Committee Reports > List of Committees > Joint > 1980 > Committee on Commercial State-Sponsored Bodies > Report No. 08 - Bord na Móna

APPENDIX 2

SUPPLEMENTARY MEMORANDUM FROM BORD NA MÓNA

PRICING

In carrying out the duties laid down for Bord na Móna in the Turf Development Act 1946 the financial policy of the Board has been to pay its way and no more. Paying its way meant recovering in revenue sufficient to meet its operational costs, the servicing of its capital (obtained until recently almost wholly from the Exchequer), and the repayment of the capital over the life of the bogs developed.

The pricing of Bord na Móna’s products, whilst reflecting this financial policy, was, of course, heavily influenced by the necessity to sell the products in competition with others in the market. Fuel sales are made on an ex-works basis, and a uniform price per product is charged by Bord na Móna throughout the country. Development and production costs are not uniform for various reasons e.g. nature of the bog and terrain, bog size and economics of scale, but these factors are catered for by the uniform pricing structure. Costs alone do not determine prices. They determine whether the enterprise can remain in business or, if it can, the level of profitability.

Realisation of the Board’s financial objective has, therefore, depended on two things viz. (1) being able to compete successfully in the market, and (2) achieving a correct balance in regard to overall development and production costs so that too enthusiastic discharge of its statutory duties did not result in too much high cost bog being developed leading to a chronic financial deficit position.

The change in the world energy situation since 1973 has two significant features. Firstly there is the necessity of developing alternative energy sources to oil. Secondly there is the considerable increase in the cost of energy. How these features bear on Bord na Móna’s position is clear to be seen.

Prior to 1973 further development of peat resources was inhibited by the necessity of maintaining price levels that enabled the Board to sell its production in competition with other fuels and meet its financial obligations. The increases in prices of alternative fuels from the end of that year caused the development of other peatlands to become an economically viable proposition. The Board’s forward planning was sufficiently advanced to enable it to put forward a programme to expand the area in production by 40,000 acres (30%) in February 1974. Further increases in competitive energy prices enabled that programme to be expanded to 63,000 acres or a 50% increase of the area in production in 1973. These areas are inherently more expensive to develop and produce from, and the capitalisation and capital servicing costs are much higher than for the earlier programmes.

Prices in 1973 were market related. Since that time prices of competing fuels—all imported—have increased by reason of the world market situation. Prices of Bord na Móna fuels have increased only by the level of increases in internal costs on existing production. This has resulted in a heavy switch in demand to peat fuel from other fuels to such an extent that peat supplies are unable to meet demand.

The Board therefore found itself in a situation in which it was dissipating resources which could be used for development of less economic peatlands through selling at prices below those which the consumer was willing to pay. Accordingly it asked the National Prices Commission to approve of a price increase to lessen the capital costs, and the ultimate prices, from newly developed areas. A price increase to yield £1 million capital in a full year was granted by the N.P.C. in October, 1978 with provision for an annual review of this arrangement. Continued increase of future interest and repayments estimates, and examination of further higher cost peatland, prompted the Board to put forward proposals to the N.P.C. for full market related prices that would again balance supply with demand and provide development capital from revenue instead of from repayable borrowings at high interest rates.

This decision was influenced by the fact that it is not practicable to enforce maximum prices to consumers in a shortage situation, and distributors are able to take excessive margins when demand is in excess of supplies since all fuels are sold on an ex works basis. The interests of the consumer in the long term, in the Board’s view, would best be served by developing as much peatland as possible for fuel and financing as much of the capital costs of these developments as possible by setting prices at a level that would have the consumer buy all the peat fuel that could be produced.

The Board has four main product divisions, Machine Turf, Milled Peat, Peat Briquettes and Moss Peat. The nature, location and size of the bog determines what product is produced from it. In general the bogs and factories are committed completely to their specific product, i.e. a bog or factory cannot ordinarily be switched to one of the other products during its lifetime. Prices are charged in the normal situation in accordance with market realities taking the Board’s long and short term interests into account. The normal situation applies now only to Moss Peat products.

In the case of fuel products price increases that have been granted since 1976 are below the levels that the market can sustain. These price increases have been spread over the various products so as to maintain the same relationship to probable market prices for each product.

Some cognisance is taken of the relative importance of customers. A rebate scheme operates for fuel customers related to their annual purchases. The maximum rebate at present is approximately 2½%. It is the Board’s policy to have the market situation such that new entrants can be attracted into the trade to preserve competition, and sufficient incentive is provided for existing customers to keep them selling.

There is of course no direct alternative to the Electricity Supply Board insofar as supplies of peat for electricity generation is concerned. In a free price situation prices to the E.S.B. are set taking account of its importance to the sales of Bord na Móna both as to annual volume and long term commitment to turf purchases. This basically is the same policy as for non E.S.B. sales.

It is the Board’s policy to seek market related prices for all its products so that it can develop every acre of peatland possible at no additional cost to the community beyond the price that the community is willing to pay for the peat produced. The price the community is willing to pay is the market price.

December 1979