Committee Reports > List of Committees > Joint > 1985 > Committee on Commercial State-Sponsored Bodies > Report No. 03 - Bord Gais Eireannn

TITHE AN OIREACHTAIS

JOINT COMMITTEE
on
COMMERCIAL STATE-SPONSORED BODIES
THIRD REPORT
BORD GÁIS ÉIREANN

MEMBERS OF JOINT COMMITTEE

(at 19 December, 1985)

SUMMARY OF RECOMMENDATIONS

i.That, notwithstanding the need to maintain an energy-related price structure for gas, more flexibility be applied by BGE in its pricing policy for individual industrial customers. (Ref. Par. 27)

ii.That implicit financial subsidies, achieved through the price charged per therm of gas sold to commercial state agencies (currently the ESB and NET) be highlighted in the financial statements of the beneficiaries in respect of all future gas deliveries. (Ref. Par. 28)

iii.That BGE and the ESB jointly quantify the volumes of gas likely to be required for power generation after 1989. (Ref. Par. 30)

iv.That BGE further develop its own work in the area of compressed natural gas (CNG) which would appear to hold attractions particularly as a replacement for currently non-economic spur lines and as a fuel for internal combustion engines. (Ref. Par. 37)

v.That, in view of the large investment already made and yet to be made by BGE in Dublin Gas Company, BGE consider seeking representation on the board of that company. (Ref. Par. 39)

vi.That BGE explore the feasibility of providing some of its highly qualified technical, administrative and other advisory staff, either on contract or secondment, to the weaker gas companies. (Ref. Par. 45)

vii.That BGE’s annual reports and accounts be laid before the Houses of the Oireachtas as soon as practicable and in any event not later than six months after the end of each financial year. (Ref. Par. 58)

viii.That since the major future activity of BGE will be marketing oriented the composition of the board of the company should reflect and benefit from further commercial and marketing expertise. (Ref. Par. 66)

ix.That a review of the Gas Act, 1976, in relation to BGE’s powers and duties be undertaken. (Ref. Par. 67)

x.That the Department of Energy clarify the respective roles for itself, the board of BGE and management with regard to strategy and, especially, with reference to the implementation of operational matters. (Ref. Par. 68)

xi.That the Department of Energy publish as a matter of urgency an energy policy which, in the context of BGE, would -

(a)greatly facilitate the long term planning function,

(b)minimise the need for involvement by the Department in BGE’s operational matters, and

(c)eliminate unnecessary competition for the use of natural gas, particularly at commercial and domestic consumer level, between BGE and the other State-owned energy producers. (Ref. Par. 72)

THIRD REPORT

BORD GÁIS ÉIREANN

I. INTRODUCTION

1.Natural gas is often found in association with crude oil so that over the past forty years as a spin-off from the development of the oil industry a natural gas supply and distribution industry has also grown up, particularly in Europe and North America. Before that, gas had been supplied from individual coal and later oil-based manufacturing plants in large towns and cities and it was used mainly for domestic cooking and heating. The availability of natural gas via an integrated network of gas transmission pipelines criss-crossing continents has meant that the old gas-making plants could be shut down, and moreover, that new energy markets could be profitably supplied with natural gas.

2.Thus, natural gas has transformed the economics of the old “town gas” companies to the point where these now supply 20% of all energy needs and are generally highly profitable enterprises, successfully competing for energy sales alongside electricity, oil, liquid petroleum gas (LPG) and even coal, except for very large-scale energy uses. World gas reserves are now projected to last at least 150 years.

3.The original oil and gas exploration work in Ireland was done by Marathon Oil Company of USA. Marathon found the country’s only viable gasfield to-date when it drilled into the Kinsale Head field in 1971. The field is medium-sized by international standards. It lies 30 miles off the Cork coast and is contained in geological strata lying 3,000 feet below the sea bed and in 300 feet of water. These gas-bearing strata, which constitute the gas reservoir, extend over fifty square miles and are about 100 feet deep. Two production platforms, three miles apart, are needed to produce the gas efficiently from all parts of the reservoir. The platforms each have seven producing wells and a 24” pipe has been laid along the sea-bed to bring the gas ashore, where Marathon pass it over to Bord Gáis Éireann - the Irish Gas Board at the terminal at Inch, Co. Cork.

4.Bord Gáis Éireann (or BGE as it is known) was set up as the State’s Natural Gas Development Agency under the Gas Act, 1976, the main provisions of which are summarised in Appendix 1 to this report. It now sells the gas supplied from the Kinsale Head field to the Electricity Supply Board (ESB), Nitrigin Éireann Teoranta (NET) and a number of industries. It also supplies Cork and Dublin Gas Companies, which, in turn, retail it to their domestic and other customers.

5.While the ESB has been BGE’s largest customer to date, it will, according to the projections contained in the ESB’s annual report for the year ended 31 March 1984, virtually cease using gas after 1989, as the Moneypoint coal station in Co. Clare becomes fully operational. BGE, in its submission to the Joint Committee, stated that it is now considering its allocation policy in this light bearing in mind its take or pay obligation under the 20 year contract with Marathon. This obligation, quantified at 45,000 thousands of millions of standard cubic feet (Mscf) in BGE’s annual report for 1983, requires the company to take one twentieth of the total gas reserve each year and to pay for any part of the quantity not taken in any year. Gas paid for but not used in any given year may be drawn off in a subsequent year.

II. PRODUCTION

6.The pressure of gas when taken on shore at Inch, Co. Cork, is regulated for supply to BGE’s customers. Whereas NET requires gas to be delivered at 650 pounds per square inch (p.s.i.), the pressure is reduced to much lower levels for distribution to other industrial and domestic users. Originally, the pressure of gas leaving the Kinsale Head gasfield was 1000 p.s.i. This has now fallen to 740 p.s.i. as a result of the offtake of gas since commencement of production. In early course it will be necessary to introduce compressor equipment in order to maintain pressure, particularly for NET, and at levels required for gas transmission to BGE’s other customers. As the gas is completely odourless a sulphur based chemical is added in a concentration of 5 parts per million (ppm) to give the gas a smell.

7.Natural gas is a highly attractive fuel with many commercial and industrial applications. Because of its flexibility in use, ease of delivery and cleanliness it is favoured by large users of energy for heating and processing, particularly where accurate temperature control is required. In Europe domestic consumers account for the next largest user category after industry. In Ireland natural gas consumption by private industrial and domestic users has only been partially developed.

8.Natural gas has helped reduce Ireland’s dependency on imported fuels from a high total of 80% in 1979 to 61% in 1983. In the main this has resulted from BGE supplying the ESB with an increasing proportion of its input fuel. The growth in the usage of natural gas by the ESB since 1980 is diagrammatically shown in Appendix 2. It will be seen that in 1984 natural gas accounted for 54% of the fuel used by the ESB to produce electricity.

9.The Kinsale Head gasfield originally contained 1.253 trillion (million million) cubic feet of gas - about 20% of Ireland’s total energy needs for twenty years. In 1984, according to BGE’s annual report for that year, 21% of the total primary energy demand was met by natural gas. The value of the gasfield to the nation at 1984 oil prices is about £7 billion - say £350 million/year over its 20 year life. The field now produces more energy than the combined output of the ESB and Bord na Móna. It was estimated that by the end of 1984 one quarter of the reserves had been used up and BGE estimates that the resulting sales of natural gas will have -

(i)contributed a cumulative £182 million to the Exchequer (payments in 1984 were £71m.);

(ii)cumulatively helped the national balance of payments by £1327m. (in 1984 alone by £367m.)

10.A favourable contract with Marathon provides for a drawdown of the gas over a 20 year period to 1999. The base price of the gas is indexed to annual movements in international oil prices as defined by Platt’s index and the exchange rate of the Irish pound with the US dollar. The movement in the index in the period 1979 - 1984 is shown in Appendix 3. Movements in this index are used as a basis both for reviewing the annual price per therm payable to Marathon and also for arriving at the price guidelines used by BGE for charging their customers. A condition of the contract, however, is the take or pay clause, which, as previously mentioned, obliges BGE to pay for gas not taken although such ‘unused’ gas can be availed of at a later date.

11.BGE’s headquarters is located at Little Island, Co. Cork, in a modern building which houses offices, the control centre and a maintenance depot. The control room, access to which is restricted, controls the overall transmission of the gas and regulates the pressure of the supply to BGE’s customers. In the gas industry the term “transmission” normally refers to the supply of gas at high pressure as in the case of the Dublin-Cork pipeline; the term “distribution” refers to the supply at low pressure, for example, to the individual domestic consumer. Modern methods of telemetry and telecommunications are employed in order to communicate with each of the above ground installations (AGI’s) for monitoring gas pressure and flow rates. BGE’s executives have drawn upon the most up to date technology employed within the gas industry both for the initial construction of the pipe network and the later installed control systems. Its operations are in accordance with international technical and safety standards as required by Section 38 of the Gas Act, 1976.

12.BGE is one of the few State boards operating completely outside Dublin. The Joint Committee was informed* that a high proportion of senior executives’ time is spent commuting to Dublin in order to attend meetings with the Department of Energy, Dublin Gas Company, commercial banks and legal advisers.

13.The present BGE gas network is shown in Appendix 4. In the company’s annual report for 1983 it is stated that “in the near future it is hoped to extend the National Gas Grid to Limerick, Clonmel and Waterford”. While it was understood that Government sanction had been obtained for this work it appeared to the Joint Committee that little progress had been made and, accordingly, it asked BGE for an up-to-date timetable for the proposed supply of gas to these centres.

14.BGE informed* the Joint Committee that the principal reason for delay in providing gas to Limerick revolved upon negotiations concerning the ultimate shareholding structure and the proportion to be held respectively by private and State shareholders. The present position is that Limerick Gas Co. will now be entirely owned by the State. With regard to Clonmel the Joint Committee was informed that the delay was caused both by changes in the scope of the project and by the terms attaching to the financial arrangements between BGE and Clonmel Corporation. The Joint Committee understands that both these issues are now substantially resolved. In the case of Waterford the delay was caused by the preoccupation of Dublin Gas Co., the parent company, with its own programme of conversion and development. The Joint Committee noted from BGE’s annual report for 1984 that it was expected that the grid would be extended to Clonmel before the end of 1985 and to Limerick and Waterford in 1986.

15.The Joint Committee was informed** that, following the connection of Limerick Gas Co. to the grid, the supply of gas to towns west of the Shannon, including the Shannon Industrial Estate, would be subject to these centres being commercially viable and that, in any event, it could take up to three years before supplies could be made available. The Joint Committee was also informed that, having regard to the cost of connection to the grid, the supply of gas to smaller towns might best be done through the use of compressed natural gas (CNG) delivered by bulk tanker. It is understood that Wexford town will shortly be supplied on this basis.

16.In evidence* the Joint Committee was informed that Aughinish Alumina Ltd. (AAL) would constitute a major load for BGE - 25 m.c.f. per day compared with the ESB’s current usage of 160 m.c.f. per day. It would represent a welcome albeit part replacement for the ESB’s planned reduction in demand for gas. However, the Joint Committee understands that whereas the quantities of gas involved could readily be accommodated it has not been possible up to the present ** for BGE to supply gas to AAL within the pricing guidelines laid down by the Department of Energy.

17.The Joint Committee asked BGE whether the pricing guidelines, based upon the price of heavy fuel oil (HFO), were realistic and not unduly restrictive. It was informed*** that the guidelines were continuously under review by the Department of Energy which was particularly mindful of their effectiveness in helping BGE achieve its target market share.

18.The Joint Committee is concerned about the slow pace, since the completion of the Cork - Dublin pipeline in 1982, of making natural gas available both to Clonmel, Limerick and Waterford, other towns en route, and, in general, to industry. It regards the availability of natural gas as an important element in the national strategy for economic development and thus in the provision of employment opportunities. It notes the experience of supplying natural gas to industrial estates in the Cork region which, according to BGE, has resulted in 2,200 job approvals by the IDA.

19.BGE, when negotiating with potential customers, is invariably queried about continuity and the availability of supplies of gas after the Kinsale Head gasfield runs out in 1999. Prior to the recent announcement of a further, as yet, unquantified offshore find there were no alternative sources from which gas could be drawn off. The fact that the entire network is, at present, supplied from one 24” pipe from the Kinsale Head gasfield places the entire grid at risk. In the event of an interruption in supply and apart from the inconvenience caused to domestic and industrial consumers, the ESB would be deprived of more than half of its input fuel at a single stroke. In a written submission from BGE the Joint Committee was informed that it has commissioned the Institute for Industrial Research and Standards to undertake a risk analysis of the likelihood and consequence of an interruption in gas supplies and the possibility of using a radar surveillance system to monitor the movements of vessels in the vicinity of the pipeline is also under consideration.

20.Alternative sources of supply will, in the absence of any further indigenous and substantial discoveries, need to be negotiated prior to 1990 either via a link to the UK gas grid or through direct imports of liquefied natural gas (LNG).

21.In evidence*, representatives of the Confederation of Irish Industry expressed the view that the level of offshore drilling activity depended upon the conditions attaching to the licensing terms. It was suggested that the comparatively small number of wells currently being drilled annually (7 in 1984 compared to 200 in the UK sector of the North Sea) was a direct consequence of the present licensing policy. It was also suggested that conditions should be made more attractive in order to increase the level of drilling activity - up to, say, twenty wells per year - thereby increasing the probability of finding more natural gas.

III MARKETING

22.BGE has a relatively limited number of customers. In addition to the ESB and NET, which together in 1984 accounted for 92% of gas sold, the ‘other’ category of customers accounting for the balance includes two gas utilities, together with a number of industrial customers mainly in the Cork city region. Last year a spur from the main Dublin - Cork pipeline connected Comhlucht Siúicre Éireann Teo, Carlow. The allocation of all gas delivered in the period 1979 - 1984, extracted from the company’s Report and Accounts for 1983 and 1984, is shown in the chart below:

23.The ESB and NET have provided the cash flow which, in turn, has helped fund the entire national grid, inclusive of the Cork to Dublin pipeline, the Cork city pipeline and the conversion and development plans for both the Cork and Dublin gas utilities. This is so even if the prices paid have not been entirely energy-related during the period under review. (By conversion is meant the cost of adjustments to appliances so that they can operate on natural gas; by development is meant the seeking out of new markets for the gas e.g. in new industrial and housing estates.)

24.BGE has assembled extensive market data identifying potential industrial users which could ultimately provide more profitable sales outlets for natural gas. It has established that there are adequate numbers of potential customers available who would pay commercial prices for the gas. The current energy price structure for large users, (i.e. those using in excess of 2 million therms* per year), is designed to be competitive with the price of the fuel currently used by prospective customers, otherwise there would be no incentive for customers to change from oil to gas. The market aimed at by BGE are companies using either fuel oil, gas oil or a combination of both. In October, 1985, the base price for low sulphur heavy fuel oil (viz. 3.5% sulphur, barges f.o.b., Rotterdam lows), corresponds to 30.2 pence per therm which translates to a landed price in Ireland of 34.2 pence per therm. The price of oil, against which BGE must compete, is not only governed by international supply and demand but also, since the dollar is universally used for pricing oil products, by the prevailing exchange rate for the US dollar.

25.The representatives of the CII, queried** the pricing structure of natural gas for industrial users. They advocated a price which would be midway between the present price to industry and that paid by BGE to Marathon. It was claimed that such a reduced price would be more in line with that charged by other European countries and that it would have the effect of -

(a)facilitating the allocation of the ESB quantities post 1989;

(b)accelerating economic activity, and

(c)helping the balance of payments by displacing imports of heavy fuel oil.

26.The Joint Committee was informed* that the CII would be willing to assist BGE locate clusters of industrial users which, collectively, would justify the cost of a spur line from the main grid.

27.In evidence the Joint Committee was informed that the Department of Energy had agreed that BGE may supply large industrial customers (greater than 2m. therms per year) directly rather than through the individual gas utilities. It notes, however, that Dublin Gas Company are now supplying A.Guinness & Company Ltd., a major user, which expects to use 16m. therms during 1985. The Committee is of the opinion that, notwithstanding the need to maintain an energy-related price structure for gas, more flexibility be applied by BGE in its pricing policy for individual industrial customers.

28.As previously mentioned the ESB and NET currently account for 92% of the Kinsale gasfield output. While this may be strategically desirable it does have the following financial consequences: -

(a)the price paid by NET is marginally above the price paid by BGE to Marathon which, in 1984, implied an annual subsidy of approximately £36m. (See Appendix 5)

(b)natural gas, a premier fuel, is used for electricity generation, 40% of which, it has been estimated, is in turn used for heating and cooking loads; and

(c)the price paid by the ESB is 24p per therm of gas sold. In 1984 this implied an annual subsidy of £51m.

The Joint Committee recommends that implicit financial subsidies, achieved through the price charged per therm of gas sold to commercial State agencies (currently the ESB and NET) be highlighted in the financial statements of the beneficiaries in respect of all future gas deliveries.

29.The Joint Committee was informed* that where domestic users are concerned an unnecessary and potentially wasteful competitive situation, particularly between the ESB and BGE can arise. If the ESB was to pay the full energy related price this overlapping would be reduced. The Joint Committee notes that NET has now returned to profitability and it is of the view that BGE should take this factor into account when negotiating the supply of future gas quantities. The Joint Committee was informed that the optimum price per therm of gas sold was always BGE’s goal.

30.BGE informed** the Joint Committee that after the final commissioning of the coal fired station at Moneypoint, Co. Clare, in 1989, the ESB could continue to have a requirement of between 80 and 90 Mscf of gas per day while the ESB has projected a requirement of approximately 20 Mscf.***

In the light of this situation and in view of the ESB’s predominant position as a consumer of natural gas, the Joint Committee recommends that BGE and the ESB jointly quantify the volumes of gas likely to be required for power generation after 1989.

31.The percentage of natural gas used for electricity production in a number of EEC countries, including Ireland, in 1983 was as follows:

The amount of gas currently used in Ireland for electricity generation is roughly three times the EEC average. Council Directive 75/404/EEC of the European Communities on the restriction of the use of natural gas in power stations allows its use for the production of electricity only when it cannot be used for other purposes and/or for meeting peak power station loads. The texts of the Council Directive and S.I. No. 73 of 1978, which gave effect to the Directive, are set out in Appendix 6.

32.Up to the end of 1981 the price charged to the ESB was the Marathon cost plus a contribution towards BGE’s borrowing and operating expenses. In 1983 and 1984 the ESB paid 24p per therm for gas which was approx. 11p per therm less than the current cost of the fuel displaced viz. heavy fuel oil. Although many arguments have been put forward by the ESB about the make up of the cost and the reasons for using individual fuels, a subsidy, based upon the current price for heavy fuel oil (i.e. the relevant fuel displaced) of the order of £51m. is implied in BGE’s current pricing structure to the ESB. (See Appendix 5.)

33.In the report of the Inquiry into Electricity prices* issued by the Department of Energy on 14 September, 1984, the ESB is quoted as stating that “the availability of natural gas and its use by the ESB, up to the end of 1983/84, has been of great financial advantage to :

34.In the ESB’s annual report for the year ended 31 March, 1984, it is stated that if additional gas fired generator plant had not been built “the cashflow from ESB use would not have been available to develop the Kinsale Head gasfield and to build the pipeline to Dublin. The ESB investment, with the approval of Government, has brought the benefit of indigenous natural gas to homes and industries throughout the entire country which otherwise would be confined to communities privileged to have a gas pipeline”.

35.That the Government is aware of the implications of this allocation policy is clear from the following statement in “Building on Reality 1985 - 1987”, par. 3.52:

“The allocation of gas to ESB and NET reflects the reality that these organisations were the original customers for the gas and provided the basis for development of the field. These arrangements do not capture for the Exchequer the full value of the gas. The Government have considered charging, full heavy fuel oil price for gas sold to both ESB and NET. However, in view of the current level of electricity prices, the Government believe that a price increase arising from such a policy would not be practical at this stage. Future arrangements for NET and ESB are currently under review”.

36.Bearing in mind the responsibility which BGE has for the overall development of the market for natural gas in Ireland, the Joint Committee considers that BGE should be seen to take a more prominent role especially with regard to its marketing function, to more actively promote the use of natural gas and to be seen to be the ‘voice’ for the industry. The Joint Committee is of the view that in order to increase public awareness to the uses and advantages of natural gas, more attention should be given to generic advertising and public relations.

37.BGE informed* the Joint Committee that a town with approximately 3,000 domestic consumers is needed in order to justify the £0.5m. cost of construction of a spur line from the main grid. BGE is involved in the experimental use of compressed natural gas (CNG) for direct supply by bulk tanker to consumers whose present usage could not justify the construction of the spur line. Furthermore, the use of CNG transport applications would appear to be a premium use for the gas and would have a favourable impact on the national balance of payments. The Joint Committee recommends that BGE further develop its own work in the area of compressed natural gas (CNG) which would appear to hold attractions particularly as a replacement for currently non-economic spur lines and as a fuel for internal combustion engines.

38.BGE has a major responsibility towards its customers with regard to ensuring the continuity and safety of gas supply.

It has invested in and is committed to further investment in the two gas companies supplied to-date, i.e. Cork Gas Company and Dublin Gas Company. For example, finance provided to the latter company under refinancing arrangements approved by the shareholders of that company in March 1984, was as follows:

In the case of Cork Gas Co. rebates of £5m. were provided by BGE to defray the cost of conversion.

39.Despite this heavy capital investment, made and committed, BGE has no direct board representation or other control over the activities of either company, although it is represented on a number of committees at Dublin Gas Company which monitor the development, conversion, marketing and financial aspects of the overall programme. A great deal of BGE management time and effort has been applied to the work of these committees, primarily to ensure that Dublin Gas will emerge as an efficient and viable customer. It is not unusual for semi-state agencies to seek to protect their investment through the appointment of nominee directors to the boards of companies in which they have invested. State lending and grant giving agencies such as the Industrial Devleopment Authority, the Industrial Credit Company and Fóir Teoranta frequently require that applicant companies co-opt a nominee director to their boards for the duration of outstanding loan facilities provided. In view of the large investment already made and yet to be made by BGE in Dublin Gas Company, the Joint Committee recommends that BGE consider seeking representation on the board of that company.

40.The present and projected usage of the major gas utilities is as follows:

These usage figures should be seen in the context of the present output of natural gas which, in 1984, was 756m. therms. The figures underline the task facing BGE in the reallocation of gas from the ESB to a broader base of industrial and other commercial consumers. Representatives of the CII were of the opinion* that the major markets for natural gas lay with industrial users and that domestic users would, for the foreseeable future, continue to form a small percentage of overall gas usage. BGE, in its submission to the Joint Committee, stated that market studies confirmed that there were adequate outlets, particularly in the industrial sector, which could be profitably supplied, subject to the price and allocated quantities falling within the guidelines laid down by the Department of Energy.

41.Unlike the ESB, which is both a transmission and a distribution utility, BGE is unable to turn off the gas in the event that a gas company cannot or refuses to pay for gas deliveries made. The only remedy open to BGE is to institute proceedings for recovery of amounts due. The Joint Committee understands that such steps have been taken at least once in the case of both the Dublin and Cork Gas Companies.

42.The Joint Committee is not privy to the reasons for the failure of the talks in March 1984 to supply gas to Northern Ireland and thus to towns such as Drogheda and Dundalk en route, although it was informed* that the quoted price per therm was not the sole factor in precipitating the failure of the talks. It regrets that work on the extension of the grid to Belfast was terminated. Such a link could ultimately have facilitated a connection to the UK grid and thus subsequent imports and/or exports of natural gas. It is stated in BGE’s annual report for 1984 that the availability of EEC grants together with further marketing investigations would determine whether the grid could be extended north of Dublin.

43.It would appear that many of the gas companies seeking supplies of natural gas are inefficient, over-manned and financially weak. For example, the quantities of unaccounted for gas recorded by Cork Gas Company is believed to be in the region of 30%; the corresponding percentage for Dublin Gas Company is in the region of 15%. The extent of over-manning may be reviewed by using the customer to staff ratio for the two largest utilities and then to compare these with a typical regional gas company in Denmark, the Fynen Distribution Co. which is supplied by the Danish Oil & Natural Gas Transmission Co.:

On the basis of these figures it would appear that the Irish utilities are employing at least twice the equivalent number of employees in order to service the same number of customers. Cork Gas Company have, however, recently negotiated approximately 80 redundancies in order to reduce the present staffing level to 110.

44.It is understood that the majority of the gas companies are trading unprofitably. For example, the position of Dublin Gas Company and its wholly-owned subsidiary, Waterford Gas can be appreciated from the following information extracted from the published results of the two companies:

The Joint Committee also understands that Cork Gas Co. Ltd. reputedly owed BGE a very substantial sum for gas delivered. This is indicative of an unhealthy trading situation. While BGE has the expertise necessary to help resolve the many technical and financial problems of these companies it had, heretofore, no mandate to become directly involved. However, the acquisition in July, 1985 by BGE of the entire share capital of the Cork Gas Company will enable BGE to address this utility’s problems.

45.The Joint Committee recommends that BGE explore the feasibility of providing some of its highly qualified technical, administrative and other advisory staff either on contract or secondment to the weaker gas companies - even if these are jealous of their autonomy. The success of the individual gas companies in overcoming their problems will, to a large extent, determine the ultimate success of BGE in obtaining and developing new outlets for the sale of natural gas.

IV FINANCE

46.BGE commenced trading in September, 1978. The six year trading summary, extracted from the audited accounts 1979 to 1984, showing turnover, profitability, balance sheet structure and data on capital investment is reproduced in Appendix 7. The key figures are as follows:

47.Profits earned each year are mainly derived from the quantities delivered and prices charged per therm to the two major customers, ESB and NET. With regard to NET the price for gas charged is, as noted, BGE’s own cost to Marathon plus a portion of BGE’s operating and debt servicing costs. Essentially, therefore, the NET contract operates at breakeven.

48.Prior to 1981, the price charged to the ESB was similar to that charged to NET. Thereafter, it was agreed that an energy-related price be charged to the ESB for the gas. In the table in paragraph 46 this is reflected in the average price per delivered therm resulting in the large increase in profits recorded, particularly since 1982.

49.BGE’s balance sheet, although depleted by quarterly payments to the Exchequer, is satisfactory when measured by its level of long term debt to equity. However, the negative current asset position for all years examined is less than satisfactory. BGE informed* the Joint Committee that this situation was brought about by quarterly dividend payments being made to the Exchequer in advance of collection from debtors in respect of sales invoiced for the preceding month. In the period 1979 - 1984 dividend payments to the Exchequer accounted for more than 80% of all profits earned after tax. In order to rectify the situation whereby a positive net current asset position is reached it would be necessary for the Exchequer to forego receipt of at least one quarterly dividend. While this seems an unlikely eventuality it would enable BGE to borrow more readily without necessarily relying upon a Ministerial guarantee.

50.To-date, BGE has not required State funding to complete any of the projects undertaken, although the Minister for Finance has guaranteed BGE’s borrowings in each of the years as follows:

51.It is clear from BGE’s Reports & Accounts for the year ended 31 December 1984, that it readily complies with the Government target rates of return viz. cost of funds plus 5% (see Appendix 8) for State investment. It also complies with the requirement of section 10 of the Gas Act, 1976, that it shall “earn a reasonable return on any capital it employs” as can be seen from the following table:-

52.BGE has been a valuable source of revenue for the Exchequer as will be clear from the following statistics:

53.In its submission to the Joint Committee, BGE stated that the pricing structure adopted by the company depends on the end use for the gas. Excluding prices charged to the ESB and NET, the company now has two main groups of contracts with different pricing provisions:

(a) Gas supply contracts with industrial users in accordance with guidelines approved by Government. This gives prices which are linked to the competing grade of oil and depend upon the quantity of gas used. Currently, for large users, supplied directly by BGE, the price ranges from 38p. to 48p. per therm.

(b) Supply contracts and prices charged to the gas companies under the town gas supplies contracts reflect the financing of the distributors’ expenditure in converting and expanding the distribution systems. This pricing structure is effected through the rebate system from a price equivalent to that of heavy fuel oil. Currently the price is in the region of 32p. per therm gross of rebates. As BGE and the distributors both supply industrial users it is important that a uniform pricing policy is seen to exist.

54.Commitments for capital expenditure in each year 1979 to 1984 are detailed in Appendix 7. Actual expenditure incurred during 1984 was £11.1m. and budgeted Government capital expenditure for 1984 was £17m. The following is an extract from “Comprehensive Public Expenditure Programmes 1984”, Programme 24: Energy, Minerals and Hydrocarbons, p. 197:-

“BGE’s 1984 estimate provides for expenditure of £9 million on the Dublin Ringmain/Phase one of the North Eastern pipeline and £3 million, which may be necessary, for preliminary work on the second phase of the North Eastern pipeline. The remaining provision is for exploratory work on the provision of gas to Limerick, Kilkenny and other towns. All of these projects have yet to receive Government approval, which will be subject to the individual projects proving technically and economically feasible.”

55.The Joint Committee understands that an estimated £11m. was budgeted for capital outlays for 1985. This was to be required for extensions to the transmission system and for the installation of compressors. The Joint Committee was informed that it was intended to link up the following large industrial customers during 1985:

Pfizer Chemical Corporation, Ringaskiddy, Co. Cork, Irish Distillers Ltd., Midleton, Co. Cork, Ballyclough Milk Products Ltd., Mallow, Co. Cork, Mitchelstown Co-Op. Agricultural Society Ltd., Mitchelstown, Co. Cork.

56.The Joint Committee understands that a claim has been lodged by the main contractor for the Dublin - Cork pipeline contract, purportedly due in respect of work done. In a note to the BGE accounts for the year ended 31 December, 1984, it is stated that “the Board has obtained professional advice that the claims have no basis”.

57.The Joint Committee commends BGE on its overall financial performance to date as measured by the large financial payments to the Exchequer, strong balance sheet and the capability to undertake all capital projects to date without the need for State funding.

58.BGE’s Report and Accounts for the year ended 31 December, 1984, were laid before the Houses of the Oireachtas on 19 September, 1985. The Gas Act, 1976 - Sections 14 (1) and 15 (2) - makes the laying of the Report and Accounts a responsibility of the appropriate Minister. Although the legislation does not prescribe a time limit for the laying process there is an obvious need to lay the document before the Houses as quickly as possible if the information given is not to become dated by the time it is published. Having regard to the Joint Committee’ mandate to examine the Reports and Accounts of BGE and of other commercial State-Sponsored bodies and its desire that any such examination should be conducted on the basis of the most up-to-date information available, it recommends that arrangements be made to ensure that in the future the company’s Report and Accounts are laid before the Houses as soon as practicable and in any event not later than six months after the end of each financial year.

V ORGANISATION

59.BGE’s staff totalled 121 in December, 1984. The staff includes a preponderance of highly skilled managerial and technical personnel:

60.The completion of the following contracts is testimony to the ability of the staff to carry out highly technical projects within time and budget:

Cork District Gas Pipelines,

Supervision of Cork - Dublin pipelines,

Dublin City pipeline and extensions to ESB (Poolbeg and North Wall),

Direct supply lines to 16 industrial customers.

The Joint Committee queried the need for present total staff numbers, having regard to the limited number of customers for natural gas. BGE informed* the Joint Committee that these staff numbers were required in order to:

(a)supervise the pipeline which had grown from 30 to 300 kilometres in length;

(b)monitor gas flows 24 hrs. per day at the control room in Cork; and

(c)undertake planning and design of extensions to the grid.

61.BGE has well-developed information systems and management accounting functions which produce monthly operating statements for the board. The organisation structure is shown in Appendix 9.

62.The Joint Committee understands that BGE has enjoyed trouble free industrial relations to-date and the introduction of new technology has proceeded smoothly since the company commenced trading. There are two trade unions represented within the company:-

63.Revised salary structures were implemented for engineering staff under the terms of the 1982 National Pay Agreement which, in turn, authorised BGE to conclude a development/flexibility agreement with all staff. A three year agreement was signed in February, 1983 as a result of which the greatly enlarged gas grid system was taken on and operated by BGE staff. As an aid to improved communication within the organisation a joint consultative committee, representative of all grades and divisions of staff management, has now been set up. The decision to set up the committee was taken under the terms of the above mentioned agreement. The Chief Executive holds quarterly briefing sessions for all staff.

64.In addition to the direct employment created by BGE the development of the gas field has indirectly helped generate employment in service/supply industries acting as subcontractors to BGE as in the case of a manufacturer of high technology equipment who supplied telemetery and computerised control units for the transmission of gas throughout the grid.

65.The Joint Committee has formed the view that tight control is exercised by the Department of Energy on BGE’s decision-making with regard to operational activities and that this control may have an inhibiting affect on both board and management with regard to the allocation of gas, the negotiation of prices with customers and the undertaking of capital projects. The slow progress recorded to date in supplying gas to Limerick, Kilkenny, Clonmel and other industrial customers en route may be attributed, at least partly, to these controls.

66.Since the major future activity of BGE will be marketing oriented i.e. seeking new customers and new uses for natural gas, the Joint Committee recommends that the future composition of the board reflect and benefit from further commercial and marketing expertise. In this connection the Joint Committee notes that one of BGE’s directors is on secondment to the Department of Energy from industry and is both a director of BGE and a Project Co-ordinator, nominated by the Minister for Energy, to Dublin Gas Company Ltd.

67.In its submission to the Joint Committee BGE stated that considerable changes had taken place in the scope of its operations since it was established and that it was appropriate that a review of the provisions of the Gas Act, 1976, in relation to the company’s powers and duties, should now be undertaken. The Joint Committee is of the view that any such review should take into account the commercial environment within which BGE is obliged to operate and the fact that the company has been trading for ten years. For example, it might now be considered appropriate for BGE to become involved in -

(i)exploration activities, either directly or indirectly;

(ii)the setting up of subsidiary companies and/or involvement in associate companies for specific activities such as -

(iii)the termination of supplies to customers where justified by the circumstances.

The Joint Committee shares BGE’s views as to the need for a review of the Gas Act, 1976, in relation to the company’s powers and duties and it recommends that a review be now undertaken.

68.Reference has already been made to the fact that a considerable amount of senior executive time is spent commuting between Dublin and Cork for attendance at meetings with the Department of Energy, banks and the Dublin Gas Co. The Joint Committee feels that there may be some ambiguity concerning the respective roles of the Department, the Board and the senior executives of BGE with regard to the interpretation and implementation of policy. It recommends that the Department of Energy clarify the respective roles for itself, the board of BGE and management with regard to strategy and, especially, with reference to the implementation of operational matters.

VI POLICY

69.The Joint Committee was informed* that BGE presented its first five year plan to the Department of Energy in July, 1984, and that it has since been under study. However, pending approval of the plan by the Department, it was not made available to the Committee. The Joint Committee understands that the principal reason for the delay in publishing the plan arose because of the impact which the ESB’s new coal fired station at Moneypoint would have on other energy sources to be allocated within the plan. Recent statements by Government concerning policy for the allocation of natural gas are contained in the following sources:

(a)Statement by the Minister for Industry and Energy in the Dáil in the debate on the Estimate for Industry and Energy, 9 June, 1983.

(b)Building on Reality, 1985 - 1987.

(c)White Paper on Industrial Policy, 12 July, 1984.

The relevant extracts from these sources are contained in Appendix 10.

70.The Department of Energy was invited to send officials to a meeting of the Joint Committee for the purpose of giving oral evidence but it failed to do so. Correspondence with the Department in the matter is reproduced in Appendix 11. While the Department has invoked Government decisions in explaining its position, its attitude is at variance with that experienced by the Joint Committee in the case of other inquiries, involving other Departments, which it has completed. For instance, in connection with its examination of Óstlanna Iompair Éireann Teo., the Joint Committee took oral evidence from officials of the sponsoring Departments (i.e. the Department of Communications and, subsequently, the Department of Labour) and in that case Government decisions did not inhibit co-operation with the Joint Committee in discharging the mandate given it by the Houses. Having regard to the high hopes expressed for the committee system when it was established and the fact that the Joint Committee’s Orders of Reference specifically empower it to send for persons (as well as papers and records), it is gravely disappointed with the negative response of the Department of Energy. The Department’s stance undermines the credibility of the Joint Committee and it has serious implications for the effective discharge of its functions by the Joint Committee. It also has implications for the committee system generally.

71.The Joint Committee is convinced that in the absence of a declared national energy policy, the formulation of a medium term plan covering BGE’s future activities must, indeed, be difficult and surrounded by many uncertainties. Insofar as a national energy policy, yet to be published by the Department, is concerned, the Joint Committee was informed,* that the main elements of the policy are as follows:

(a)To utilise natural gas in order to reduce the nation’s dependence upon oil imports,

(b)to investigate the implications of the ongoing and heavy use of natural gas for power production,

(c)to develop a national grid in order to capture premium markets for natural gas.

(d)to exhaust the Kinsale field, in accordance with the terms of the contract with Marathon, by 1999, through major allocations to bulk users, town gas utilities and by direct connections to major industrial users, and

(e)to avoid wasteful competition with other energy suppliers, principally the ESB.

While the Joint Committee accepts the need for competition between the various energy bodies (ESB, Bord na Móna, Irish National Petroleum Corporation and BGE) it nonetheless is concerned that there may be wasteful competition in the absence of a declared national energy policy.

72.The Joint Committee is concerned at the delay in publishing a national energy policy. It recommends that the Department of Energy publish as a matter of urgency an energy policy which, in the context of BGE, would:

(a)greatly facilitate the long term planning function,

(b)minimise the need for involvement by the Department in BGE’s operational matters, and

(c)eliminate unnecessary competition for the use of natural gas, particularly at commercial and domestic consumer level, between BGE and the other State-owned energy producers.

73.Representatives of the CII informed* the Joint Committee that they were of the view that the involvement of private enterprise with the State would accelerate the use of natural gas and that private enterprise might even provide the major proportion of the funding required to make a connection to the UK grid. The CII was also of the opinion that the present depletion policy for the Kinsale field was too conservative in view of the fact that there were indications, including the recently announced discovery in the Celtic Sea, that further supplies of gas were available. The CII representatives also expressed the opinion* that in view of the present high level of unemployment, natural gas should be more actively used as a resource to reduce unemployment through the creation of economic activity.

74.The Joint Committee appointed Messrs. Eamon Dundon & Associates Ltd. to assist it in this inquiry. It wishes to express its thanks to Mr. Eamon Dundon for the valuable advice and assistance which he gave at all stages of the inquiry.

* Evidence (Question 5)

* Evidence (Questions 1,8,24 and 26)

** Evidence (Questions 34 and 44)

* Evidence (Questions 21,22 and 28)

** December, 1985.

*** Evidence (Questions 29 and 41)

* Evidence (Question 88)

* a therm is equivalent to 109.9 cu.ft. of natural gas or 29.3 units (kilowatt-hours) of electricity.

** Evidence (Questions 83,85,97 and 100)

* Evidence (Question 80)

* Evidence (Questions 46 and 47)

** Evidence (Questions 4 and 21)

*** Appendix x, ESB Annual Report for year ended 31 March 1984.

* Report of the Inquiry into Electricity Prices, Department of Energy, Dublin, 14 September, 1984. Par. 11.5.2.

* Evidence (Question 2)

* allows for inflation and completion of conversion by 1986.

** allows for inflation and completion of development by 1989.

* Evidence (Question 93)

* Evidence (Question 12)

* Evidence (Question 30)

*Evidence (Question 13)

*Evidence (Question 45)

* Evidence (Question 35)

* Evidence (Question 79)

* Evidence (Question 85)