unusual relationship, which I have not encountered before in business.

Ms Aston:
It is an excellent arrangement, in that it allows the reporter to work closely with the company to correct any problems, and it allows us to monitor developments. For example, the reporter sees how data flows through the annual information return. Therefore, how the answers are derived and their consistency is important, as is ensuring correct execution. That ensures confidence and robustness in the process.

Mr Wells:
The question must be asked: should the reporter not have discovered the discrepancy before Northern Ireland Water did?

Ms Aston:
I am not sure that that was the sequence, Jim, and we might look into that matter. I have just described how the reporter works, and he needs something to work on — he needs an output. He then he goes back over the process that led to that output, checks whether the process was correctly and consistently followed through, and he identifies the issues that arise.

Mr Osborne:
It is a matter of who is running the company. We could take the approach that the reporter should first outline what he thinks the tariffs ought to be, and then let Northern Ireland Water’s management team comment on whether they agree with his work. Ultimately, however, that would muddle accountability arrangements, because the management team is accountable for the outcomes. We audit management’s work, not the other way around.

Mr Wells:
Is it not a weakness in the system that a reporter’s role is reactive in that he cannot initiate his own investigations if he feels that something is just not right?

Mr Osborne:
As the regulators, it is we who initiate investigations. The reporter might suggest to us that there is an area of concern, and, in that case, we could ask him to examine it. We can ask him to examine issues proactively, and, in some instances, we have done so.

Tariff setting is an annual process. This is the first time that we have done it, and it has been a particularly bumpy experience. We need to do it better in future. The fact that the reporter was planning to carry out an audit led to the company’s doing the work itself — and better — and that is what brought the problem to light. I offer that as a successful illustration of the importance of the reporter’s role. His job is not to micromanage the company, but to create transparency and insist on good practice, which, in turn, drives the company to do better. The weakness — what went wrong — was that the company, having discovered that there were problems, did not react appropriately to that knowledge and instead ran off with the ball into private huddles for six weeks. However, that is a different story.

The Chairperson:
Would the hope be that when the benchmarking work is carried out in the next couple of years, the data that emerge will be more reliable than it is at the minute?

Mr Osborne:
Absolutely; as I said, the basis of our strategy is essentially that we are starting from scratch.

The Chairperson:
Everyone is working from scratch; there has been no benchmarking at all. I was going to say that it is a bit of a shot in the dark, but as this issue has been with the Department since 2004, I do not think that that is the right expression to use.

Mr Dallat:
We have heard a great deal of theorising today, and there has been much ping-pong, passing the parcel and so on. To tell you the truth, I was looking forward to hearing something refreshing after lunch. I am seriously wondering what the utility regulator’s role is in this whole matter. Why are you not screaming from the rooftops about the scandal that is taking place right now, whereby the poorest and most vulnerable people in society will be clobbered — not this year or next year, but for years to come — because of the total incompetence of those who were in control of the Water Service? Pardon my ignorance, but please define your role, because I am totally confused.

Mr Osborne:
Certainly; our role is a doing and control role — it is not a campaigning role. That is why we are not screaming from the rooftops. The Consumer Council does that very well.

Mr Dallat:
I am getting no material to work on today. You talked about how there would be bumps in the roads for years to come.

Mr Osborne:
Let me describe our role to you. It is to require the company to implement robust processes and systems and to hold the company to account as to whether those processes and systems are appropriate. It is also to hold the company to account to ensure that it is pushing itself as hard as it can to deliver efficiencies and to ensure that it is getting its basic governance right. We have a range of powers that enable us to do that. The formal power that is relevant in this case is the approval of the scheme of charges, and it is because Northern Ireland Water is moving towards having to account to us and lay it all out for us that it has done its homework better this year than it did last year.

As I said, the way in which the company and the Department reacted to discovering that there was a problem was not modern. It was not a response from the post-regulatory era; it was from the pre-regulatory era, and that is because we are at an intermediate stage, with a great deal of the money involved coming from subsidy. I understand why the company’s first instinct was to talk to the Department, although I regret that it was. Once we reach clear waters and have a clear financial model, I absolutely agree that the impact will fall on customers. Our role is to protect customers from that kind of incompetence by requiring the company to follow best practice and be transparent and accountable.

Mr Dallat:
My position on this Committee — and that of the Minister — has been damaged by the Laurel and Hardy show that has gone on. I also believe that your position has been damaged because the public, particularly those who can least afford to pay for water, will look to you. It amazes me that you claim that everything is above board, open and transparent.

Mr Osborne:
I am not saying that; I am saying that the situation has been very badly handled.

Mr Dallat:
I wrote down words to that effect that you said.

Mr Osborne:
I am saying that it has been very badly handled. Our role —

Mr Dallat:
It has been extremely badly handled. Do you really believe that it was a coincidence that this issue was leaked to the media when the Committee, the Minister and everyone else were in the Netherlands?

Mr Osborne:
I have no idea whether that was a coincidence.

Mr Dallat:
Do you know what the recurring costs for the next five years will be?

Mr Osborne:
I know what the figures are in the company’s business plan, and I do not think that they are correct. Therefore, we are rebuilding and reviewing that business plan. Furthermore, we are putting together a monitoring strategy, and we will work through a robust and transparent process that involves consultation with all the stakeholders to ascertain how much the company needs to spend.

Mr Dallat:
When can we expect to have that?

Mr Osborne:
As I told the Committee a couple of weeks ago, the review of the business plan will be published in the next few weeks. The process of putting together the periodic review has already started through workshops with some of the key stakeholders. Early this summer, we will publish a plan that everyone can see that will show the building blocks of the price control. Consultation on each of those building blocks will be conducted through detailed discussions with stakeholders and through public-consultation exercises.

The process will be public and transparent. It will not provide instant answers. I am not saying that I know what the plan is for the next five years. In order to have formed such a plan, I would have had to have written it on the back of an envelope. It is precisely the instinct to write plans on the back of envelopes that has got us into the current situation. A robust and transparent process is required, which is what we, as the regulator, will create.

Mr Dallat:
We certainly do not want it written on the back of an envelope, although I suspect that that has already happened.

Ms Aston:
Since I started to work in the regulator’s office, I have been focused on trying to get a handle on this company. We need the company to deliver a good service for the best value. We have had to examine the strategic business plan and get to grips with what it says that the company will deliver. We have spent a great deal of time establishing baselines to enable us to measure the output, and we have spent time benchmarking the efficiencies, which we will continue to do. We are focused on getting a good service to customers for the least cost and on making the company work hard to perform well.

We cannot do that quickly; we have to work through a robust process, we have to get good templates, and we have to have good data. Part of the problem is getting good data; we have found that there is a shortfall, which is a problem that we will have to address and fix.

Mr Dallat:
It must be extremely disappointing that week after week it seems that your efforts to achieve that are being undermined by new revelations of simple issues that should have been discovered during the past four years.

Mr McCartney:
You presented several slides to the Committee on 27 February. Is the information from those slides still current?

Mr Osborne:
I do not have those slides in front of me. To be honest, I had not reviewed them when preparing for today’s meeting. However, I am told that nothing material has changed.

Mr McCartney:
One of the slides showed that one of the utility regulator’s proposed actions was to hold an investigation into the submission of false information. Will you give us an update on that investigation? Furthermore, will you tell us why you thought that it was necessary, and when you will settle on the terms of reference?

Mr Osborne:
As I said, a regulatory regime has substantial advantages for consumers. The foundation of such a regime is based on the company’s providing the best information that is available. Candour is important.

We did not know about those issues, and we had had a formal submission from the company. What needs to be established is how that formal submission failed to alert us to the fact that there was an enormous change in the allocation methodology. There is a number of possibilities, one of which is that the change was in the report and we missed it. I do not believe that that is the case, but it is possible. Another is that it was buried in the numbers, and we did not spot it. However, given that this is the first year that we have had that set of numbers, I do not know how we would have missed it.

Another is that, quite simply, the report was wrong, relative to what the company knew at that time. It is extremely important to establish which one of those scenarios is the case. That is why we are going to undertake the investigation. It is quite specific to ensuring that something that is fundamental to having a regulator is in place — the duty of candour.

Mr McCartney:
What about the terms of reference?

Mr Osborne:
We have been focusing our resources on trying to get the scheme of charges signed off for the coming year, so we have not done very much work on the investigation. On the basis that the scheme of charges is supposed to be signed off tomorrow — and I suspect that that will slip further, because we have not had all of the submissions that we need; although it needs to be done within a week or so — we will be settling the terms of reference within the next couple of weeks. I expect that, at the latest, we will conclude this by the end of May, quite possibly earlier.

This is a matter of parochial interest to us in regard to making the regulatory regime work, but this is a matter of much wider interest. We would be very happy, if appropriate, to come and brief the Committee before we release our report on this investigation, and we would certainly inform the Committee — as we would inform other stakeholders — if we decided to move to formal enforcement action as a result of this investigation.

Mr McCartney:
Have you informed the company that you are going to undertake this investigation?

Mr Osborne:
Yes.

Mr McCartney:
What was its response?

Mr Osborne:
The company recognises that we need to ensure that the regulatory regime is robust. It does not believe that it misinformed us, but it understands why we need to go through a process of investigation.

Mr McCartney:
You were notified of that issue on 22 February. Had your reporter discovered, previous to that date, that there was a problem in the offing?

Ms Aston:
The reporter works with the company to discover what is happening, and what the processes are that lead to the output. In doing that, the reporter discusses that with the company, to make sure that he has got it right, and perhaps even indicate to the company what it needs to do better or differently. That is a win-win situation, because things can be corrected before they get to us. It is not hidden behind the cupboard; it is fully disclosed in the reporter’s report. Nevertheless, the company is not given the opportunity to become aware of the shortfalls that the reporter finds.

We received the reporter’s report on 22 February. We had a meeting with the reporter earlier that week, in which those problems were brought to light. We then insisted on receiving the full report at the earliest opportunity. We received that on 22 February, which, coincidentally, was the same date that the news broke.

Mr McCartney:
So it was the reporter and not NIW that informed you of the problems?

Ms Aston:
The protocol is that the reporter informs us, but the shortfall here is that we were given a scheme of charges on 31 January. We perceive that the company would have been aware of the shifts and would have known that there were shifts in numbers in that submission. However, the company did not draw our attention to that. Given the scale of the shift, one might have expected that to have been the case.

Mr Sean Lyons ( Northern Ireland Authority for Utility Regulation):

There were 17 recommendations in the reporter’s report. Most of those can be implemented this year, but there are two or three that will be relevant next year. It is not feasible to rectify some of those this year; there will need to be an ongoing process to take those on board.

Mr McCartney:
The slides that you presented on 27 February said:

“NIW has ignored the legal framework”.

That was after you were notified on 22 February. How did NIW ignore the legal framework?

Mr Osborne:
NIW ignored the legal framework in the sense that the primary responsibility for approving a scheme of charges rests with us. Therefore, when it uncovered something that made a big difference to the scheme of charges, it should have notified us.

As I said earlier, I understand why NIW talked to the Department about the problem, because it had an impact on subsidy. However, it ought to have briefed us simultaneously and talked to us about the implications for the scheme of charges. The aspect of the legal framework that NIW ignored is the fact that responsibility for the scheme of charges lies with us, legally.

Mr McCartney:
Did you inform NIW that it had breached that legal framework?

Mr Osborne:
The first thing to establish is why, despite having had a report on 31 January, we were unaware of the issue until the 22 February. As I said, one logical possibility — although I do not believe it — is that it was our fault. Therefore, I wish to establish our ground first, and then we will see whether there is a case to answer.

Mr McCartney:
What reason did the company give for not informing you?

Mr Osborne:
Essentially, it said that it was an oversight, and that, although it recognised immediately that it was a subsidy issue, collectively it failed to recognise that it was also an issue to do with the regulator. There is a corollary to that, which is that the people to whom I refer are not the most senior people in the organisation. The company experienced a breakdown in internal communication, and, as soon as the most senior people were briefed about the issue, they asked whether the regulator knew about the problem. At that point, they started to engage with us more.

Mr McCartney:
Did you inform the company that you knew that there was a problem before then? When you heard that there was a problem on 22 February, did you phone the company the next day and tell them that there was a problem and that you had not been informed?

Ms Aston:
I will answer that. The company actually phoned us on 22 February in response to the media attention in relation to the matter.

Mr McCartney:
When did the reporter inform you of the problem? Was that on 22 February as well?

Ms Aston:
We received the report on 22 February. We had discussions and a meeting with the reporter earlier that week, during which he mentioned the recommendations that he had made. Therefore, we had asked to have his report at the earliest opportunity.

Mr McCartney:
Was the reporter involved when the water company found out about the problem in January? Should he have been involved?

Ms Aston:
The reporter would not have been involved in that sort of discussion; he was there purely as a technical auditor, looking at process and data streams, and that was his focus.

Mr Osborne:
The sequence of events was that we told the company that the reporter was going to do the audit. The company did its own audit, so as to ensure that it would be happy with the reporter’s conclusions. The company discovered the problems. Then the reporter did the audit and reported to us on 22 February, but by then a great deal of time had elapsed, and the matter had become public knowledge.

Ms Aston:
Some of the questions that you are asking are questions that we wish to have outlined in our investigation. That is why we clearly must investigate the matter.

Mr Osborne:
If I may lob you a ball, Raymond, you could ask us why we did not pick up on the matter when we received the report on 31 January. That would be a perfectly reasonable question. My starting point is that — not having gone through the exercise before — when confronted with a set of numbers, it is difficult to say whether there is something wrong with it if you do not have a previous set to compare them with.

To some extent, this is an exercise in self-criticism. We must establish whether we were at fault, or whether the report was sufficiently dense and lacking pointers that it was, in effect, misleading.

Mr McCartney:
We are trying to get to the bottom of many aspects of the matter, including the point at which the problem should have been discovered. As I pointed out this morning, the official from the Department said that the Department knew, and accepted, that poor data was being handed from Water Service to the new company. That information was not included in any of the presentations to the Committee, including strand one and strand two of the independent panel report. The panel will have to answer for itself, but nobody put that information on the table.

The Consumer Council flagged up the issue in 2006, and it was dismissed by the Minister at the time as scaremongering or playing to the gallery. However, it turns out that the Consumer Council was right.

If people accept that there was poor data then you can assume that there would be a poor result as a consequence. Therefore, there is the suspicion — and it has been said around this table this morning — that you get people over one hump and then you are lobbed something and told that a mistake has been made and that it will add £50 to the cost or whatever the latest figure is. We need to find out if that is the case and to ensure that it does not happen in the future. Therefore, whatever the role of the regulator — and I understand that you are under pressure — I would like to see the terms of reference and the investigation being carried out as soon as possible so that those questions can be tackled and answered.

I am not being judgemental but everyone seems to have half answers or in-between answers because the matter lies in between people. All the issues need to be brought together to find out when and how it happened and, importantly for the future, that it does not happen again because we are all committed to make sure that there are no bumps in the road that can be seen. I realise that there might be bumps in the road that no one will see, but this was a bump in the road that people pointed out and who were dismissed when they did so.

Ms Aston:
Everything is happening at the eleventh hour, which is undesirable for everyone. We have already issued the company with our preferred timeline for managing this process next year. That will begin in October this year and allow for a proper consultative process with all the key stakeholders and, indeed, the Committee. That is really what needs to happen: that issues emerge and are discovered much earlier, and that there is due process, transparency and openness.

Mr Osborne:
That is part of the answer to the scheme of charges question. More widely, concerning a company getting data management information systems that work: we will write to the Committee and describe the programme that we set for the company to get a robust set of data. Some of that can be done reasonably quickly; other matters involve the company changing the way its network works so that it can, for example, measure pressure better. Different timescales are involved, but we will inform the Committee in writing as to what progress is being made.

The Chairperson:
Non-domestic bills are due in six weeks. We have not seen any tariffs, models or costings for those bills. That will have a direct impact on the domestic bills. It will be interesting to see the new figures for non-domestic bills.

Mr Osborne:
The figures are not changing much. Most of the discussion has been around mitigation. Implementing the reporter’s recommendations has meant that the volumes have moved up and down a bit. However, most of it is around mitigation measures. It is not a good thing that the Committee does not know what the expected levels are next year. Whose job is it to tell you?

The Chairperson:
As long as someone tells us, we are all right. The company says that one of the reasons for the reallocation between domestic and non-domestic is a miscalculation of trade effluent. The total bill for trade effluent is £5·5 million. There is a gap of £20 million.

Mr Osborne:
It is not that the figure for trade effluent is hugely out.

The Chairperson:
The Department told the Committee this morning that the reason that this miscalculation occurred was because of a miscalculation of trade effluent.

Mr Lyons:
That is only one of several reasons.

The Chairperson:
The figures do not match, if that was the only issue.

Mr Lyons:
There are other reasons — for example, assumptions were wrong.

The Chairperson:
Could you repeat that? You are saying that it was because the assumptions were wrong in the strategic business plan.

Mr Lyons:
Some of the assumptions put into the model were wrong. As information was updated, the assumptions were corrected, which highlighted the problem.

The Chairperson:
Trade effluent was not the only issue?

Mr Lyons:
It was not the only issue.

The Chairperson:
The other issue was that there were miscalculations in the other data that went into the model.

Mr Lyons:
Yes; for example, unmeasured customers.

The Chairperson:
It was 75% out on unmeasured customers.

Mr Lyons:
I am not sure of the percentage, but it was out.

The Chairperson:
When I read the figures, the percentage jumped out at me. You could be 10% or 15% out, but 75% out is a lot. If you closed your eyes and got a pin, you would probably have been closer to the mark. Trade effluent was not the only issue.

Mr Osborne:
I was thinking about the fact that you have not been told about the intended non-domestic bills. We will talk to the company. I suspect that it is the company or the Department, but, one way or the other, we will ensure that somebody gives you that information.

The Chairperson:
The Committee agrees that this is the start of a process. There is so much information, and so much misleading information has gone out into the public arena, that people do not know where they are. This is the first cut at the matter, and we will have to go back over it again. We will get to the bottom of it eventually — hopefully.

As Raymond McCartney said, the main issue is for the Committee to ensure, as far as possible, that it does not happen again. At the end of the day, the customers have to pay, and that is the big issue for us.

Mr McCartney:
You referred to rebuilding the business plan. When do you expect to present that?

Ms Aston:
We have the baseline nearly done. The strategic business plan talks about different percentages and different baselines. We are coming in and trying to monitor output and, therefore, we need to establish what baseline we will use. We will be coming back to the Committee in two or three weeks. I will talk to the Committee Clerk and give the Committee a summary of the business plan.

The Chairperson:
The Committee would be happy if it had some baselines to work from. Everything is very fluid at the minute. We do not know whether things are right or wrong. Hopefully, after this year, we will have the beginning of the baselines, and we will become more proficient as we go along.

That was very interesting. Thank you very much.