Spiralling costs at Irish Water flagged last year
The Government was warned almost four months ago by the energy regulator that the "long-term interests" of customers would not be served by the 12-year deals given to councils to provide services for Irish Water.
And the Irish Independent has learned that the regulator also raised concerns over the set-up costs of the new utility company.
Up to 20pc of the €150m establishment costs, or €30m, might not be "reasonable", a letter to the Department of the Environment from the Commission for Energy Regulation (CER) reveals.
Customers will pay the price for the long-term agreements struck between Irish Water and local authorities to run the network.
The 12-year deals, called Service Level Agreements (SLAs), came into effect on January 1 when Irish Water took control of the network.
They require the same staffing numbers to remain in place, unless cuts are agreed with unions, as workers are protected under the Haddington Road Agreement.
Irish Water has repeatedly said the SLAs would ensure that water services would be improved, that the 4,300 employed would reduce over time and costs of up to €2bn stripped out of the system by 2021.
But economic think-tank the ESRI has suggested that too many are employed in the sector, which will add to customer bills.
Correspondence from the regulator shows concerns were raised almost two months before the deals came into effect.
The CER's finding on costs will be crucial as it will determine how much homeowners will be expected to pay for their water once billing begins in October.
"The primary goal of the CER... will be to protect the interests of the water services customer," the letter from November 18 last to the Department of the Environment says. "Setting revenues at a level that only includes expenditure efficiently incurred by Irish Water is central to this.
"The nature and content of the Service Level Agreements between Irish Water and the local authorities is key to Irish Water managing its costs in an efficient manner. The CER is of the view that the long-term interests of the water services customer are not maintained by the existence of SLAs."
It continued that 80 to 85pc of the (€150m) establishment costs of Irish Water "appear to be reasonable", but did not suggest that the remaining 15-20pc were "not reasonable". It would require detailed examination to determine if costs were justified, it added.
"The in-depth review of costs by CER will be critical in confirming the validity of this view," the letter adds.
The CER also said that any spending of a €30m contingency fund to establish Irish Water should be approved in advance by the department to "ensure effective oversight and incentivise efficiency".
The department said that SLAs were "dynamic agreements", subject to annual reviews and could be changed. This included reducing staff numbers.
In separate correspondence to the Public Accounts Committee, Irish Water also confirmed it is spending €3.3m on "customer engagement and brand development", and another €1.5m on "customer validation" to "prepare individuals to become customers of Irish Water".