MEMBERS OF JOINT COMMITTEE
SUMMARY OF REPORT
(i)The Electricity Supply Board (E.S.B.) was established by the Electricity (Supply) Act, 1927. Under this Act the Board took over the operation of the Shannon Scheme and it was charged with the task of co-ordinating the country wide supply of electricity and promoting its sale. It was, furthermore, obliged to set its charges for electricity at a level which would cover all its costs each year. Since 1927 there has been a number of modifications and additions to the Act but the fundamental requirement to break even still remains central.
(ii)As the E.S.B. is a statutory corporation its capital structure contains no provision for equity capital. It must, therefore, rely on advances or borrowings to finance its expansion. The 1927 Act did specify that capital needed for expansion and plant investment would be made available from the Central Fund as repayable interest bearing loans. In 1954 the Act was modified to allow the E.S.B. to obtain its investment funds by borrowing on the international money markets with the support of Ministerial guarantees.
(iii)The E.S.B. can be said to have served the country well. It has provided each year sufficient electricity to meet the needs of an increasing population and growing industrialisation and shortage of electricity has not at any time been a restriction on national growth.
(iv)Today the E.S.B. is the country’s largest home based industrial operation, employing 12,114 people and supplying almost 1.2 million customers.
(v)In the twelve months ended 31 March, 1986, it had total sales revenue of Ir£790 million, of which Ir£757 million was attributable to sales of electricity. In that year losses of IR£7¾ million were incurred, bringing the total accumulated loss position to Ir£72 million or 9.5% of sales revenue. The bulk of these losses have arisen over the past three years.
(vi)Total investment in the E.S.B. at 31 March, 1986, amounted to Ir£1,686 million.
(vii)Total borrowings at 31 March, 1986, were Ir£1,285 million or 41% of the total borrowings of the commercial State-sponsored bodies, excluding the finance and insurance sector.* Two-thirds of these borrowings were in foreign currency, a reduction from 77% in March, 1984 and some 20% of borrowings were still in U.S. / Canadian dollars. Borrowing levels had increased from Ir£502 million in 1980.
(viii)Adverse currency movements increased borrowing levels by Ir£226 million over the five year period ended 31 March, 1985, but there was a currency surplus of £53 million in the year ended 31 March, 1986.
(ix)The E.S.B. suffers from a number of operational, geographic, and other difficulties compared with other European electricity utilities. These difficulties were highlighted by the Jakobsen Report on Electricity Prices (September, 1984), and the report estimated that the difficulties represented increased operating costs of the order of 20%.
(x)In the 25 years prior to the first oil crisis of 1973/74, growth in electricity demand averaged 8-10% each year. In those years the E.S.B. generated most of its electricity from fuel oil and, as a result, its customers benefitted from electricity prices which reduced by over 30% in real terms.
(xi)Since 1974 growth in demand has become much more volatile with annual growth rates ranging from +9% to -2½%.
(xii)Like many of its fellow electricity utilities, the E.S.B. badly mis-read the recovery period after the first oil crisis and, consequently, it has excess generating capacity to-day. In March, 1986, the operational E.S.B. capacity was 3547 MW while the peak demand was 2130 MW over the previous winter. This represented a reserve capacity of 67% against a more normal level of 30-35%. With the ongoing commissioning of 900 MW at Moneypoint this situation will continue into the early 1990’s.
(xiii)Between 1979/80 and 1985/86 the E.S.B.’s fuel mix changed dramatically with natural gas increasing to 53% and fuel oil declining from 73% to 20%. For the future, steam coal is planned to be the main fuel to be used.
(xiv)Over the past six years over 70% of the E.S.B.’s fuel costs (gas, peat, local coal), representing 30% of total costs, have been Government controlled and over the same period the Board was subject to several large price increases in these fuels, with very little prior warning or apparent justification.
(xv)In the current year fuel costs have changed dramatically again, because of the reduction in the price of fuel oil. The Joint Committee was informed by the E.S.B. that the following represents typical fuel costs in May/June, 1986, on a sent-out basis:
(xvi)Up to 1977/78 electricity costs to industrial customers were equivalent to the European average but domestic customers enjoyed significant cost advantage. Over the next three or four years this situation changed dramatically and by 1984, as highlighted by Jakobsen, electricity prices for most industrial customers were 25% higher than European averages. For large users the excess cost was 50% to 70% higher but reductions in industrial tariffs over the past year and a half have reduced the differences to 16% to 30% (large users). Prices for domestic users are in line with the European average.
(xvii)It is generally accepted that currently there is excess employee levels in the E.S.B. Jakobsen estimated the overmanning at 3,000 in 1984. The E.S.B.’s Strategic Plans indicate that there is overmanning to the extent of 2,000 employees. At the 1985/86 average cost per employee this represents an excess cost of nearly Ir£34 million per annum.
(xviii)Some E.S.B. ancillary activities, such as appliance sales, repairs and contract installation work, have consistently lost money (over Ir£8 million losses since 1979/80) and would no longer appear to be a necessary part of the Board’s operations.
(xix)A Directive on Air Pollution, currently being discussed at E.E.C. forums, could, if implemented in its latest form, require an investment of over Ir£200 million at Tarbert and Moneypoint, according to the E.S.B. Furthermore, additional significant capital costs could be incurred in any new oil or coal fired plant in the future.
SUMMARY OF RECOMMENDATIONS
Following is a summary of the main recommendations of the Joint Committee:
(1)The current accumulated deficit of Ir£72 million should be phased out over the next five years. (Par. 22)
(2)The currency risks on the E.S.B.’s borrowing levels should be reduced by a policy of increased borrowing from the local financial markets and other E.M.S. currencies. (Par. 26)
(3)The recommendations of the Inter-Departmental Working Party (1979), on the creation of a Capital Development Fund for future investment commitments should be implemented. (Par. 34)
(4)The E.S.B. should adopt a Plant Reserve Margin of 35%. (Par. 40)
(5)Progress should be accelerated in the discussions with the Central Electricity Generating Board on a proposed interconnection with the U.K. (Par. 51)
(6)The E.S.B. and Bord Gáis Éireann, with the support of the Department of Energy, should reach agreement on a formula which would relate natural gas prices proportionally to market prices for steam coal and fuel oil, this formula to remain in force for the life of the Kinsale field. The quantities of gas to be available to, and taken by, the E.S.B. should be agreed at the same time. (Par. 96)
(c) Electricity Prices
(7)The Joint Committee shares the Government’s view, as expressed in the White Paper on Industrial Policy, that Irish energy costs should be brought more in line with other European countries and that price adjustments be tilted in favour of industrial consumers. It recommends that industrial prices for electricity be brought in line with average European levels on a phased basis over the next three years. It suggests that Government support for this recommendation should be forthcoming through favourable adjustments in the E.S.B.’s hydrocarbon tax levels, rates levy and natural gas prices. (Par. 107)
(d) Staff Levels
(8)In consultation with the various staff unions the E.S.B. should aim to reduce total employment levels progressively in line with its Strategic Plans. (Par. 119)
(e) Ancillary Activities
(9)The Joint Committee agrees with the recommendation made by Jakobsen that the E.S.B. should divest itself of the appliance trading, installation trading and appliance repair businesses. (Par. 137)
(f) Strategic Plan
(10)The Joint Committee supports the E.S.B.’s commitment to complete by early 1987 a comprehensive strategic, plan for future development. It recommends that key elements of that plan and future plans be included in future annual reports (Pars. 148, 156).
BACKGROUND & HISTORY
1.The Electricity Supply Board was established by the Electricity (Supply) Act 1927. Under the terms of this Act it was assigned three main objectives, as follows:—
(i)to operate, manage and maintain the Shannon Scheme and to distribute and sell its output;
(ii)to promote and encourage the purchase and use of electricity; and
(iii)to control, co-ordinate and improve the supply, distribution and sale of electricity.
2.On its establishment the ESB obtained its capital requirements for expansion by drawing from the Central Fund. These advances were repayable to the Exchequer with interest. The E.S.B., essentially, had a monopoly in the sale and purchase of electricity and was to be the national vehicle or “power-house” which would support the industrial growth of the country and contribute to the improvement of living standards generally by providing electrical power country-wide at the lowest possible cost.
3.The development of the E.S.B. since 1927 can be split into the following three distinct eras:—
(i)(a)1927 - 1945: These were the formative years, concerned with the rapid extension of the network system and the development and organisation of the staff. The era was dominated by the efforts to develop the Shannon Scheme into a comprehensive national distribution system, bringing the benifits of electricity to urban centres.
(b)At the start of this era the task facing the E.S.B. was quite daunting. The country was literally on its knees after the trauma of the struggle for independence and the Civil War. Industrial development had not begun and agricultural production was delcining. In addition to the E.S.B., there were a further 160 existing individual electricity supply undertakings which needed to be integrated into a national supply system.
(c)Development was slow but steady with real progress hindered by major international events, including the world recession of the early 1930’s, the economic war with Britain and the Second World War.
(ii)(a)1945 - 1973: This era was concerned initially with recovery from the effects of the War, followed by a prolonged period of significant growth in the demand for electricity and in expansion of the E.S.B.
(b)The completion of the hydro electric programme, the development of and growth in the use of peat for electrical generation and the progress in the rural electrification programme were significant developments in this period. Growth in demand for electricity was at a steady 8-10% through the 1960’s and early 1970’s. By 1973 almost two-thirds of electricity was generated in oil fired stations. The stability in oil prices meant that the price of electricity in constant terms declined by almost a third over this period. In 1954 amending legislation enabled the company to borrow on the international money markets, supported by Government guarantees, to fund its capital investment programme.
(iii)(a) 1973 - 1986: This era was dominated by the dramatic upheaval in world energy prices, two major recessions, with, in-between, major international commitments to energy conservation. The first oil crisis of 1973/74 meant for the E.S.B. that the average price of oil increased from £6.70/tonne in 1973/74 to £32.90/tonne in 1975/76 and demand in growth declined from a steady 8-10% to nil growth over the three years 1973/74 - 1975/76. For the next four years growth in demand again recovered to an average of 8%. Following the second oil crisis in 1979 growth again declined and, indeed, was static over the period 1979/80 - 1982/83. In the past three years growth has again recovered to approximately 4%.
(b)Fortunately, in the late 1970’s the increased availability of Kinsale gas allowed the E.S.B. to greatly reduce its dependence on increasingly expensive fuel oil. Gas burning plant was installed and some oil burning plant was converted to gas fired and gas and oil represented 54% and 20%, respectively, of E.S.B. production by 1984/85.
(c)For the medium term, the E.S.B. has taken a strategic decision to use steam coal as the main fuel in new generating plant installed between now and the end of the century. A major station with generating capacity of slightly over 900 MW is being completed at Moneypoint in Co. Clare and already one of its 300 mw units is operational and feeding into the supply system. The second unit is currently undergoing commissioning, while the third is expected to be commissioned by October, 1987.
The collapse of crude oil prices since the latter months of 1985 has been advantageous to the E.S.B. and it has meant increased usage of its main oil fired stations at Tarbert and Great Island. The basic costs of the heavy fuel oil used by the E.S.B. in June, 1986 were lower than even the fuel costs of coal at Moneypoint.
(d)Today, the E.S.B. is Ireland’s largest industrial organisation. In the year ended 31 March, 1986, it had total sales revenue of almost Ir£790 million, total investments of Ir£1,686 million, borrowings of Ir£1,285 million, total employees of 12,114 and 1,194,765 customers.
4.The method of funding of the E.S.B. and the repayment of advances by the Board is provided for in Sections 12, 13 and 14 of the Electricity (Supply) Act, 1927, which, inter alia, require:
-the Minister for Finance to advance out of the Central Fund to the Board as and when requested by it “all such sums as the Board shall from time to time, but not later than the appointed day, request the Minister to advance to it”,
-the payment of interest to the Minister for Finance on sums advanced to the Board out of the Central Fund “at such rate as shall be appointed by the Minister for Finance at the time of the advance”,
-the repayment of advances by the Board in half-yearly payments.
5.The important obligation to fix its charges so as to break even was provided for in Section 21 (2) as follows:
“All charges made by the Board ------------- shall be fixed at such rates and on such scales that the revenue derived in any year by the Board from such sales and services together with its revenue (if any) in such year from other services will be sufficient, and only sufficient (as nearly as may be) to pay all salaries, working expenses and other out-goings of the Board properly chargeable to income in that year (including the payments falling to be made in such year by the Board to the Minister for Finance in respect of interest and sinking fund payments on advances out of the Central Fund) and such sums as the Board may think proper to set aside in that year for reserve fund, extensions, renewals, depreciation, loans and other like purposes”.
6.Some general powers were also vested in the Board by the 1927 Act, including:
-acquisition of private electric undertakings.
-wayleave powers, right of entry, compulsory acquisition of land, etc.
-the vesting of the Shannon and local authority undertakings.
The 1927 Act was modified regularly to broaden the Board’s operational area, but the next major change was provided by the 1954 amending Act. This permitted the E.S.B. to borrow funds up to specified limits, with the support of Government guarantees, directly from the home and international money markets.
7.A further amending Act in 1982 provided, inter alia, that any expenditure for capital purposes would require the approval of the Minister. This Act also made provision for the payment yearly of specified sums in lieu of rates to the Minister for the Environment on E.S.B. generating/transmission and distribution assets which had previously been exempt from rates.
8.In March, 1985, the constitutional validity of the Board’s wayleave rights under Section 53 of the 1927 Act was successfully challenged in the Supreme Court. The judgement was that the Board’s wayleave powers were invalid having regard to the provisions of the Constitution in relation to the rights of private property. However, further legislation was quickly enacted to remedy this Constitutional defect. This new legislation - the Electricity Supply (Amendment) Act, 1985 - provided that where a landowner refuses consent to the E.S.B. to enter on land and erect lines and masts, the E.S.B. may proceed with the work but the landlord is entitled to compensation, which, in default of agreement, shall be fixed by an arbitrator.
9.The Joint Committee notes that the purpose of the Electricity (Supply) (Amendment) Bill, 1986, is, inter alia, to enable the E.S.B. to engage in the purchase, treatment and sale of coal or any by-products obtained in the process of electricity generation.
GOVERNMENT POLICY ON ELECTRICITY GENERATION AND SUPPLY
10.The following extracts from Government publications and from a Ministerial statement disclose aspects of Government policy on electricity generation and supply and, therefore, on the general operation of the E.S.B.
(a) White Paper on Industrial Policy, 12 July, 1984.
Costs to Industry
4.4 “For over 60% of Irish firms, energy costs account for between 5% and 6% of total turnover. For a small number this proportion can be as high as 40%. The two main components of energy costs are fuel oil and electricity prices. Industrial fuel oil, electricity and post and telecommunications charges are amongst the highest in the E.E.C.…”
4.7 “The Minister for Energy, as part of a long term programme, has taken a number of initiatives to bring energy costs in Ireland more into line with those prevailing on average in other European countries and to promote greater competition in energy markets generally”.
4.8 ----- A new pricing formula for milled peat recently evolved between Bord na Mona and the E.S.B. will not adversely impact on electricity costs while maintaining Bord na Mona’s peat production for the E.S.B. -------”
4.9 ------“As part of the price control mechanism for electricity charges there will be an annual review of the electricity industry. This review will take account of the progress made in improving productivity and operating efficiencies. It will also consider the effect of economies of scale arising from growth in demand brought about by increased industrial output and growth in national income and expenditure”.
(b) Building on Reality 1985 - 1987
3.46 “The role of the energy sector is important in providing employment directly in production, transmission and distribution, on account of its significance to the productive sectors of the economy, and as an important item in consumer expenditure”.
3.47 “Government policy in this area has the following objectives:
-Securing the supply and availability of energy and implementing a market related pricing policy, where this is possible.
-Stimulating the use of domestic energy sources and reducing our dependence on oil by broadening the fuel mix.--------”
3.54 PEAT - “The pricing policy is aimed at ensuring that peat stations, when efficiently operated, will be competitive with oil generation costs for the foreseeable future.------”
3.55 E.S.B. “A major programme of diversification has been in train since 1975 in the E.S.B. There has been a major switch from oil to gas as the more significant fuel in power generation and there will be a substantial allocation of gas to ease the transition to coal over the period 1985 - 1987.
3.56 “The cost of electricity has for some time been a cause for concern. When the report of the Committee established to review electricity prices has been considered, the Government will announce further measures aimed at improving efficiency and costs in the electricity industry. The Government will also continue to keep under active review the feasibility of cost saving interconnectors with Great Britain and Northern Ireland”.
(c) Speech of the Tánaiste and Minister for Energy in the Dáil on 22 April, 1986 in debate on Motion on Electricity Prices.
The following are relevant extracts:
Jakobsen Inquiry - “The inquiry found that, while the price of electricity to domestic consumers in Ireland was in the middle range of prices in European countries, industrial electricity prices were higher than average. Obviously, this finding of the Inquiry was a matter of serious concern to the Government”.
“Against the background I have been describing it should not be surprising, therefore, that we have been moving gradually to improve the price to industry by judicious. tilting of the balance at each review. This has obvious importance for job creation and the competitiveness of the economy”.
“The E.S.B. said publicly at the time of my announcement that they expect to hold prices stable now for two or three years”.
“It is my duty, of which I am constantly aware, to keep electricity prices at the lowest possible levels”.
“Low domestic prices for electricity, as well as for many other items, play a part in keeping down inflation and the need for high pay demands”.
E.S.B.’s Accumulated Deficit of £64 million at 31/3/1985
“That figure cannot be ignored either by me or by the E.S.B. in considering appropriate pricing policy. The Government have a responsibility to ensure that the E.S.B. maintain their financial viability. Failure to do so would inevitably result in the Exchequer and, in the final analysis, the tax payer, being called on to carry the burden. The E.S.B. during their long history, have never had to make demands on the Exchequer. It is my Government’s intention that they will not need to do so now or in the future”.
11.It is the view of the Joint Committee that a comprehensive Government policy statement on electricity pricing policy for the future, including policy positions on the pricing of indigenous fuels used by the E.S.B., is long overdue. In its report on Bord Gáis Éireann the Joint Committee expressed its concern that there may be wasteful competition between the various energy bodies (E.S.B., Bord na Móna, Irish National Petroleum Corporation and Bord Gáis Éireann) in the absence of a declared national energy policy. In the Joint Committee’s view a satisfactory pricing policy for any one body cannot be decided in isolation and should, appropriately, be dealt with in the framework of a national energy policy.
GOVERNMENT REPORTING OBLIGATIONS
12.The Board of the Electricity Supply Board consists of twelve members all of whom are appointed by the Government for a term of up to five years. The Chairman of the Board is a full time position but under the proposed new legislation this would become part-time. The Chief Executive is also a member of the Board and four members of the Board are elected by the staff under the Worker Participation (State Nominated Enterprises) Act, 1977. The Board is responsible to the Minister for Energy for the operation of the enterprise and must report annually to him in a format required by him and must, furthermore, provide him with any data he requests.
13.The Board’s capital expenditure is subject to Section 2 of the Electricity (Supply) (Amendment) Act, 1982. This provides that the Board shall not incur any expenditure for capital purposes without the prior approval of the Minister and that the total expenditure of the Board for capital purposes shall not exceed such sum as stands specified by the Minister from time to time. The specified limit is currently Ir£2,172 million.
14.Section 4 of the 1982 Act outlines the limit proposed by the Government on the level of guarantees of E.S.B. borrowings given by the Minister of Finance. The current level is Ir£1,600 million. Each loan of a long term nature (i.e. over 1 year) requires the specific approval of both the Ministers for Energy and Finance who also require quarterly details on foreign borrowings and repayments.
15.Up to the end of 1985 any increase in electricity tariffs had, first of all, to be referred to the National Prices Commission whose recommendations were then referred to the Minister of Industry, Trade, Commerce and Tourism for his approval or modification.
GENERAL OPERATIONAL DIFFICULTIES RELATED TO ELECTRICITY GENERATION/SUPPLY IN IRELAND
16.According to the E.S.B. there are a number of significant unique factors which increase the difficulty and cost of generating and supplying electricity in Ireland. These fall under a number of headings including geographic, social, Governmental and operational. These factors could, in the estimate of the Jakobsen inquiry, amount to as much as a 20% increase in costs over comparable utilities in Europe. Following are some of the main local operational difficulties which the E.S.B. point to and which, in its view, makes invalid a comparison of Irish electricity supply statistics with Continental equivalents. These operational burdens have, in the main, been confirmed by the Jakobsen enquiry.
17.The main burdens are:
-Low customer density and dispersed population, e.g. 15.6 customers/km2 in Ireland as compared to 136 customers/km2 in the average English area board. As a result the length of supply/network per customer is very much greater, i.e. 4.6 times that of the average English area, while the overhead network per customer is 91/2 times that of the U.K. The E.S.B. network is shown in Appendix (i);
-Low per capita consumption. In 1984 Irish consumption per capita was 2645 kwh compared with 4258 in the U.K. and consumption per domestic customer was 1062 kwh as against 1486 in the UK;
-The need to operate a large number of small, old and generally inefficient generating stations;
-Government directive to use large amounts of peat, both milled and sod peat, at prices which are Government established and higher than they would be on an oil related basis;
-High capital cost and high manning requirements of peat and local Arigna coal stations. Peat stations require 2.2 men per MW of capacity as compared to 0.51 men in oil stations, and 0.45 men in gas stations. In Moneypoint at completion it is likely to be less than 0.4 men/MW;
-No interconnection with any other electricity utility. This increases the reserve capacity required by the E.S.B;
-Frequent delays in the implementation of price increases leading to loss of significant revenue;
-Poor capital structure which means that funds for capital investment must be obtained on the international money markets. Because of fluctuations in the value of the Irish currency, the true cost of borrowings has been greatly increased by the regular large currency losses incurred on borrowings;
-Hydro-carbon tax on heavy fuel oil which, at £15.5/tonne is double that charged to manufacturing industry and well above that paid by most other utilities in Europe;
-Withdrawal of exemption for payment of rates since 1982;
-Supply of electricity to offshore islands at subsidised prices; and
-Operation of three (previously four) small 5 MW stations using hand - cut peat along the Western seaboard.
18.The E.S.B.’s financial history must be viewed against the statutory obligations imposed on it to establish its tariffs so as to generate sufficient revenue to pay all its costs, including repayments of loans, in other words to break even. It must be remembered that, since its establishment, the E.S.B.’s growth has been financed largely by advances in its earlier years and by way of borrowings on the international financial markets over the last twenty years. The E.S.B. Board, bearing in mind its statutory obligations and limitations, defines its own corporate mission as follows:
“To provide an acceptable level of electricity service to the community at minimum cost to the customer at all times and in competition with other sources of energy.”
(a) Financial Results
19.The table overleaf outlines some of the main financial and other operational results extracted from the E.S.B.’s annual reports over the twelve year period 1974/75 to 1985/86.
20.In the current year the E.S.B. intends to change its financial year to a calendar year and it will, therefore, cover only a nine months period. Appendix (ii) shows the sales revenue and profit and loss figures each year allocated under the headings of electricity sales and other ancillary activities.
21.The total sales revenue of the E.S.B. in 1985/86 was almost Ir£790 million which included a sales revenue from electricity amounting to Ir757 million. In the twelve years since 1974/75 revenue from electricity sales has increased by a factor of six and three quarter times. In that same period the total number of electricity units sold increased by only 60%, while the average price per unit to the customer has increased by a factor of over four and a quarter times.
ANALYSIS OF E.S.B. STATISTICS 1975 - 1985/86
22.In 1985/86 the ESB incurred operating losses of £7.7m, of which £6.6m is attributable to sales of electricity. It is disclosed in the Board’s annual report that no amount is included in the accounts in respect of an outstanding consequential loss claim against the Board’s insurers and that the financial outcome for the year could have been substantially better if settlement of the claim had been reached before the year-end. The E.S.B. now has accumulated trading losses in its balance sheet of nearly Ir£72 million or equivalent to 9.1% of its total current revenue. This is an unsatisfactory situation which will cause financial stress if allowed to deteriorate further and the Joint Committee shares the concern about the situation expressed by the Tánaiste and Minister for Energy in the Dáil on 22 April, 1986. It recommends that the elimination of this deficit over the next five years should be a priority objective of the E.S.B. and that this objective be supported by the Department of Energy.
23.In the 1960’s the E.S.B. incurred losses in only two years and it made small profits in the other eight. In the first four years of the 1970’s large losses were incurred and in 1974/75 the cumulative deficit had reached almost Ir£9 million or over 7½% of the sales revenue in that year. In the eleven years since then losses have been incurred in seven years and, as mentioned earlier, the cumulative loss level is now 9.1% of current annual revenue.
(b) Borrowing Levels
24.In 1954 a major change in its statutory position allowed the E.S.B. to borrow on international money markets to fund its investment and expansion programmes. As shown in the table opposite the total borrowings at 31 March, 1986, were Ir£1,285 million. This had increased from a level of Ir£234 million in 1974/75, an increase of almost five and a half times. Approximately two-thirds of the borrowings were still in foreign currencies in March 1986, despite the E.S.B.’s objective to reduce this level. However, in the last two years it had made some improvement in this situation and almost three-quarters of its new borrowings in 1984/85 were on the Irish market. By March, 1986, the local element of borrowings had improved to 33% from a level of 23% two years previously. Borrowings in U.S. dollars/Canadian dollars still constitute almost 20% of the total and while this has declined from 24% of total borrowings in 1981/82, dollar loans have cost the E.S.B. considerable currency losses over the previous five years.
25.In the ten year period 1974/5 to 1984/5 currency losses on borrowings amounted to a total of over Ir£270 million and, hence, increased the total borrowings and interest payments in Irish currency. However, a reverse of this trend occurred in 1985/6 when currency gains of Ir£53½ million occurred. In the previous five years the major part of currency losses arose from the ever increasing value of the U.S. Dollar against the Irish Punt. Currency losses are calculated on exchange rates at 31 March each year and are not charged against revenue and, it is understood, were not accepted by the National Prices Commission as justification for any element of price increases in electricity. The Joint Committee also understands that, prior to 1983, the E.S.B., on Government instruction, borrowed much of its funds from the European Investment Bank and it was not usually in a position to influence the currency mix of these loans. On joining the European Monetary System the Government was afforded a subsidy on interest, payable on qualified projects, and E.S.B. borrowings through the European Investment Bank were used as one means of qualifying for this subsidy. It is understood that the value of this subsidy to the Government on the foot of E.S.B. borrowings from E.I.B. amounted to some Ir£55 million.
26.In its Corporate Plan for the period 1985/6 - 1989/90, the E.S.B. has set itself a target of sourcing 30% to 50% of new borrowings from the Irish markets. It appears that the new borrowings over the next four years will amount to slightly over Ir£270 million, while loans due for repayment over the same period total some Ir£631 million. In view of the large currency losses incurred on loans in the more volatile currencies such as U.S. dollars and Sterling in the past, the Joint Committee strongly supports the E.S.B.’s objective to source large parts of its future borrowing requirements from within the Irish market and it recommends that the remainder of its borrowing requirements be sourced, as far as possible, from within other currencies in the European Monetary System.
(c) Loan Repayments
27.An analysis of E.S.B. borrowings at 31 March, 1985, shows that 50% is repayable within five years and this is confirmed by the figure of Ir£631 included in the Corporate Plan. A further 33% is repayable between six and ten years while 17% is repayable after ten years. Of the borrowings in U.S. and Canadian dollars 63% is repayable over the remainder of this decade. In its income and expenditure accounts, the E.S.B. includes an an amortization charge as a provision to cover redemption of debt. The Joint Committee understands that this is approximately 5½% of borrowings each year based on 5% of the borrowing levels and 5% of currency losses over the previous five years. In the period 1974/75 to 1984/85 the total amortization amounted to Ir£331 million. As the increase in borrowing levels arising from currency exchange losses in the same period was slightly over Ir£270 million, it is clear that amortisation as currently applied will not provide adequate finance for debt redemption and the E.S.B., as it has done for the last twenty years, resorts to rolling over debt when it becomes due. Both the Fletcher and Jakobsen reports expressed some scepticism about the E.S.B.’s amortisation policy. While the amortisation charge can be provided for as a cost before profits it is conventional within commercial enterprises to declare surpluses or deficits before the amortisation charge is accounted for. It would appear that the E.S.B. targets a normal debt period of approximately 20 years which is related to the expected life of its principal plant items. In the past, increases in amortisation levels were not accepted by the National Prices Commission as justification for any element of increase in electricity prices. In relation to the matter of amortisation the following statement in the Jakobsen Report is of interest:-
“Amortisation is a provision against the redemption of debt charged by the E.S.B. in the annual accounts on the basis of the 1927 Electricity (Supply) Act. In reality this is an accounting format for the appropriation of profit. While it served its purpose in buttressing the inadequate funds generated by way of historic cost depreciation, it is not related to the cost of future investment and does not match the actual cash requirements.”
28.In considering the E.S.B.’s levels of borrowings, it is interesting to note that it amounts to 41% of the total borrowings of the commercial State-sponsored bodies, excluding the finance and insurance sector, while its element of borrowings in foreign currency at the end of 1985 was approximately 45% of semi-State sector borrowings in foreign currencies.
(d) Interest Payments
29.In 1984/85 the total interest paid on E.S.B. borrowings amounted to almost Ir£120 million. Of this amount, Ir£80 million was charged to the revenue account and, therefore, against profits/losses, while Ir£40 million was capitalised. It is the E.S.B.’s normal policy to capitalise interest on new assets up to the time of commissioning those assets. This means, for instance, that out of the total final investment cost of approximately Ir£835 million for Moneypoint and its associated two x 400 kv transmission lines, a figure of approximately Ir£137 million will represent capitalised interest accumulated prior to commissioning.
(e) Investment Levels
30.The Joint Committee understands that total assets employed in 1984/85 were valued at approximately Ir£1.5 billion, while in 1985/86 they were Ir£1.7 billion. Of the latter figure, nett investment in capital assets was Ir£1.36 billion after charging depreciation of Ir£382 million on the original investment of Ir£1.7 billion. The investment in capital assets as per the balance sheet breaks down as 42% generating plant, 14.5% transmission, 35% distribution investment and 8.5% buildings and others.
(f) Financing of Asset Investment
31.The E.S.B. sets aside in its accounts each year a depreciation charge against revenue as a provision for replacement of assets. Depreciation is charged on a straight line basis on historic cost. The inadequacy of this as a means of funding new asset requirements can be seen from the fact that in the past ten years depreciation charges totalled almost Ir£300 million while the amounts invested in new assets were close to Ir£1 billion. In their reports on the E.S.B. both Fletcher and Jakobsen expressed doubts about the depreciation policies of the E.S.B.
(g) Levels of Internal Financing
32.Because of its statutory limitations the E.S.B. cannot accumulate profits to any great degree, from which to fund investment in new plant, etc. It must, therefore, rely to a large extent on external borrowings supported by any internal financing that can be generated. Internal financing arises from depreciation, any asset disposal that take place and any profits (or losses).
33.The E.S.B. has set itself a target of generating 40% of its investment requirements (capital and working capital) from internal finances. This level of internal financing is a requirement for World Bank financing. In the five years to 1984/5, the Board’s generation of internal finance has been well short of this target. In fact, it declined from 36% in 1978/9 to 16% in 1984/5. However, the Joint Committee understands that in the year ended 31 March, 1986, the internal financing figures had recovered to much healthier levels, partially due to the fall off in capital investment.
34.In 1978 an inter-departmental working party was established by the Minister for Industry, Commerce & Energy to examine the accounting practices of the E.S.B. and to recommend such changes as they deemed desirable. In the report which was issued in June, 1979, the working party recommended that a level of 40% for internal financing would be appropriate for the E.S.B. They further recommended the establishment of a proposed Capital Development Fund which would be used to supplement depreciation and other internal charges to finance capital investment by the E.S.B. This recommendation was never implemented. The Joint Committee would strongly recommend that it be again considered seriously both by the E.S.B. and the Department of Energy.
35.Over the four years to the end of the current decade the capital investment requirements of the E.S.B. are likely to be considerably lower than in the previous ten years. In fact, the Board’s Corporate Plan 1985/86 - 1989/90 shows capital expenditure projections of approximately Ir£657 million over the period. However, a new capital investment programme is likely to be required towards the middle of the 1990’s. It seems to the Joint Committee that this would be an opportune time to establish and create the recommended Capital Development Fund to ensure that the necessary levels of internal financing can be readily achieved during the period of high capital investment in the 1990’s. Furthermore, the likely more favourable fuel situation between now and 1990 will reduce very much the pressure for electricity price increases and indeed should, hopefully, generate significant savings in E.S.B. operations over that period.
ELECTRICITY DEMAND FORECASTING & AVAILABLE CAPACITY
36.Electricity is a product which cannot be stored and, therefore, increased demand must be instantaneously met by increased generating and transmission capacity. Appendix (iii) shows the daily load curves which the ESB has to meet on typical Summer and Winter days. While the load curves shown are for 1983/84 they would not be significantly different in shape or configuration from those experienced in the current year. In each of these load curves the night valley level is about 50% to 60% of the day peak. These load curves are typical for most European countries and, in fact, the E.S.B. system load factor of 60% is on the better side of utility average. The system load factor is the relationship between the peak load experienced during the year and the average load over the year.
37.The importance of electricity in economic growth can be appreciated from the fact that 35% of all primary energy is converted into electricity before end use. This percentage has increased steadily from 25% over the past 15 years. Industrial and commercial growth as well as improvements in living standards would all be seriously curtailed by the inadequate availability of a reliable electricity supply.
38.It is the corporate objective of the E.S.B. to provide an acceptable level of service at minimum cost to the customer. If there is a shortage of plant capacity, the customer suffers directly by interruptions to supply and, indeed, by restrictions to increased demand. On the other hand, if there is too much plant he suffers directly by having to pay a higher price for electricity. An example of this is that the capital cost of a megawatt of coal-fired generating plant is now estimated to cost over IR£800,000 at current prices. The financing cost associated with this one megawatt would amount to at least Ir£100,000 per annum.
(a) Forecasting Methods
39.The E.S.B. in its planning and forecasting uses sophisticated computer based techniques to arrive at plant capacity requirements. However, forecasting accuracy has become increasingly more difficult when one considers that over the past fifteen years the annual change in the growth rates for electricity demand have varied from plus 11% to minus 2%. Furthermore, the planning and construction period for a major coal-fired power station such as Moneypoint can require up to eight years. Capacity has to be planned to meet the likely peak demand rather than to be able to generate the total electricity demand in megawatt hours. While historically there was a good correlation between the increases or reductions in both these factors, in recent years this has not been quite the case. For instance, between 1984/85 and 1985/86 the total units sold increased by 5.5%, while the total units generated increased by 4.5%. However, the peak load increased by only 1.81%. In the period between 1979/80 and 1985/86 the pattern was similar. Units sold increased by 14.3% and units generated increased by 12.2% but peak load increased only by 8.1%. It must be said, of course, that the lower levels of peak load reflect good marketing efforts by the E.S.B. in shaping its load curve or in encouraging customers to use less electricity at peak time and more in off peak time. It is to be complimented on the level of success represented in these figures.
40.Forecasts of total demand in the years ahead are carried out using sophisticated forecasting techniques. A range of growth rates are then taken and historic relationships are used to arrive at the average of the fifty highest daily peak demand levels to be expected during the winter. The E.S.B. then relates this to its plant margin or to the amount of spare capacity needed using a target of loss of load equivalent (LOLE)
The E.S.B.’s standard target on LOLE is failure to meet peak demand on any one day over a five year period. The plant margin or reserve capacity requirements using this standard would, it is understood, tend to work out in the range 30% to 35% spare capacity. This level was considered by Jakobsen to be too conservative when compared with the normal Danish reserve margin of 20% to 25%. However, Danish utilities have the advantage of being interconnected to other European systems while the E.S.B. is a stand alone system and, hence, the need for a more conservative approach. It would appear to the Joint Committee that a plant margin of 30% to 35% should not be considered excessive in the E.S.B.’s circumstances.
(b) Recent Forecasting History
41.Up to the early 1970’s forecasting of demand and decisions on increased plant capacity was relatively easy for the E.S.B. Prior to 1973 and the first oil crisis demand for electricity increased at a steady 8-10% per annum, oil prices were steady and costs, on a constant money basis, declined steadily. However, in the last twelve years life has become very much more complex for the E.S.B. and like many other electrical utilities it misread the situation and ended up in a position of over capacity which will continue into the 1990’s.
42.The crucial point came in 1979/80 when, after a nil growth in the period 1974-1976, the Irish economy had responded sharply with a steady increase of electricity demand of 8%+ in each of the following four years. Most experts, including the E.S.B., were predicting a continuation of this growth. In fact, in a study entitled ‘Energy Ireland’, issued by the Department of Industry, Commerce and Energy in July, 1978, it was stated that on the basis of the projections for future energy demand, it would seem that the provision of generating plant should be based on the ability to meet an average annual growth in demand of 8½% over the period to 1990.
43.In the event, the predictions proved totally incorrect. In the four years following March, 1980, the level of electricity consumption grew by 3.3% and peak demand by little over 1%. To meet the projected growth the E.S.B. in 1978 had committed itself to the construction of a coal fired station at Moneypoint capable of generating 900 MW (almost 50% of 1980 peak demand) by 1987, and between 1976 and 1984 it commissioned 1725 MW of new generating plant, of which almost 1200 MW was gas fired. The situation could, however, have been far worse having regard to the fact that in January, 1979, the E.S.B.’s Generating Plant Programme projected the installation of 3270 MW of new capacity between 1981/82 and 1990/91. By November, 1980, this had been slimmed down to 2401 MW and, finally, in November, 1981, it was reduced to 1483 MW. This is the programme which was finally implemented.
44.The table opposite shows the E.S.B.’s reserve margins on its generating capacity since 1974/75. It is probable that in previous years the E.S.B. desired plant margin targets would justifiably be in the higher area of 30-35% as forced outage (or plant unavailability) rates for generating plant were running at over double the current 8% rate in that period. In addition to the current installed capacity of 3427 MW, the E.S.B. has 540 MW of mothballed plant which could be brought back into operation, if necessary.
45.Further details of the mothballed and retired (not maintained) plant are shown in Appendix (iv). The table opposite gives details of the reserve capacity plant available over the last twelve years and it also shows projected reserve capacity figures based on growth rates of 3% and 5% in annual peak demand. The table also shows that in the year ended 31 March, 1986, the E.S.B. had reserve capacity amounting to two-thirds of its peak demand and, based on actual growth rates over the coming four years, could have reserve capacity of over 70% in some of those years. There would appear to be no need for further generating capacity until well into the early 1990’s.
ANALYSIS OF E.S.B. ANNUAL RESERVE GENERATING CAPACITY
PROJECTED RESERVE CAPACITY
46.The E.S.B. informed the Joint Committee* that the installation of gas units in the late 1970’s and early 80’s, which may be considered surplus to requirements, had generated very large savings for electricity customers, balance of payments savings and large profits for the Government through Bord Gáis Éireann. While accepting the validity of statements regarding the massive fuel savings etc. arising from the use of gas rather than heavy fuel oil, the fact remains that in the year ended 31 March, 1986, the E.S.B. had in operation and fully manned 24 hours a day 3,547 MW of generating capacity to cope with a maximum peak load of 2,130MW. This represents a reserve capacity of 66.5% and clearly demonstrates the excess capacity in the system. It is appreciated that the E.S.B. has a difficult task in implementing a decision to close some of the older, less efficient and probably un-necessary units because of the associated job losses and the reluctance of the Department of Energy to allow such closures. Nevertheless, it must be accepted that, currently, there is excess generating capacity which increases the E.S.B.’s operating costs and, therefore, the price of electricity to the consumer.
(c) Day to Day System Operations
47.In controlling daily generating operations the E.S.B. uses computer assisted programmes which evaluate the marginal cost of various generating stations and, therefore, help the operating engineers decide the most cost effective stations to cope with any increased demand. Clearly, with the significant reduction in heavy fuel oil costs, the merit order of generating stations had had to be revised significantly in recent months. Normally, the most efficient and largest units would be on base load or 24 hour operation while the less efficient units would be run purely to overcome peaks in demand. One other restriction in operating flexibility would be the requirement to meet the contractual peak off-take levels.
48.Traditional system operation practice required the maintenance of spinning reserve (i.e. generators running below capacity) equivalent to the largest generating load or infeed to the power system. This was necessary to cater for the possible loss of the largest generator feeding the system. Over recent years the E.S.B. developed a system of under frequency tripping relays allied to interruptible tariff agreements with some customers which greatly reduced the need for spinning reserve and contributed several million pounds per annum in fuel savings.
(d) System Interconnection
49.Most European electricity utility systems are interconnected with neighbouring systems. The advantages are basically:
(i)Sharing of spinning reserve;
(ii)Reduction of plant margin, i.e. excess capacity over peak demand; and
(iii)Interchange of power at reduced costs.
50.In 1970 an interconnection system was commissioned with Northern Ireland with a capacity of 300 MW. This interconnection was out of commission for long periods because of malicious damage and was finally closed down completely in 1976. It is estimated that the availability of a reliable interconnection would have reduced by 250 MW the total generating capacity currently required by the E.S.B.
51.In 1978 consideration was given to a D.C. link of 500 MW capacity with the British system via submarine cable to Wales. This was dropped largely due to current excess capacity in the Irish system and the apparent lack of interest by the Central Electricity Generating Board in the U.K. Discussions have restarted and it is understood that interconnection would now probably cost over Ir£200 million. The Joint Committee would strongly recommend the rapid development of these discussions.
GENERATING CAPACITY DETAILS
52.As mentioned previously, the E.S.B.’s present installed generating capacity is 3427 MW in 28 stations with a further mothballed 540 MW of capacity. This capacity breaks down as follows:
53.As can be seen, there is a wide variety in the size of generating sets, ranging from three 5 MW sets which are fed from hand won sod peat to three oil/gas sets of 270/250 MW capacity, and the 305 MW coal fired set operational at Moneypoint since October, 1985. These figures do not include the second 305 MW set currently being commissioned at Moneypoint.
54.The table overleaf gives some further details of the plant performance and operational costs in the year ended 31 March, 1986. Apart from one small hydro station, all stations are manned on a 24 hour basis.
55.The table hereunder summarises some of the chief cost factors:
The unit costs of the oil fires stations have reduced considerably in recent months, while the unit cost of Moneypoint units will reduce with more continuous running.
56.The thermal efficiency of the 5 MW sod peat stations is as low as 14%, while in the case of gas fired sets the thermal efficiency varies from 32% for combustion turbines to 39.5% for gas fired steam cycle and 41/42% for gas combined cycle. Because of difficulties in load factor, unit generator size, etc., it is difficult to make precise comparisons on efficiency with other utilities. However, it can be said that the E.S.B. generating unit operational efficiencies are as good as similar units in other European utilities.
57.The average unit cost of electricity sent out from each station is heavily influenced by the load factor or the proportion of the total capacity of plant that is used on average over the year. As can be seen on page 36 this varies from 15% in the case of the oil fired station at Great Island to over 80% for the efficient/low cost gas units at Marina and North Wall.
58.The load factor or operating time in peat and local coal stations is decided by Government directives on the levels of fuel that the E.S.B. is instructed to use. The load factors of hydro stations are more influenced by the flow/ water storage in the relevant rivers.
59.The E.S.B. generating set up is quite diverse, as can be seen, with a high proportion of small sets using a variety of fuels. In many cases the generating stations are located a significant distance from the main load centres which are largely located on the east coast. Hence the transmission system is more extensive. In fact, it is approximately six times that of a typical English region. The losses in the overall generating/transmission/distribution at 16% total are higher than experienced by other utilities. These losses break down as follows:-
The higher the voltage the transmission lines operate at, the lower the losses that will be incurred. For instance, the losses over 400 kv lines from Moneypoint to Dublin are expected to be about 0.8%.
60.It is noticeable that the E.S.B. operational engineers have managed to reduce system losses over the past six years. In 1980/81 83.3% of units generated were sold to end customers, while in 1984/85 this had improved to 84.5% and in the year ended 31 March, 1986, it had again improved to 85.4%. The E.S.B. is to be complimented on these improvements. It is estimated that a 1% increase represents a saving of approximately Ir£7m.
61.The Joint Committee felt that because of the capital intensive nature of electricity supply, it was important to get an understanding of the way the E.S.B., in its submission to Jakobsen, highlighted the dangers in trying to get valid comparisons because of currency variations, interest rates, treatment of various cost elements e.g. interest, labour productivity, etc. Nevertheless, the Jakobsen Inquiry, with the help of the E.S.B., did manage to find valid comparisons, particularly with Moneypoint. The view expressed in the Inquiry Report was that the E.S.B.’s generating station capital costs were in line with those in Europe but that the period needed for construction of a station such as Moneypoint was about two years longer than would be typical in Europe. Interestingly enough, these comments are very similar to those made by Fletoher in 1971. Jakobsen also came to the conclusion that capital costs of erecting transmission lines were lower in Ireland than in the U.K. area boards.
62.The E.S.B., unlike most other European utilities, plans designs and builds its own generating stations, transmission lines, etc., using mainly its own employees. The table hereunder shows the E.S.B.’s relative cost per KW of construction of different types of generating stations on a new site. The absolute figure shown also is very much an estimate of an ‘instant 1985 price’.
63.An in - depth study of the E.S.B.’s control of budgeted costs of major projects was not possible. However, the following results on Moneypoint would indicate a satisfactory performance in relation to budgets:
64.Up to now control of the quality of waste gases from power stations has been controlled by the Local Authorities who set the standards required. For instance, in the case of the Moneypoint power station, the requirements of Clare County Council were that the maximum concentration of sulphur dioxide (SO2) should not be greater than 45 mic - gm/cubic metre of air at the point of maximum impact which would normally be between 10 and 15 kms. from the power station flue gas stacks. The E.S.B. is confident that the levels of SO2 concentrations caused by Moneypoint will be a small fraction of that standard.
65.The situation regarding waste gas control and standards is likely to change quite dramatically over the next ten years and, more importantly, will also have significant retrospective impact. It would appear that new E.E.C. standards will be established and issued, applying particularly to operators of large combustion plants with a thermal capacity of 50 MW and over. In the case of the E.S.B. this directive will apply to all power stations over 15 MW (electrical output) capacity and also to other major industrial operations such as Aughinish Alumina Ltd and Cement Ltd. This subject has been covered extensively in Report No. 25 of the Fourth Joint Committee on the Secondary Legislation of the European Communities. That Committee’s report would appear to substantially support the proposals before the E.E.C. currently, despite the obvious disagreement of the E.S.B.
66.The pending E.E.C. directive is based on proposals for a Council Directive on the limitation of emissions of pollutants into the air from large combustion plants and the Commission’s original proposals were amended following debate on the proposal in the European Parliament on 15 November, 1984. As mentioned earlier, this directive will apply to new and existing combustion plants with a rated thermal output equal to or greater than 50 MW. It is designed substantially to reduce emissions of sulphur dioxide (SO2), oxides of nitrogen (NOx) and dust from such installations. Of these pollutants, sulphur dioxide is the one that will cause the greatest problems, particularly to the E.S.B., as most heavy fuel oils contain 3% or more sulphur, while most steam coals contain between 1% and 1½%. The equipment to limit SO2 content of fuel gases is very expensive, requires additional manning costs, and is likely to have a negative effect on power station efficiency. The revised E.E.C. proposal falls under two specific headings as follows:
(a) New Plant or Plant whose building licence is issued after the issue of the directive:
In the case of such plants the maximum allowable levels of SO2 in the flue gas will be 400 mil-gm/cubic metre of flue gas. For comparison with this target the E.S.B. expects that without FGD (flue gas desulphurisation) Moneypoint will have a concentration of SO2 in its flue gases of 1700-2000 mg per cubic metre.
(b) Old Plant:
This would apply to all plant of 50 MW thermal capacity and over, the building licence in respect of which has been approved before the issue of the proposed directive. This would, of course, include the Moneypoint power station.
67.In the case of existing plant, the directive does not set out specific flue gas pollutant levels to be achieved but rather bases its targets on the total national emission of SO2, NOx and dust from the national pool of combustion plants of 50 MW and over. The following outlines the targets to be achieved by 1995 in existing plants:
-SO2 target is a reduction of 60% of the total emission of applicable plants in 1980.
-NOx - Reduction of 40% in the 1980 levels.
-Dust - Reduction of 40% in the 1980 levels.
68.Concentrating on SO2 which has most significance from the point of view of the E.S.B. and electricity costs, the following situation applies. In 1980 the total emission of SO2 into the Irish atmosphere from all sources was, it is understood, 214,000 tonnes, of which approximately 100,000 tonnes or 45% emanated from specific plants, i.e. those of 50 MW and over thermal capacity. Therefore, the original proposed directive would require an Irish target of 40,000 tonnes SO2 in total from specified plants by 1995.
69.The selection of 1980 increases the difficulty for the E.S.B. as at that time it was using significant amounts of sulphur free gas and the 100,000 tonnes of SO2 in 1980 from specified plants had been as high as 127,000 tonnes in 1978/1979. To put these figures into context it is accepted that in 1982 the total Irish emissions of SO2 represented only 1.1% of the total emissions of SO2 by all E.E.C. Member States.
70.The E.S.B.’s original estimate of SO2 emission from Moneypoint with three sets operational was 49,000 tonnes per annum but this has now been reduced to 37,000 tonnes because of decisions to purchase low sulphur content (1%) coal for that station. The Joint Committee understands that the E.E.C. Council of Ministers has had under discussion significantly revised proposals for this directive which, it is believed, would require in Ireland’s case zero reduction from the emission levels applying in 1980. While welcoming these new relaxed proposals the E.S.B.’s view is that even these revised levels will still require very significant capital costs if these standards are to be met by 1995.
71.The following table summarises the E.S.B.’s estimates of those costs:
The figures in brackets represent prime capital costs excluding interest charges. In addition, the E.S.B. estimates that a further Ir£240 million would be required for sulphur dioxide control on the anticipated 600 MW of new plant needed between 1995 and 2000.
72.If the E.S.B. figures can be taken as being realistic estimates, the effect on electricity prices in the 1990’s could be significant. The E.S.B.’s original estimate was an increase of 20% in prices, while Jakobsen estimated that increased prices arising from SO2 control would be between 5% and 10%. In the Report of the Fourth Joint Committee on the Secondary Legislation of the European Communities it was estimated that the effect on electricity prices spread over a period of ten years could be less than 1% per year. In answer to this, however, the E.S.B. states that RWE, the largest electrical utility in West Germany, has just been granted a phased increase in tariffs of 15% to cover the acquisition and operation of emission control equipment to meet the West German standards. The Joint Committee understands that a Danish power station at Studstrupp, with capacity very similar to Moneypoint (1000 MW), is installing desulphurisation equipment at an estimated capital cost of Ir£120 million. This cost is very similar to E.S.B. estimates.
73.Clearly, the decision in this situation is a difficult one for the Government which has to strike a balance between the likely significant effect on electricity prices to the consumer and the political disadvantages of being seen not to fully support environmental control legislation within the E.E.C. As already mentioned, Ireland’s total SO2 output represents only 1.1% of the E.E.E. total, while from specified Irish plants the total would amount to less than 0.5%. The dispersal effect of wind and distance means that the Irish specified plants contribution to European acid rain would probably only amount to 0.1%. The capital investment needed for desulphurisation seems, for Ireland, out of proportion to its contribution to the problem.
74.If, as seems likely, an E.E.C. directive issued on air pollution along the most recently suggested lines, Ireland will be obliged to enact its own legislation to ensure compliance here with the E.E.C. directive. The Joint Committee would recommend that, from the point of view of existing plant, any such legislation should be framed to encourage the use of low sulphur level fuels, particularly low sulphur content coal and fuel oil rather than insisting on high cost desulphurisation refits which would give marginal benefit to the overall European position.
FUEL USAGE, AVAILABILITY & COST
75.Fuel has become an ever-increasing and significant element of the E.S.B.’s electricity cost structure. In the 1960’s fuel costs represented about 20% of total costs, and this proportion increased to about 25% in the earlier years of the 70’s. Following the first major increase in the price of fuel oil in 1973-75, the fuel element of cost increased to over 40%. The second oil crisis and sharp fuel oil increases of 1978/79 increased the fuel element of costs to a peak of over 49% in 1980/81. Since then, however, it has declined to an estimated level of 39.1% in the financial year ended 31 March, 1986. This declining percentage has arisen both from greater stability in fuel costs and also more rapid inflation in capital and other operating costs and, therefore, electricity prices. It is interesting to note that, on the basis of the relevant costs per unit, fuel increased by 184% from 1979/80 to 1985/86. In that same period the capital element of costs increased by 258%, other operating costs increased by 244% and the actual average price per unit sold increased by 221%. The movement of each of these cost elements is shown in Appendix (v).
76.The large increase in fuel costs in the 1970’s as a proportion of total costs was very much influenced by the dependence of the E.S.B. on fuel oil as its main source of energy for generation. In 1978 fuel oil was the primary fuel used to produce over 70% of E.S.B. output and in that year it used over 1.6 million tonnes of heavy fuel oil. The graph overleaf shows that in 1985 fuel oil had declined to 20%, while gas had become the dominant fuel source with 53% of the generated output. The proportions of different fuels used in 1985/86 were as follows:- Oil 26%, Gas 47%, Hydro 7%, Peat 17% and Coal 3%. The situation in the current year is likely to be quite different due to the significant reduction in fuel oil prices and the start up of the much more economical coal fired plant at Moneypoint. The E.S.B. anticipates that fuel oil will supply 43%, gas approximately 16% and coal 22% over the period from April to December, 1986.
The gas agreement between Bord Gáis Éireann and Marathon Petroleum was the subject of a Supreme Court ruling earlier this year. It is understood that as a result of that ruling a reduced price per therm applies where the BGE off-take of gas is less than 165 million cubic feet per day (mcfd). The price per therm above this level has not been determined and BGE is restricting its off-take to ensure that the annual off-take does not exceed the aggregate of daily off-takes of 165 mcfd.
77.In view of the reduction in fuel oil prices over the past six months, previous medium term predictions for fuel mix are unlikely to be valid now, particularly with regard to the proportions of fuel oil and gas. It is likely, however, that imported coal used at Moneypoint will contribute about 40% of generated output from 1989 to the mid 1990’s. Peat and native coal over the last couple of years has represented approximately 20/21% of production fuels and this is likely to decline to about 12% of total output by the early 1990’s. The overall volume of electricity from hydro electric schemes will also remain static and with increasing demand its percentage will probably reduce from the current level of about 6% to 5% or 4½% by the early 1990’s. The remaining output will then be split between fuel oil and gas in proportions which will probably depend on the relative costs of these two fuels.
78.Appendix (vi) shows the average cost per tonne of the various fuels to the E.S.B. and the escalation in prices which has occurred over the past fifteen years. As can be seen, fuel oil had escalated by a factor of almost 29 times by 1985/86, while peat had increased between 7 and 9 times on the 1970 base price. Since its introduction as an E.S.B. fuel in 1979/80 natural gas has escalated more rapidly than any of the other fuels and in that time has increased in price by a factor of almost four times.
79.The table opposite shows the relative costs of the various fuels as a source of energy and as a fuel cost per megawatt hour sent out. The costs which applied in February, 1985 and in March, 1986, are given in each case. The very significant changes in fuel oil costs relative to its competitor fuels can be clearly seen from this table. Fuel oil in May, 1986, was the cheapest energy source for the E.S.B. being less than the estimated Moneypoint cost and being little more than half the average cost of natural gas. Fuel costs per megawatt hour for milled peat are approximately 2½ times that of fuel oil, while Arigna coal costs almost 4 times as much as a source of electricity than fuel oil. Appendix (vii) shows consumption by the ESB of its different fuels in volume terms over the eight years from 1978 to 1986. The figures are in respect of calendar years and the 1986 figure is a projected figure.
Availability/Price of Individual Fuels
(a) Natural Gas
80.Initially, negotiations on supply of natural gas were carried out with Marathon Oil by the E.S.B. and Nítrigin Éireann Teoranta. Bord Gáis Éireann (BGE) was established in 1975, shortly before a gas supply agreement was concluded with Marathon Oil. This supply contract was then transferred to B.G.E. In the case of the E.S.B. it provided for the supply of 489.1 billion cubic feet of gas at the rate of 72 mcfd (million cubic feet per day) for a period of twenty years. The original price of 4.3p/therm was linked to a basket of oil prices and a dollar/Irish Punt exchange rate. The price was to be revised at the start of each year to take account of variations in oil pirces and dollar exchange rates. Based on the conditions of the original contract, the Joint Committee understands that the current equivalent price for the 72 mcfd of gas would be approximately 6.35p/therm.
COMPARISON OF FUEL COSTS (EXPORIED)
81.Since 1978 gas prices and quantities supplied to the E.S.B. have been decided by directives from the Minister for Energy who decreed in 1979 that gas prices should be energy and market related. It was not clearly established at that time what energy the prices would be related to, but it was generally believed to be the price of heavy fuel oil. As a result, natural gas prices to the E.S.B. increased from 6.841p per therm to 9.163p on 1 January, 1980. The allocation of gas to the E.S.B. was increased to 125 mcfd in January, 1981, and the price was raised by a further 70% to 15.577p per therm. In January 1982, there was a further increase in price to 16.9135p per therm.
82.In June, 1982, a dedicated amount of 337 billion cubic feet of gas was committed to the E.S.B. by agreement with B.G.E. and the Department of Energy. This was to be supplied at a rate of 150 mcfd to 1 April, 1988 and at a rate of 11 mcfd thereafter. In July, 1982, the E.S.B. was informed that the gas price was being raised to 24p per therm and this increase was implemented with effect from April, 1983. In January, 1985, the E.S.B. was allocated an additional 15 mcfd at 30p per therm for the calender year 1985 above its base level of 150 mcfd. It was estimated that this would generate savings of Ir £6 - £10 million as against the cost of using an equivalent amount of heavy fuel oil. These savings were to be passed on to industrial users as a price reduction ranging from 2% to 6%. However, the ESB was not able to take advantage of this additional allocation because of restrictions on the gas flow through the Cork to Dublin pipeline.
83.While the E.S.B. may justifiably complain about the uncertainties related to gas prices and gas availability, it is, nevertheless, estimated that the availability of natural gas has meant reduced costs of the order of over £250 million to the E.S.B. since 1978. Use of gas for generation of electricity is generally regarded as inefficient and indeed an E.E.C. directive (75/404) provides for restrictions on the use of gas in power stations.
84.The Joint Committee understands that the E.S.B. is awaiting a decision from the Minister of Energy as to what action is to be taken on gas prices. Most industrial users have had, or are about to have, significant reductions in gas prices because of the rapidly falling price of fuel oil. In view of the current high comparative energy cost of gas in relation to imported coal or fuel oil, the projected reduction in gas usage by the E.S.B. this year is understandable.
85.Since natural gas from the Kinsale field became available in 1979, the E.S.B.’s usage has been almost 300 billion cubic feet or two-thirds of the total B.G.E. offtake of 450 million cubic feet from the field. Over the past five years the E.S.B.’s usage has been in excess of 70% of B.G.E.’s purchases from Marathon. Bearing in mind that B.G.E. has a ‘buy or pay’ contract with Marathon, the E.S.B. has been an extremely important element in B.G.E.’s successful and profitable operation.
86.Furthermore, as the table on page 49 shows, natural gas at a sent out fuel cost averaging approximately Ir£25/MWH is now very expensive in comparison with fuel oil at a sent out fuel cost of Ir£13/MWH and imported coal at Ir£14.5/MWH. If gas usage volumes by the E.S.B. are to be maintained at recent levels, gas prices need to be adjusted downwards significantly, otherwise the electricity consumer will be merely subsidising a false profit situation in B.G.E.
(b) Fuel Oil
87.In the 1960’s Ireland and the E.S.B. depended far more on fuel oil for electricity production than did most other European countries. Hence it also benefitted from the stability of oil prices during that period. It became obvious during the latter half of the 1970’s that a rapid diversification away from oil, which had escalated in price per tonne by a factor of over 20 in the ten years from 1970 to 1980, was necessary. Consequently, oil usage by the E.S.B. declined from 1.66 million tonnes in 1979 to approximately one-third of that figure in 1984. However, with the sharp drop in fuel oil costs which have taken place this year, the E.S.B. are projecting significantly increased usage of fuel oil to over 0.9 million tonnes in the nine months April to December, 1986.
88.Under a Government directive of September, 1982, the E.S.B. was, until last year, obliged to buy 250,000 tonnes of fuel oil from the Irish National Petroleum Corporation Limited (I.N.P.C.) at a price related to I.N.P.C.’s break-even costs. The E.S.B. honoured this commitment by paying I.N.P.C. the necessary differential premium and purchasing the necessary 250,000 tonnes on a more cost effective basis on the spot market. It was estimated that this commitment to I.N.P.C. cost the E.S.B. up to Ir£6 million per annum in the early 1980’s. It is understood that the E.S.B. currently has a twelve month contract with SOCAL (Elf) for the supply of between 100,000 and 200,000 tonnes of heavy fuel oil at market prices. The remainder of its fuel oil requirements are, it is understood, purchased on the spot market. The E.S.B. is obliged to pay a hydrocarbon tax of Ir£15.5 per tonne of fuel oil. This is double the tax paid by Irish manufacturing industry. On the basis of the present fuel oil delivered price of $50 per tonne, this hydrocarbon tax represents an added cost of over 40% on the base price price - an extremely onerous tax rate.
89.The E.S.B. uses annually about 3 million tonnes of milled peat and 250,000 tonnes of sod peat. For milled peat the price basis until 1980 was related to Bord na Mona’s cost of production. In 1980 the Minister for Energy directed that an energy related price should be used for peat and the price per tonne increased from £5.67 to £10.37. In July, 1982, the price was increased further to £16.91 per tonne. The Jakobsen Interim Report suggested that, on the basis of Bord na Mona’s production costs, the price of milled peat could be reduced by £3.50/tonne. This recommendation was not implemented.
90.On June 13th, 1984, the Minister for Energy directed that the following supply conditions for milled and sod peat would apply for that year:
Recently, a three year supply contract was agreed with Bord na Móna for the following scheduled tonnages of milled peat:
The current price is as follows:
Ir£18.565 per tonne up to total of 2.7 million tonnes.
Ir£16.037 tonne over that level.
The price adjustment each year will be based on the C.P.I. increase less one percentage point. The current agreed price for sod peat is Ir£26.418 per tonne.
(d) Arigna Coal
91.This fuel is used to supply the 15 MW Arigna station which in the year ended 31 March, 1986, operated at a load factor of 59.2%. Prices are decided by the Department of Energy and have increased by a factor of 8 times in the last 12 years.
(e) Steam Coal
92.Reference has been made to the necessity in the mid 1970’s for a major diversification away from crude oil. In the short term gas burning facilities could be quickly brought on stream but in the long term steam coal would be the most cost effective fuel. Hence the decision to build Moneypoint which, at full capacity, will burn two and a quarter million tonnes of steam coal and will operate on a base load basis. At the present time four contracts have been entered into for supply of coal to Moneypoint. Details of the contracts are as follows:
The Joint Committee understands that these contracts have been approved by the Board of the ESB and each contract is a formal one with some flexibility in annual volumes. The base price agreed at the time of the contract is, it is understood, adjusted by an escalating formula related to U.S. Labour and Commodities prices. In the case of the Intercor contract, the price is tied to the average price of steam coals imported into European countries.
93.It is understood that coal prices at June, 1986, were approximately $50 (U.S.) per tonne delivered, which includes approximately $4.5 per tonne freight costs. This price would appear to be very similar to the spot prices currently on offer from most Western countries apart from South Africa and Australia where F.O.B. prices are as low as $29 and $35 per tonne respectively. A freight contract for shipment of 50% of the total requirements of two and a quarter million tonnes per annum up to 1990 has been signed with Yamashite-Shinmihen Steam Ship Company of Japan.
94.The first 300 MW unit at Moneypoint came on stream in October, 1985, and its capacity has since been uprated to 305 MW. Fuel costs/unit sent out in the start up period to March, 1986, were well above stable budget levels at IR£32.78/MWH. Current fuel costs/MWH sent out are running at Ir£15.5/MWH against budget of Ir £14.5.
95.The Joint Committee supports the E.S.B.’s strategic decision to designate steam coal as its major fuel element for the immediate and, indeed, longer term future. Steam coal is in abundant supply throughout the world with the major reserves located in politically stable Western countries, such as the U.S.A. and Australia. Furthermore, its pricing movements are likely to be politically less volatile than the cartel (OPEC) influenced situation in relation to fuel oil. In addition, the E.S.B. can purchase steam coal with low sulphur content (1%) as against the more normal 3½% in most fuel oils.
96.Since 1979 the E.S.B. has been faced with the invidious situation that 70% of its fuel requirements (30% of total costs) have been controlled by Government directive with no consistent agreed policy relating to price. Twice over the past six years it has been faced with sudden major price increases in both natural gas and peat. In 1979/80 the price of natural gas increased by 70% and milled peat increased by 83%, while in 1982/83 gas increased by a further 42% and milled peat by 33%. This is an operationally impossible situation when one considers that the E.S.B. has to make major plant investment decisions which will not infeed into its day to day operations for seven to eight years. The Joint Committee would, therefore, recommend that the Department of Energy, in conjunction with B.G.E. and the E.S.B., establish a formula for natural gas prices which would have a proportional relationship to the international prices of steam coal and heavy fuel oil and that once this formula is established it should remain in force to the end of this century and be the basis for adjustments to natural gas prices at regular intervals. It is recommended that, associated with this pricing formula, agreement be also reached on the amounts of gas which would be available to the E.S.B. and which would be used by them over the life of the Kinsale field.
97.The Joint Committee is pleased that the E.S.B. and Bord na Móna have agreed a three year supply/price contract on peat. It recommends that a similar long term price formula, as suggested for gas, be established for peat, but which takes as a starting point the currently agreed prices. The ideal basis for these contractual arrangements should be in the context of a national energy policy.
98.In general, it can be said that the subject of electricity prices in Ireland has, particularly in recent years, been the most controversial aspect of the E.S.B.’s operation. The most common view held is that prices of electricity for domestic users is very much in line with those in European countries, but that the costs to industrial users in Ireland are significantly higher than for their European counterparts. The estimated higher industrial prices were up to 1985 said to range from 20% higher for the smaller industrial user to as much as 70% for the very large user.
99.While the E.S.B. does not deny that electricity cost to industrial users is higher in Ireland, it does question the validity of many of the comparisons made. It states that comparisons are complicated by currency exchange rates, government taxes (V.A.T.) on electricity charges, tariff scale complications, hidden government subsidies and negotiated bulk sale costs to very large customers in other countries. It also justifiably points out that in the application made to the National Prices Commission in 1984 for a price increase, it specifically requested to be allowed to implement the approved increase in such a way as ‘to adjust tariffs by a few percentage points to the benefit of parts of the industrial sector’. While the National Prices Commission supported this view, the final approval by the Government was on the basis that the increase be applied equally as a flat increase to domestic, commercial and industrial customers. Since that time Government policy has changed and, as stated by the Minister for Energy in the Dáil, the balance has been tilted in favour of the industrial customer.
Reports on E.S.B. Prices
100.Over the past fifteen years two major inquiries into ESB prices were commissioned by the Government.
(a) Fletcher Report
The first investigation was carried out in 1971/72 by an E.S.B. Investigation Committee which was chaired by Mr. John Fletcher, a former director of a major Swedish electrical utility. This committee was set up following controversary about an E.S.B. price increase of 6% in February, 1971 and a further increase of 7% in June, 1971. Fletcher’s committee compared average prices for domestic and industrial customers in Ireland with those in other European countries and these are shown on the table opposite. These comparisons were taken from UNIPEDE 1970 electricity price comparisons and exclude any taxes on consumption. As can be seen, Irish domestic prices compared very favourably with many of the major European and E.E.C. countries, e.g. German domestic prices were on average almost 60% more expensive. The table for average industrial users shows also that, at that time, Irish prices were very comparable with average European prices, although they were not generally as favourably priced compared with the Irish domestic customers.
(b) Jakobsen Report
101.In May, 1983, the Government announced the establishment of an inquiry into electricity prices which was to be chaired by Mr. E.L. Jakobsen, Managing Director of a major Danish electricity utility. The terms of reference of the Inquiry required it, inter alia, to compare the components on which Irish prices were bases and identify reasons and costs which would make Irish prices higher or lower than other European countries. The following summarises some of the main points of the findings of the Jakobsen Inquiry in relation to electricity prices:
(i)Up to 1979 Irish prices for electricity were competitive or lower than those in other countries;
IRISH ELECTRICITY PRICE COMPARISONS - FLETCHER COMMITTEE REPORT 1973/74
(ii)After 1979 increases in Irish electricity prices generally outstripped those in other European countries, caused by Ireland’s greater dependence on fuel oil for electricity generation;
(iii)Electricity prices for industrial customers in Ireland were 20% to 30% higher than in Europe generally, with heavy industrial users experiencing an even larger price difference of 50% to as much as 70% in exceptional cases.
(iv)Price comparisons for January 1984 showed that for domestic consumers electricity prices were close to the European average.
102.The Inquiry also studied the relationship between industrial and domestic electricity prices in Ireland compared with other European countries. The Inquiry’s view was that over the previous ten years there was evidence of a widening divergence to the disadvantage of industry between Irish and European practice in the matter of relative domestic/industrial prices. Basically, the Inquiry stated that compared with other European countries the difference between domestic and industrial electricity prices reduced between 1973 and 1984. An examination of average E.S.B. domestic and industrial prices/unit between 1973/74 and 1984/85 shows (Appendix viii) that domestic average prices increased by a factor of 6.6 times while industrial prices/unit increased by a factor of 7.1 times.
103.Because of special factors in Ireland, which the Inquiry Report identified and quantified, the E.S.B. is faced with costs 20% higher than faced by ‘average’ utilities in Europe. A table from the Jakobsen report which compares Irish and European prices for January 1984 is reproduced in Appendix (ix). Appendix (x) shows the sharp divergence of Irish electricity prices between 1979 and 1983 compared with those of other European countries. The Irish price escalation between 1971 and 1986 can be clearly seen from the price increase table in Appendix (xi).
Electricity Prices 1985/86
104.In its 1985 Budget the Government made available to the E.S.B. a further daily allocation of 15 mcfd of natural gas (at 30p per therm) which, it was estimated, could save the E.S.B. up to £10 million in 1985 and would allow it in turn to reduce prices for industrial consumers by 2% to 6%. The table hereunder shows Government approved price movements since late 1984.
105.Earlier this year the National Prices Commission was disbanded by the Government which indicated that it is to be replaced by a Fair Trading Commissioner. In the meantime, electricity prices would appear to be directly controlled by the Minister for Energy.
Irish Electricity Prices to 1990
106.It has recently been stated publicly on behalf of the E.S.B. that “there will be no increase in electricity prices before 1989 and there may be more reductions”. A comparison of Irish electricity price levels with those in five other European countries at January, 1986, are shown in Appendices (xii), (xiii), and (xiv). These show that even before the 5% September, 1986, reduction, domestic prices here are very much in line. On the other hand, industrial prices even after recent reductions are from 16% to almost 30% higher, depending on usage levels. This difference will have increased, if anything, in recent months as other countries have implemented price reductions, e.g. U.K. with industrial reductions of up to 6%.
107.It is the view of the Joint Committee that the current stable situation gives the Government a perfect opportunity to equate industrial electricity costs with those of our European competitors and in so doing greatly boost the confidence of the industrial sector. The Joint Committee would recommend that a policy to bring our industrial electricity costs in line with European average prices over the next three years should have full Government support and the cost to the E.S.B. should be fully subsidised by reductions in the following charges:
- hydro-carbon tax
- rates levy
- natural gas prices
Industrial users consumed 3553 million units in 1985/86 at an average price per unit of 6.194p. An average reduction of 15% would cost the E.S.B. Ir£33 million in revenue per annum or Ir£44 million if the reduction were 20% on average. However, this loss of revenue could be offset by an increase in consumption in response to price decreases.
Electricity Consumption Analysis
108.The E.S.B. summarises its electricity consumption over three types of user, i.e. domestic, commercial and industrial. While the number of domestic users would account for most of the 1.16 million customers, the proportion of electricity consumed by each group of user in 1985/86 was as follows:-
These proportions have not altered significantly since 1974/75 (See Table on page 18) except that the domestic element has declined by two percentage points, while the commercial element has increased its share by a similar amount. The relative load pattern of the three sectors is shown in Appendix (xv). The industrial load pattern is the most suitable as it is relatively level apart from the morning start up peak, while the domestic profile is the most peaky and, therefore, least attractive.
109.Consumption of electricity per capita in Ireland is still significantly lower than in the U.K. and other industrialised countries. For example, in 1984 Irish consumption was 2,645 KWH per head while in England/Wales it was over 60% higher at 4.258 KWH. However, the relationship has improved compared with 1971/72 when the U.K. consumption per capita was 107% higher than in Ireland.
110.With the projected excess generating capacity that the E.S.B. is likely to have for the remainder of this decade, it obviously needs to consider ways of increasing its market and, therefore, the use of more of its installed capacity. Appendix (xvi) shows the proportion which electricity has in end use markets. Clearly, in areas such as cooking, water heating, local and central heating, there is scope for increased market penetration. At the moment the main obstacle would appear to be the high cost of electricity relative to competitive fuels such as town gas, bottled gas, solid fuel and oil.
111.Prior to 1970 the E.S.B.’s organisation consisted of a main Board and Executive Board, with the two prong control of a Chief Engineer and a Chief Accountant. Following a major study by the international consultancy firm, McKinsey, a new structure was established including the appointment of a Chief Executive. This structure, with some minor modifications, was still in existence in 1983/84 and is shown in Appendix (xvii).
112.In the first half of 1984 a major organisational survey was carried out in the E.S.B. This was spearheaded by outside consultants, Miller-Barry, supported by an E.S.B. internal Task Force. This has proposed some significant organisational changes, currently being implemented, which are expected to carry the E.S.B. into the 1990’s. An outline of the proposed new structure is shown in Appendix (xviii).
The main changes include
-Reduction of the number of executive directors and associated departments from six to five.
-Creation of a new directorate with responsibility for Strategic Planning and Development.
-Establishment of a new directorate for Corporate Services which will include responsibility for Personnel.
-Establishment of a new post of General Manager - External Services which will report to the Chief Executive.
-Reduction in number of generation regions from four to three.
-Reduction in the number of distribution districts from twelve to six.
113.These reorganisational proposals were, it is understood, not accepted by the four worker directors and were strongly resisted by the Trade Unions to the extent even of a one day token strike. It is also understood that the reorganisation has been implemented down to Divisional Manager level and that changes below that level are currently being negotiated with the Trade Unions.
114.The Joint Committee has the following comments on the Miller-Barry reorganisation changes:-
(a)The economic and customer service benefits are not clearly proven in the report:-
(b)In relation to the sharing of responsibility and work load between the various executive directors, it is noted that the two operational directors seem to have responsibility for over 10,000 employees and the bulk of the E.S.B.’s assets, while Strategic Planning has a total staff of 13. However, the Joint Committee does support the allocation of executive director status to the Strategic Planning function.
STAFF LEVELS AND STAFF COSTS
115.Appendix (xix) gives details of the total numbers employed by the E.S.B. at the end of each financial year (31 March) since 1971/72 together with a breakdown of staff on operations, construction and other work. Appendix (xx) shows a more detailed analysis of the staff at 31 March, 1986.
116.In the financial year 1971/72 total employees were 11,800 and this reduced by 1,000 approximately over the next six years as the effects of the first oil crisis and recession of 1973/75 were experienced. From March, 1978, when total employees were 10,845, staff numbers increased steadily to a peak of 13,600 in September, 1982. This was an increase of over 15% during a period when the peak demand and units of electricity actually declined slightly. Clearly, the E.S.B. got its manpower planning and electricity demand growth forecasts wrong during this period.
117.Since 1983 employment levels have been gradually reduced to a figure of 12,114 at March, 1986. The general consensus view is that the E.S.B. is still significantly overmanned by comparison with other utilities and that the overmanning could be as high as 2,000. The validity of any comparison with other utilities is readily questioned by the E.S.B. which points to special Irish conditions such as numerous small generation stations, long transmission/distribution system, in-house construction and planning manpower, etc. In this context it is interesting to note that the South of Scotland Electricity Board in 1984/85 generated double the E.S.B.’s total units, had a peak load which was twice that of the E.S.B., serviced 50% more consumers, had a transmission/distribution network almost as extensive as that of the E.S.B., yet had total employees of 12,019 against the E.S.B.’s 1984/85 total of 12,454.
118.Following are some projections of the E.S.B.’s total employment levels:
(a)The Jakobsen Report estimated an overmanning of 3,000. It did not specify the basis for this estimate;
(b)The ESB Strategic Plan 1983 - 1988 targets reductions of some 2,500 over the five year period;
(c)The ESB Corporate Plan 1984/85 - 1988/89 projects total staffing levels of 11,000 by March, 1988;
(d)In documentation supplied to the Jakobsen Inquiry the E.S.B. set a 1990 total staffing target of 10,000;
(e)In documentation submitted by the E.S.B. to the Joint Committee a target of 9,930 by March, 1988, is outlined; and
(f)The Corporate Plan 1985/86 - 1989/90 targets a total of 10,700 by March, 1989.
Furthermore, the Chief Executive of the E.S.B. was reported in February, 1985, as accepting the validity of 3,000 overmanning from peak levels. He did, however, at the time draw attention to a reduction of over 1,000 already achieved. While all these varying targets present an unclear picture, it can be said that it is generally accepted by the E.S.B. management that total staffing levels of between 10,000 and 11,000 are achievable within the next five years. The completion of Moneypoint and its associated transmission lines should allow a large reduction in the 1,400 people engaged in that work, of whom over 600 are temporary. Closure of older, smaller generating stations as Moneypoint comes on stream is also a possible area for manpower reductions.
119.In the Fletcher Report in 1972, it was estimated that overmanning of the order of 15% existed at that time in the E.S.B. Areas for particular comment were manning levels in hydro-electric stations and distribution departments. The Jakobsen Report in 1984 estimated overmanning levels of 3,000 staff. The areas highlighted in that report included hydro stations, peat stations and transmission/ distribution departments and head office and administration. The Joint Committee recommends that, in consultation with the various staff unions, the E.S.B. should aim to reduce total employment levels progressively in line with its Strategic Plans.
120.Criticism of E.S.B. salary and payment levels in both the Fletcher and Jakobsen reports is refuted by E.S.B. management and by ESBOA, the ESB Staff Union, in its submission to the Joint Committee. Appendix (xxi) shows the total staff cost per E.S.B. employee over the past fourteen years. These costs include superannuation contributions, shift allowances, call-out payments, expenses and other payments which would not allow these figures to be compared with earnings of other groups. However, year-on increases could be compared with other industries and certainly over the period average cost per employee increased significantly faster than the Consumer Price Index level. For instance, over the two years 1980/81 and 1981/82, average staff costs increased over 57%, with an increase of almost 34% in 1981/82 alone. This reflects the cost of the Comprehensive Industrial Relations Agreement between the Unions and the E.S.B. which was implemented in 1981 and was estimated to have increased staff costs by up to 19% in that year. Further smaller staff costs would have arisen from this agreement in the following two years. It is likely, therefore, that E.S.B. staff costs are higher than those of industry or State bodies generally at the present time.
121.A total of seventeen different unions are recognised by the E.S.B. as having the right to represent employees working within the company. It is not surprising, therefore, that industrial relations are difficult with strong resistance to work changes or modifications in working conditions. The situation in the 1960’s was particularly difficult as can be seen from the following table which appeared in the report of the Committee on Industrial Relations in the E.S.B. in 1968, or as it is more commonly known, the Fogarty Report.
NUMBER OF STRIKES BY EMPLOYEES IN EACH CATEGORY
122.Clearly, the 1960’s was an extremely difficult period and hence the reason for the study by the Fogarty Committee. While the years since 1969 have shown a market improvement, occasions like the industrial dispute arising from the transfer of staff from Ringsend to Poolbeg still tend to occur.
123.The E.S.B. has historically operated a policy of no compulsory redundancy. To reduce or control numbers in the past they have generally used policies of limiting recruitment and natural wastage. However, with the mothballing of generating stations in recent years, the need arose to accelerate this situation. A scheme to encourage voluntary redundancy was devised. This offers generous severance conditions equivalent, it is understood, to about six weeks pay per year of service to those aged under 50, and equally attractive early retirement benefits to those over 50. Despite this, the numbers opting for voluntary severance amounted to only 355 in 1984/85 and 149 in 1985/86.
124.The mothballed generating plant serves to illustrate the difficulties encountered by the E.S.B. in its efforts to reduce numbers. Ringsend Generating Station was mothballed in April, 1983. By June, 1986, the numbers had reduced to 46, still not quite down to a mothball crewing level. In the intervening three years or so, the staff there had enjoyed their previous operational conditions, including shift allowance, overtime, etc.
125.Major disagreements are generally referred to an E.S.B. Industrial Council whose recommendations are not binding. Any union represented in the E.S.B. can take unilateral industrial action which could halt the complete generation of electricity and, hence, industrial and commercial activity in the country. The Joint Committee would urge that every effort be made by the E.S.B., in conjunction with the unions, to avoid any development likely to lead to industrial action.
126.The E.S.B.’s ancillary activities can be sub-divided under the following headings:-
(i)Fisheries - Commercial and Conservation Operations;
(ii)Consultancy Operations; and
(iii)Trading Activities - which can be further sub-divided as follows:
(i) Fisheries & Conservation
127.In return for the water rights and the freedom to use the rivers for hydro-electric schemes, the E.S.B. has a statutory obligation to preserve and foster the fish life. These activities have broadened in recent years and they now include joint ventures and further developments in fish farming.
128.This operation is basically a cost to the E.S.B. and has been accounted for separately in the annual accounts. The total cost in the ten year period ended 31 March, 1985, totalled over Ir£4.5 million and it has increased annually from a level of £170,000 in the mid 1970’s to Ir£826,000 in 1984/85. In this context the view exprdssed as follows by the Committee in its report on Udarás na Gaeltachta is relevant:-
“It considers that the Department of Fisheries and Forestry should initiate an integrated programme for the commercial development of salmon farming and that, preferably, implementation aspects of this programme in relation to Commercial State-sponsored Bodies should be co-ordinated by an tÚdarás in view of the fact that the development opportunities are mainly located in the Gaeltacht regions. The objective should be to centralise responsibility as far as practicable, possibly within one State agency”.
(iii) Consultancy Operations
129.The overseas consultancy of the E.S.B. was started in the mid 1970’s primarily to provide useful employment for surplus engineering staff. It has been largely concentrated on Middle Eastern Countries, in particular Bahrain and Saudi Arabia. The numbers employed in consultancy had grown to 250 in the financial year 1983/84, earning an annual sales revenue of Ir£13.0 million and an annual profit as high as Ir£800,000 per annum. The sales and profits of consultancy activities are shown in Appendix (ii). Sales revenue over the past eight years has totalled Ir£68 million with total profit earnings over Ir£4.8 million. In 1985/86 the income and profits of consultancy activities declined due to the $ exchange rate. A break even level was just achieved and the consultancy market is likely to be increasingly more competitive with the decline in oil revenue in the Middle East countries.
(iii) Trading Activities
130.The trading activities have, in the E.S.B.’s view, been an essential part of its efforts to promote the sale of electricity and to provide and set standards for appliance repair and contract installation work. The continued need for these operations, which have never been consistently profitable, has been questioned on numerous occasions.
131.In the Fletcher Report in 1972 a target profitability of 5% of sales turnover was recommended for these activities. The more recent Jakobsen Report recommended that “given the long term trend of unsatisfactory performance, we recommend that the E.S.B. divests itself of the appliance trading, installation trading and appliance repairs businesses”.
132.Overall, over the past twelve years, the sales turnover of these activities, which employ over 400, has totalled Ir£135 million and losses totalling nearly Ir£9 million have been incurred, of which Ir£8.2 million have occurred in the past 7 years. The sales/profit results for each operation are shown in Appendix (ii).
(a) Appliance Sales
133.This covers the operation of the E.S.B. shops and sale of electrical appliances. Jakobsen estimated that E.S.B. sales in 1977 represented 12% of the total market. This operation has had sales totalling Ir£86 million over the past 12 years, with losses totalling Ir£5.8 million. Losses over the past 7 years have amounted to almost Ir£6½m. Losses reduced from Ir£0.9 million in 1984/85 to Ir£0.52 million in 1985/86 and a breakeven is targetted this year. The Joint Committee was informed that over the past year an increase in sales volume of 30% was achieved.
(b) Appliance Repairs
134.This activity has been consistently unprofitable. In the past 12 years losses totalling over Ir£3 million have been incurred on sales of £14 million. This operation has been subsidised for many years by a ‘Safety and Conservation’ transfer from the general electricity account. Over the period 1980/81 - 1984/85 the subsidy totalled Ir£3.3 m. If this subsidy were not available the losses would have greatly increased.
135.An amount, calculated at 75p per customer “in recognition of the total safety and social role of Appliance Repairs and Installations Contracts”* is the basis for the funding of the ‘Safety and Conservation’ account. The Joint Committee considers that the historic basis for this subsidy no longer exists and it recommends that it be discontinued.
136.This operation had sales of over Ir£35 million since 1974/75 and it realised a total profit of £160,000 over that period. The operation also receives a ‘Safety and Conservation’ subsidy which amounted to Ir£326,000 ill the period 1980/81 - 1984/85.
137.There does not appear to be any valid practical or commercial reason why these ancillary trading activities should be continued by the E.S.B. The Joint Committee concurs in the recommendation made in the Jakobsen report that the E.S.B. divests itself of the appliance trading, installation trading and appliance repair businesses.
Moneypoint Commercial Coal Operation
138.The power station at Moneypoint will use two and a quarter million tonnes of steam coal per year when fully operational. While the jetty at Moneypoint can handle bulk cargoes of coal of 120,000 tonnes plus it will be underutilised in meeting the power station’s requirements.
139.Approximately 450,000 tonnes of coal is used by industrial enterprises annually in Ireland, largely by Cement Ltd. and some of the major dairy co-operatives. Much of this coal is similar in quality to that which will be imported by the E.S.B. which believes that with its purchasing power and low freight costs it would be able to offer savings to those industrial operations as well as generating some profits for the E.S.B. It would be the E.S.B.’s intention to distribute this coal from Moneypoint either by road transport or barges or in some cases small freighters. A further one million tonnes of coal is used annually by domestic users. The E.S.B. believes that it could supply a portion of this by screening suitable quantities of its own supplies.
140. It is understood that the E.S.B. has obtained planning permission for the distribution of coal both by road and sea rom Moneypoint. The priority at Moneypoint must be the successful start up and stable operation of the 3 × 305 MW generating sets. The Joint Committee is opposed to the E.S.B. becoming involved in the sale and distribution of coal because of the likely adverse impact on employment, coal distribution companies and port authorities.
STRATEGIC AND CORPORATE PLANS
141.The E.S.B. submits yearly to the Department of Energy a corporate plan which covers a rolling five year period and it also produces an annual detailed operational budget. A strategic plan was produced in 1983 and submitted to the Department of Energy. The Joint Committee has the following comments on these plans:
(a) Strategic Plan 1983 - 1988
142.This plan was submitted to the Department of Energy in 1983. In the document the E.S.B. redefined its mission for the 1980’s as follows:
“The primary objective of the E.S.B. Strategic Plan 1983-1988 is to make major changes to achieve substantial price improvement”.
143.In the Joint Committee’s view the plan is inadequate in both content and presentation. For an organisation of the size and professionalism of the E.S.B. it compares very badly with the standard of strategic planning of some of the major commercial Irish public companies. It is not a detailed or well laid out document. It contains far more history and philosophy in relation to the E.S.B.’s mode of operation and social contributions than hard facts about future levels of electricity prices, production costs, borrowing levels and other important operational facts which would be essential in setting out how, and to what degree, its stated mission was to be achieved. No firm projections of operating revenues and costs are shows and while areas in which each department could achieve savings are listed, these hoped-for improvements are not consolidated in a profit and loss projection.
144.The one area where some hard facts are given is a list of generating stations recommended for decommissioning and closure. These can be summarised as follows:-
145.Bord na Mona and the Department of Energy did not react favourably to these proposals, particularly insofar as they related to the milled peat stations and an instruction from the Minister for Energy to the E.S.B., which was made public at a Press Conference on 1 June, 1984, greatly reduced the plans for decommissioning many of the small, high cost, peat stations. As a result, the Strategic Plan 1983-1988 died a quick death.
146.The first of these Plans is no longer of any relevance. The more recent Plan was finalised in May, 1985, and already some of its major assumptions, particularly on electricity price movements, are out of date. For reference purposes the following tables from the Plan are reproduced in Appendices (xxii), (xxiii) and (xxiv):
-Profit & Loss Account (A)
-Financing Plan (A)
-Financial Ratios - Scenario A.
Senario A which each of these tables was related to was based on -
(a)No price increase 1985/86
(c)Recovery of Accumulated Deficit in subsequent years.
An extract from a more recent E.S.B. budget projection showing a forecast Profit/Loss Account for 1985/86 and a budget Profit/Loss Account for 1986/87 is reproduced in Appendix (xxv).
(c) Future Strategic Plan
147.Arising from the Miller-Barry reorganisation report and the subsequent appointment of an Executive Director of Strategic Planning, the E.S.B. is carrying out a major revision of its Strategic Planning. The Joint Committee believes that this revision is long overdue and it hopes that the quality and breadth of the next plan will be a significant improvement on the 1983/1988 version.
148.The following statement is included in the Corporate Plan 1985/6-1989/90:
“Many options are already identified in a general way and these, together with any others that may emerge, are about to be addressed and will be included in a new Strategic Plan for the company which we hope to develop during 1985.”
The Joint Committee understands that the plan is not likely to be available until early 1987. It does recognise the need for time to develop a new philosophy on strategic planning and it trusts that the recommendations made in this report will be taken into account by the ESB when framing the Plan.
MEDIUM TERM PRIORITIES
149.The key elements of the E.S.B.’s operations are covered in the Summary of Recommendations. Some of the key issues are highlighted in this Chapter.
(i) Excess Generating Capacity
150.By any standards the E.S.B. has currently over 600 MW or 30% of surplus generating capacity fully manned. This could increase further between now and 1990. This matter was addressed by the E.S.B. in the Strategic Plan 1983/1988 but action was over-ruled by the Department of Energy. If this policy continues, the cost to the consumer must be recognised.
(ii) Operating Efficiency
151.The E.S.B. is to be complimented on the operating improvements achieved to date.
(iii) Medium Term Fuel Costs
152.Current coal costs would appear to be significantly lower than those agreed between the Central Electricity Generating Board and the National Coal Board in the U.K. The E.S.B. has an advantage of at least 10% here. Informed views are that international steam coal prices will decline further to the E.S.B.’s advantage. Similarily, fuel oil prices will not increase substantially and must ensure a favourable price adjustment in natural gas prices.
(iv) Financing Costs
153.Interest rates and currency exchange rates must reduce the E.S.B. debt financing (and refinancing) costs in the short term.
(v) Staffing Levels
154.An overmanning level of 2,000 must be addressed, particularly as it represents an annual cost of nearly Ir£34 million. Obviously, this overmanning has a direct relationship to the over capacity mentioned above.
(vi) Electricity Prices
155.Reduced operational and financing costs, allied to lower capital commitments over the next five years, gives the E.S.B. the necessary breathing space to produce a strategy to align Irish and European industrial/commercial electricity prices during that period.
(vii) Stragegic Planning/Annual Reports
156.The Joint Committee supports the organisational upgrading of the E.S.B.’s Strategic Planning function and it suggests that the following matters be covered in each Annual Report:
-Projected Growth Rates
-Projected Generating Capacity
-System Generation Efficiency
-Projected Fuel Mix
-Price Adjustment Plans
-Capital Investment Plans
-Internal Financing Targets
-Total Manning Targets.
157.The Joint Committee received written submissions from individual ESB unions and from a Joint Action Committee representing a number of unions in the ESB Athlone District, all of which offered to give oral evidence. However, having regard to the large number of unions in the ESB the Joint Committee decided to invite the ESB Group of Unions to nominate representatives to give oral evidence to it. Although the Group of Unions, through its Chairman, did inform the Committee of its acceptance of the invitation, the Group did not find it possible, for stated reasons, to appear before the Committee on various dates suggested to it for a meeting.
158.For this inquiry the Committee appointed CBH Associates Ltd., Management Consultants, as specialist advisers. It wishes to express its thanks to Mr. Neil Hurley of that firm for his invaluable assistance throughout the inquiry.
The Committee is indebted to all those who provided it with written and/or oral evidence.
9 December, 1986
(Signed) FRANK PRENDERGAST,
Chairman of the Joint Committee.