Towards a private ESB

The government has announced that it will sell a minority share of the ESB. This is welcome news. Privatization of non-core activities is a matter of principle. The ESB has paid poor dividends. It has frequently been used to bankroll projects of dubious commercial (yet clear electoral) value. Selling a minority share is a low risk strategy for price discovery and much better than a fire sale.

So far so good. However, the government also announced that it would keep the ESB “as an integrated utility”. The ESB is a conglomerate. It generates power, it owns the transmission network, it sells electricity, and it provides consultancy services.

The network is a natural monopoly, and should probably not be sold. The rest of the ESB can be safely left to the market (if properly regulated).

As an integrated utility with a natural monopoly, The ESB enjoys considerably market power. The nominally independent transmission system operator, EirGrid, gets electrons from ESB, transmits them over lines owned by the ESB, and delivers them to the ESB (who then retails them). The ESB’s dominant position is the main reason why few companies have entered the Irish electricity market.

Today’s announcement suggests that the government plans to continue the current situation. It would make more sense to sell the network to EirGrid. The price of such a sale matters because the ESB is part-owned by an ESOP; and because the ESB is using the network as collateral for cheap loans.

The future ESB will therefore face three demands, compared to two now. The workers will want well-paid jobs, as they had in the past. The political masters will want their pet projects, as they had in the past. And the private owners will want dividends. The consumer will have to pay for all of this.

112 replies on “Towards a private ESB”

Didn’t FG promise a more open government ? They should publish the policy advice and analysis on this important decision.

Judging from Pat Rabitte’s comments on Morning Ireland last Monday it definitely seems like the troika are forcing the Government’s hand on this decision. I agree with Richard that selling the network element of the business makes little sense but the reasons they don’t want to unbundle are obvious enough… it raises the value of the partial stake that will eventually be sold and it avoids having to tackle the unions on the issue.

Thankfully the Government are indicating that they are only going to sell a minority and not a majority stake (myself and Eoin Reeves have commented on the issue of retaining control over key strategic industries before, see http://www.irishtimes.com/newspaper/finance/2011/0617/1224299067839.html). I would hope that the Government ensures it never retains less than a majority stake in the ESB in the future if the plan is to keep the comapny in its current integrated structure.

The big question (apart from how much the Government plans to sell, the sale method that will be used etc.) is what will happen to the proceeds from the sale? Will it go towards paying down debt (as the troika will no doubt push for) or will it go towards investment in infrastructure (as per Fine Gael’s NewEra plan)?

The substance of this announcement was reasonably predictable, but it (and Richard’s assertions) raise a host of questions.

1. How does the proposed review that will be presented to Government by end-Nov. fit with the detailed assessment of the electricity and gas sectors on the Troika’s ‘to-do’ list which is slated to kick-off by the end of this month and finish end-Q2 2012? The Troika tem will want to tick their box. And where does this leave BGE – and the other semi-states? The EU/IMF MoU requires outline privatisation proposals by year end.
2. And what is this nonsense about the energy policy and regulatory framework? The areas where genuine efficiencies may be achieved that would benefit consumers are related to the ownership, structure, regulation and financing of the ESB. Does this mean, as Richard seems to suggest, that nothing of any substance will be done in these areas and final consumers will be hosed even more than they are at the moment?
3. How does this ‘integrated utility’ fit with the EU Third Legislative Package which requires effective unbundling – even if it falls short of full ownership unbundling (the preferred option)? The minimum requirement should be effective financial ring-fencing of the network businesses. Richard notes that the ESB uses the network as collateral for cheap loans. But it could raise these cheap loans as a stand-alone, regulated network business. Indeed, its borrowing costs would be even lower as borrowing for a financially integrated low risk network business and a higher risk energy business results in a higher cost of borrowing.
4. Does the market power of this integrated utility not raise concerns for DG COMP – not to mind DG ENER? Richard sees this market power as a barrier to entry, but it is much more than this. The lack of a financial ring-fence around their networks mean that the ESB and BGE can cross-subsidise their energy supply businesses. (The excessive network revenues awarded by the CER allowed BGE to discount its electricity prices to pull customers from the ESB.) The fact that they can do this and that government will never allow the value of their capital to be damaged is a much bigger deterrent.
5. Why does the monopoly nature of the networks prevent consideration of privatisation? Other countries manage perfectly well with private sector ownership of energy networks. The biggest problem with public ownership is that the state has directly invested not one cent to part-finance massive increases in investment. The book value of the ESB networks has more than trebled under regulation and the CER has been forced to extract financing up-front from consumers to compensate for the failures of successive governments – in addition to the normal return of, and return on, investment. That’s one reason why electricity and gas prices in ireland are so high.
6. Why should the sale of the transmission network to Eirgrid be considered? The Government has set its face against this and is seeking to exploit a loophole in the 2009 Electricity Directive. The assets should have been transferred when Eirgrid was established. There’s little point doing it now.

This is a perfect example of the usual half-arsed, half-baked fix that ticks all the boxes for the players exerting pressure on the Government, but will leave final consumers even worse off. It should meet the Troika’s requirement (the early announcement moderate the Troika’s desire to sell a bigger share); the minority stake should keep Labour and the unions on board; and this and the retention of the integrated utility should satisfy the management.

The irony is that splitting the network and supply business and letting the latter fend for themselves would allow the Government to sort out regulation, revalue the networks, increase the gearing and extract some equity that would exceeds the likely proceeds of the minority stake it is proposing to sell. The supply business would have to compete on a level playing field with new entrants and consumers and citizens would benefit via lower network charges and more effective retail competition.

Yes, this seems to be in response to EU/IMF pressures to up the pace of privatisations. It is the only area in which they are dissapointed with our government’s performance in fulfilling loan commitments. Part-privatising the ESB is a risky strategy as it is a company which has worked very well in the past and this may be impaired by the challenge of improving shareholder value.

Hopefully the ESB can have a better time of being a part-privatised company than Aer Lingus or the fully-privatised Eircom.

@Richard

“It would make more sense to sell the network …..”

Quite probably you are right but IMHO it would probably be better wait ifor at least two years for the following reasons :

1) There is too much market uncertainty to calculate an appropriate price.

2) As the ESB workforce will probably get some part of the shares (as was the case in previous privatisations) the possibility of an attractive sale would also make it easier to negotiate more competitive salaries with the ESB unions.

3) We have no idea if the Euro is going to dissolve or not . If it does dissolve it could could spark a crisis if it is not dissolved amicably.

4) If a European crisis erupts a strategic asset like ESB would have to remain in the stateś hands until the “all clear” was sounded. Even if the network was sold to Eirgrid who would the eventual owners of Eirgrid be?

5)If Ireland feels it has to recourse to Zero deficit rather than three percent in a “Post Euro currency” European Union than the income (after the “all clear” has sounded) would come in very handy.

Your post was very informative and the arguments worth considering. I just feel that Ireland needs to be very cautious at the moment. Hopefully if relevant European leaders stop “can kicking” we can consider the proś and cons in a more certain economic environment.

@ Richard

I take it you have issue with the Frontier report then:
http://www.dcenr.gov.ie/NR/rdonlyres/7781AA66-9ED5-468C-995C-4340900B1597/0/FrontierReportonElectricityTransmissionAssetsPublished.pdf
or at least Pat Rabbittes of it.
Any chance of outlining what specifically you have issue with.
I’m glad to hear you’re not singing from Colm McCarthys hyme/report sheet. The guy want the wires and poles sold!

I fail to see the benefit in selling it to Eirgrid. Though I also fail to see what you mean by the ‘Network’. The Transmission network, the distribution network (What Colm advised to sell) or both?

Why not keep ‘Networks’ and all the assets in one company. Sell ESBi, PowerGen, Electric Ireland (formly customer supply), Eamon Ryans – Ecars and the rest?

@Richard
I am not sure what to say – but you just don’t know where wealth comes from , you are a fully paid up member of the depletion economics school.

Ardnacrusha would never had been built under the current market state dogma – it would have been seen as a waste of capital , because in some peoples eyes capital has a short half life.
Yet even after all these years it has value.
The west is on the eve of destruction.

@Paul
All agreed. Unbundling the ESB may well be harder after a partial flotation, depending on what the prospectus says.

@Livonian
EirGrid is state-owned. It is not on the list of companies to be privatized, because it too is a natural monopoly. Private monopolies require stronger regulation than the Irish government has been capable of. Public monopolies have not been a picnic either but (I believe without much evidence) not as bad as private monopolies would have been.

I guess this is why fiscal spending is so ineffective in the west – it just goes to making profits which is just one side of the profits / wages coin.
The commons can go to hell – I am dismayed – why should utilities pay a dividend ?
That means less money flows into capital projects….. down and down we go -where it stops nobody knows.
The nation state is dead , but they should make it official.
All republican ceremonies should stop – they are making a mockery of a 400 year experiment that is now over.
But this destructive depletion of the commons for private gain is a old one – it is always a hallmark of empires on the road to perdition & dissolution.
Begins at 6.00
http://www.youtube.com/watch?v=qMMU6_CjQtQ

@The Dork

Yes. Silvio, fair bunga play to him, has just issued a health warning to those good folks around Vesuvius not to touch the Ash from All those Anglo_Irish Promissory Notes burning in the big FIRE – even the cremated anglo_irish_ash remains Toxic.

Course we could have put them in The Ould Tee_Shock’s Peat Burning ESB plant in Ferbane Offaly … but the anarchic turf-cutters were having none of it – and the environmentalists were out in force as well.

@David
Whats the Anglo – Irish Prom Notes half life , maybe its best to bury it in Tara mines.
Ps good show on BEEB 2 tonight about Nuke power and its safety from a pro nuke physicist perspective.
The reality of the situation is that money is locked up in the shadow banking sector – deindustrialisation is inevitable when you do not invest in the physical world.

“The network is a natural monopoly, and should probably not be sold. The rest of the ESB can be safely left to the market (if properly regulated).”

If, as you suggest, the transmission asset were transferred to Eirgrid (not sold because Eirgrid have no assets to speak of and would find it hard to leverage such purchase), there would hardly be anything left of value.

The value of ESB is in the transmission assets and its generation portfolio, or at least those parts of generation portfolio developed overseas by ESB International.

The legacy generation (in the past known as ESB PowerGen) is less attractive because of the fixed costs associated with grossly overinflated salaries, heavily unionized workforce and inefficient make-work practices. Legacy generation was in recent years merged with the new generation portfolio under the new name ESB Energy International in the hope that some of the commercial acumen would rub off the old PowerGen. Spinning the generation off on its own would make commercial sense and would attract interest. However, the current owner would be well advised to deal with the fixed costs and other inefficiencies first.

The ESB Networks is in a better condition but as a business it only makes sense with the assets. Without the assets ESB Networks is a large O&M business which would struggle to maintain the scale against the competition. Move assets to Eirgrid and they will tender out the O&M work that ESB Networks do just like they do with the engineering services.

The consultancy business derives 80% of turnover from ESB Networks. It used to be an overseas consultancy brand but these days it has few projects abroad and has lost the competitive edge. At one stage ESB International was wining high value contracts for managing utilities (Georgia, Kosovo, south-eastern board in the US for example) but that business has disappeared. The few T&D and O&M contracts abroad pale in comparison with the scale of the likes of PB Power or Mott MacDonald. ESB International suffered loss of competitiveness due to overinflated wages (little less so compared to ESB Networks and the PowerGen). It has also suffered from a loss of strategic direction, largely because for years ESB wasn’t really sure whether ESBI should pursue external business or focus on being an engineering back office for ESB Networks. The wages in ESBI are 20-30% higher than those in the Irish branches of PB Power and Mott MacDonald and the only reason this was possible for ESBI to sustain is that ESB Networks are giving work to ESBI without tendering. Float the consultancy on its own and ESB Networks would immediately be obliged to tender out the engineering services. If anyone was to buy the consultancy, to make it a viable business in the competitive environment in Ireland and abroad, they would have to deal with renegotiating employment contracts and restructuring the business. This would be a lot easier in ESBI than in the Networks and generation as ESBI is a lot more of a commercial business and majority of workforce are on standard private sector contracts. But even restructured the consultancy may be worth about one week of interest on bailout funds.

Finally, I cannot think of any reason why anyone would want to buy Customer Services or Electric Ireland as they are now called as a separate entity.

To top it all, there is an elephant in the room in the shape of the deficit in the legacy defined benefits pension scheme. This is a civil-service like pension scheme but unlike their civil service brethren the ESB defined benefit retirees are not paid by fleecing the taxpayer (they are but in a different way). Instead this scheme is funded and – you’ve guessed it – underfunded to the tune of E2b.

To derive maximum value from this sale, it would probably make most sense to restructure the consultancy business and the generation and to spin them off as separate entities. The networks (with the assets) together with Electric Ireland also make sense but would also need to be restructured and made to operate in a more cost-effective manner. This would mean picking a fight with the unions and I know where my money is when it comes to the willingness of successive Irish governments to do so.

It is not at all surprising that the government is going to exercise the least-hassle option and sell a stake in the integrated utility without attempting to maximize the value of the company first.

We will see what the markets will say. And you are right – we know who is paying for all this and will continue to do so.

@Dom
The transmission network can be sold at a symbolical price from one state company to the other. The ESB ESOP would lose out, but then again they did not take a pay cut like the rest of the public sector.

The price should not be too symbolical, as that would bankrupt the ESB.

@all

And Aer Lingus 25% (flying under the radar ….)

‘Informed sources said last night any sale would involve clauses that would protect Aer Lingus’s valuable Heathrow slots being used for access to Irish airports and would also ensure a continuance of the brand name.’

??? clauses??? santa_clauses I suppose
http://www.irishtimes.com/newspaper/frontpage/2011/0915/1224304143716.html?digest=1

@all at all

An Bord Skip Neu_Nua on Disposable State Assets

(1) NAMA
(2) Dublin Docklands Development Authority DDDA
(3) Moriarity Tribunal (all personnel included)
(4) AIB
(5) BOI
(6) The Entire Justice System (no justice so why do we continue to pay)
(7) A N Others

@Richard Tol

Were you wearing the Green Gansey on the radio this morning? Your snapshot is working wonders down under – I hear Richie McCaw is on medication for nightmares (we have Tony Buckley walking around with a wig and a ponytail roaring ‘I’m TOL – WHERE’s ME_CAW) – I’m makin a killin with PaddyPower.com on Samoa – get back on the Telly and don’t shave whatever you do – don’t even think about a haircut.

@Richard,

All agreed? Somehow I doubt that.

In any event, what gets lost in all this heat generated about privatisation – ‘strategic assets’, ‘selling the family silver’, ‘fire-sales’, etc – is that privatisation is on a separate dimension to the overall thrust to ‘liberalise’ energy markets – the introduction of competition and choice of supplier – pioneered in Britain and now being pursued throughout the EU.

And neither Britain nor the EU generally have solved a fundamental problem. The bulk of the assets – generation plants, electricity wires, gas pipelines – are long-lived, specific assets. There are specific in that the contractual arrangements around them are specific to the parties concerned and specific in that the assets have little, if any, value in any alternative use.

Providers of finance – either equity or debt – will not finance invetsment in these assets unless they have a cast-iron assurance that will they recover their investment at an appropriate risk-related return. The traditional approach was based on explicit or implicit long term contracts. In the US, with most of these industries in the private sector, the reliance was on explicit long term contracts and these have been modified over time as the industries have been de-regulated, but the fundamental assurance of investment recovery remains intact.

In the EU, with much of these industries in public sector ownership the ability of the state via its corporatised integrated businesses to levy whatever prices were required and the explicit or implicit back-stop of a sovereign guarantee provided the necessary assurance. But as the EU has progressed energy market liberalisation, it has found it difficult, if not impossible, to convert these implicit contracts into explicit long term contracts that would provide the assurance of investment recovery to providers of finance.

In the US, local distribution companies (LDCs) providing a bundled (electricity and wires or gas and pipes), effectively monopoly service act as credit-worthy counterparties to enter into these explicit long term contracts with electricity generators, gas producers or gas transmission pipeline businesses. The roll-out of retail competition in the EU means that retail suppliers have no assurance of retaining their customer base and are unwilling and unable to enter into these long-term contracts. The roll-out of retail competition in the US has matched the development of liquid wholesale markets that reduce the universal requirement for these explicit long-term contracts. In the EU these markets are puny and are unable to take the weight being imposed on them to reduce the requirement for long-term contracts.

As a result, regulators have been forced into the breach to provide the assurance of investment recovery providers of finance require. And, not surprisingly, they have been captured by the businesses they have been statutorily empowered to regulate. “If you don’t award us this amount of revenue this power plant won’t be built, or these power lines won’t be constructed or these gas pipelines won’t be laid – and the lights will go out and the gas won’t flow”.

For example, in Ireland, the CER provides a capacity pot (paid for by consumers) to pay generators to construct plant and make it available. And it awards the ESB and BGE Networks whatever revenue they will settle for (again paid for by consumers) to make sure the electricity and gas stays flowing. And, to top it all, because successive governments have refused to contribute any direct equity financing (and generally extracted dividends) in the face of huge demand for investment financing, the CER has been forced to ramp up network revenues and tariffs to extract some of this investment financing up-front from consumers. So consumers pay to finance some of the investment up-front and then pay for the return of, and return on, all investment.

So, perhaps, it is understandable why the Government moved so quickly to keep the lid firmly shut on this can of worms. There was no way it could allow a detailed 9-month assessment of the electricity and gas industries to be conducted (as specified in the EU/IMF MoU). The previous government but one commissioned Deloitte to do a major electricity industry review, but was able to close out any consideration of these issues. This Government could not be assured that it would be able to do that again under the nose of the IMF. (Pulling the wool over the eyes of EU officials has become an art form – and they actually seem to enjoy it.)

It also suits the Troika and the Government because the Government’s willingness to take steps on privatiation may be contrasted with Greek tardiness. And the CER’s solid track record of hosing final consumers to award whatever revenues the ESB and BGE demand means that there will be no shortage of bidders to buy a minority stake in the ESB (and probably, in BGE) and to get their noses into this overflowing trough provided so generously and uncompainingly by Irish consumers.

If those workers get a cushy tax free windfall I’ll scweam and scweam and scweam.
Whatever is sold, and for how much, we are the shareholders, not de workers.

@Sarah Carey

Flogging the serfs really turns you on – doesn’t it. Spose one is entitled to one’s fetish …

p.s. the wine Sarah – the suspense is killing; the rumour, from a usually reliable source, is that it was BLUE NONE 😆 Can you confirm? The script is written and the producer/director is ready to roll …. you, of course, are invited to play yourself.

Richard,

In my view, the entire debate on ESB pay-cuts is pretty confused. The ESB is a commercial company and the logic that the ESB should take a pay cut just because the public service did, does not stand up to scrutiny.

Rather than imposing across the board cuts (which are equally as bad as the across the board raises – the result of collective bargaining) the ESB should be made to operate as a commercial entity with the sole purpose of providing customers and the owners with value. Thus the wages woukd be determined by the market and the ESB would be in position to reward talent and cut the wages of slackers. This would also address the public sentiment towards ESB wages. Neither is the case now.

The non-transparent and ad-hoc manner in which ESB has dealt with the matter so far (random cuts to senior and middle management – largely unknown to public) did not help either.

Bear in mind that ESB is now facing genuine issues with funding. It has recently obtained own credit rating and now the financials are under scrutiny of rating agencies and KPIs will have to improve.

@ Richard Tol
+ 1

I cannot believe we are thinking of selling another network.

The State should always try and avoid doing things it does poorly (especially HR management), but retain things it does well (like investment in infrastructure, and control of natural monopolies).

I really don’t know what will have to be done to get this message across to government

@Richard Tol

The ESB used to be a vehicle for creating well-paid jobs. Now it is also used to support renewables policy and electrification of transport.

Those damnable renewables, eh? God forbid the democratically elected government should try and implement policy though entities it has a stake in. This short termist, market fundamentalism of yours is truly tiresome.

@Aidan R
“SB has frequently been used to bankroll projects of dubious commercial (yet clear electoral) value” ….What are these?….

What about the amounts of ESB sponsorship for various events? What has these to do with delivering cost-effective electricity supplies where it is the dominant incumbent?

@Shay,

If you have no interest in seeking out the most efficient means of achieving a policy objective (or a number of policy objectives which may conflict) and if you are perfectly happy to pay more than you need to have this objective achieved, that is your choice. And if you are happy that a ‘democratically elected government’ abuses its executive dominance to impose excessive costs on all citizens, that is also your choice.

But it gives you no right to criticise and malign those of us who have an interest in ensuring value for money for energy consumers both now and in the future and who believe policy decisions should emerge from open scrutiny by the Oireachtas – and not presented as a fait accompli by government following lobbying and politciking by vested interests behind closed doors.

@Shay
It is inappropriate to conduct public policy through discretionary power over a state-owned, supposedly commercial company. Democratic control is indirect. Scrutiny is limited.

Regardless of what you think about the ends, the means are wrong.

I disagree with the idea that the ESB has no value without the grid.

Indeed, I think we will not get anything like the true value of the Grid in a sale, unless we simultaneously sell Eirgrid.

What private operator wants to buy a transmission grid, only to discover that they have no right to operate it? While Eirgrid has control of the grid, the ownership of it is not nearly as valuable as its true worth.

Therefore, full decoupling, prior to the sale of ESB will not have an unduly negative impact on the sale. Indeed, it is crucial if the sale is to achieve a fair value.

Why is it inappropriate to conduct public policy through the ESB?

If ESB is a commercial company then why does it discourage its customers from using its product? ESB is a regulated monopoly utility with commercial subsidiaries like ESBI. ESB is regulated by the Commission for Energy Regulation. The Chairman and CEO are answerable to the Oireachtas energy committee and to the major shareholder, the minister, who is democratically elected.

What is the alternative means to reach the European and Irish policy objectives for renewables use by 2020? Are you thinking taxation or subsidies or something else? I would be very interested to hear the alternative.

If decoupling goes ahead, then I would support the general approach of a part-privatisation.

Indeed, I think part-privatisations have worked well where they have occured. Shareholders scrutinise the business, identify and address waste, and prevent its usage for political ends -yet at the same time, the State retains the power to pursue legitimate aims.

Aer Lingus has really raised its (business) game since part-privatisation. Restrictive work practices have been addressed, unprofitable sectors have been closed or sold, political influence has been ended -yet at the same time, the State was able to bring a new flight service to Belfast and retain the use of the foreign landing slots. In many ways, I think part privatisation is a good model.

@Ger,

We have been handed a fait accompli. There will be no consideration of any restructuirng or regulatory reform. The Government has decided to exploit the Article 9(9) loophole in the EU Electricity Directive to keep the transmission assets in ESB Networks. The selected group of officials will assemble the details of the decision in principle of the Government to part-privatise the ESB as an ‘integrated utility’. That’s it and that’s all.

The only options left are:

1. The vague hope that consumers will wake and realise they have been ripped off, are being ripped off and will probably be ripped off even more – and decide that they are not going to take it any more;
2. A legal action contesting the Government’s abuse of its executive dominance by presenting this decision in principle as a fait accompli;
3. A legal action seeking to establish the grounds on which the Government and the EU/IMF appear to have pre-empted the detailed assessment of the electricity and gas industries specified in the EU/IMF MoU. The efficiency of these industries was intended to be a key focus of this assessment. The decision to maintain an integrated structure (and the implict decision to maintain current regulatory arrangements) closes off the possibility of identifying and implementing key reforms that would contribute to increased efficiency.

But there has been little public outrage at even more egregious rip-offs so it would be futile to expect this would provoke any concerted public outrage. The Oireachtas is so docile it might as well not be there. And who would be sufficiently foolhardy to initiate these legal actions?

@Ger,

We have been handed a fait accompli. There will be no consideration of any restructuirng or regulatory reform. The Government has decided to exploit the Article 9(9) loophole in the EU Electricity Directive to keep the transmission assets in ESB Networks. The selected group of officials will assemble the details of the decision in principle of the Government to part-privatise the ESB as an ‘integrated utility’. That’s it and that’s all.

The only options left are:

1. The vague hope that consumers will wake and realise they have been ripped off, are being ripped off and will probably be ripped off even more – and decide that they are not going to take it any more;
2. A legal action contesting the Government’s abuse of its executive dominance by presenting this decision in principle as a fait accompli;
3. A legal action seeking to establish the grounds on which the Government and the EU/IMF appear to have pre-empted the detailed assessment of the electricity and gas industries specified in the EU/IMF MoU. The efficiency of these industries was intended to be a key focus of this assessment. The decision to maintain an integrated structure (and the implict decision to maintain current regulatory arrangements) closes off the possibility of identifying and implementing key reforms that would contribute to increased efficiency.

But there has been little public outrage at even more egregious rip-offs so it would be futile to expect this would provoke any concerted public outrage. The national Consumers Agency lacks resource – and, anyways, as part of the government machine, wouldn’t touch this. The Oireachtas is so docile it might as well not be there. And who would be sufficiently foolhardy to initiate these legal actions?

@ Richard

But, how are these of electoral value to the government?

It is not that I disagree but this seem more like an assumptions than argument/hypotheses. To say, the government benefited electorally from ESB is a big claim that requires empirical evidence.

@Paul
Theres a difference between efficiency & productivity.
For instance in a closed system a efficient element will just transfer its surplus to another.
No new net productivity is created.
Market state solutions do not add anything to productivity because they do not have any strategic ambition , the company is just one element in a hypothetical closed system.
Private companies will not decide for example to reduce the coal / gas dependency of a country and the political administration will have no power to achieve any objectives in a market state.
Essentially the banks control the spice – they do not want any country going off in a tangent.
Although the French Nuclear project was a example of Bankers gone native – but these were old republican values , completly obsolete in these strange feudal times.
I suppose people now realize there is no reason to hold any loyalty to the state – its a parody of itself.
History is rhyming again…………
When the situation becomes truely farcical there will be a reaction – there always is….its sad really but predictable.
Begins at 0.00 ends at 4.10
http://www.youtube.com/watch?v=qgC3jJljGg8

@ossian smyth

“What is the alternative means to reach the European and Irish policy objectives for renewables use by 2020? Are you thinking taxation or subsidies or something else? I would be very interested to hear the alternative.”

It always come back to this, doesn’t it?

We have abandoned the growth & stability pact, our banking system has collapsed, we’ve been booted out of the financial markets, pension funds have been raided and euro breakup has become a distinct possibility.

It is curious that the only certainty amid all this chaos is that “Irish policy objectives for renewables” will be met.

@Aidan R,
Even a cursory examination of the interplay between government and ESB over the last 80 years would provide evidence of determined attempts to gain electoral advantage from ESB and other semi-state’s policy and project deployment.

This subject was referred to by T.K Whittaker as early as 1956.

Re “What is the alternative means to reach the European and Irish policy objectives for renewables use by 2020? Are you thinking taxation or subsidies or something else? I would be very interested to hear the alternative.”

Ireland does not actually have a hope of meeting these objectives under current conditions.

@Richard Tol
“EirGrid, gets electrons from ESB, transmits them over lines owned by the ESB, and delivers them to the ESB (who then retails them).”
and @George Johnstone Stoney
“Actually ESB receives the electrons Richard, I should know.”

Sorry for being picky but this description of electricity shows a basic misunderstanding of the phenomenon and is irritating. It would have been more accurate to have just said “electric current” rather than suggest that ESB is selling electrons!

Worth noting at least that the renewables targets are not ‘objectives’, but legally binding targets. They are expressed as a % of total consumption in 2020 so as the projected denominator gets smaller so too can the numerator. Climate targets are also legally binding but relative to past totals. In this case the end result isnt changing but the distance from a business as usual pathway is narrowing, reducing the marginal cost.

On the news at one, Brendan Ogle was asked would some “gravy” help get the unions onside.

He took umbrage, but then spoke unprompted on the 5% employee share while sounding like a man who was considering how to make money from that share. Perhaps by including some of the employee share in the sale.

Shame Rabitte’s starting point in the negotiations is probably where the unions would have liked to end up post the usual sham 4am union/government/employer round of negotiations.

As it is, we’ll now get the worst possible privatization and the unions undoubtedly will ask for a greater employee share while simultaneously selling off a portion. And they’ll want this tax free thanks to the Eircom precedent.

@AMcGrath

It is rumoured that many economists suffer from the debilitating condition known as Physics-Envy as they strive to apply natural science ontologies to wacky human and social sciences which are a bit more ontologically complex. It is most acute in the ontologically challenged neo-positivists, the poor dears.

This is a public blog – and considering the general understanding of both economics and physics in the general population – “Electrons” (as a simple metaphor within the Aesthetic Turn in Irish economics) is a suitable simplification … If you do wish to take on Tol in the realm of Physics may I suggest at least a ten year preparatory period. I might not always agree with R. Tol, but I doubt very much if he suffers from Physics-Envy.

So A. – what is electricity?

@George

Growth & Stability Pact targets were “legally binding”. Then the world changed.

EU renewables targets are a badly thought out nonsense that other countries will miss by a mile. We should stop wasting precious capital on this nonsense.

@DO’D
In Waldrop’s Complexity, there is an anecdote about the formative stages of the Santa Fe Institute. At a workshop, the attendees were split into two groups, physicists and economists. Each group was given the same mathematical problem to solve. The physicists wrote a computer program, found an approximate solution, went for dinner and had a jolly old time. The economists slaved all evening and found an analytical solution. Both groups walked away from this with a feeling of superiority, the economists because they had solved the problem, the physicists because they had as good as solved the problem and had a great time at that.

@Ossian Smyth,

Every study is based on initial assumptions unfortunately reality then takes its own course.

There are approx 3900MW in the Gate 3 queue, some of that 3900MW has already been refused Planning and a lot more will almost certainly be refused planning due to their location either in or very close to Natura2000 sites and even more would be very unlikely to be funded because the windspeeds at their sites are not good.

Meanwhile there are hundreds of MW which have planning permission and funding but will not be given a connection offer until Gate 3 collapses, which it undoubtedly will.

Regarding CO2 reduction targets, again it can be seen from the weekly EirGrid data, that the decision to use OCGT to counter wind intermittancy means that even as more wind goes to the grid, the CO2 emissions remain stable.

Meanwhile CER has received over 4GW worth of expressions of interest in providing pumped hydro services.

The above has relevance to this debate on many levels.

Surely it should be government policy to facilitate economic activity rather than stifle it.

@Richard Tol

Better to be approximately right, and have fun, than elegantly wrong, and have none.

I like a version of the 3rd Harvard Law of Biology: ‘with a careful research plan, under controlled conditions, using selected agents, complex adaptive systems do pretty much as they damn please’. [John Holland, Hidden Order; Ulam Lecture Series] Trick is to sense a CAS – where hermeneutics trumps explanatics; methinks we are all in one in the EZ at the mo, and the best in Santa Fe could not model it.

Many battles have been fought around the world over the nationalisation and privatisation of electricity.

The consensus is that generation can be privatised but distribution cannot. In other words generation can be competitive but distribution is a natural monopoly. In many countries there is a three tier system 1) Generation (competitive). 2) Distribution, intercity or back bone network a not for profit or wholly state owned. 3) Local distribution, municipally operated or a mix of municipal and not for profits. The three levels are at arms length from each other.
In Ireland of course it will be a matter of how our politicians can keep their fingers in the pie, efficiency and effectiveness be damned.

@Mickey
Generation can appear to become private when all is needed is a gas turbine engine (low capital costs).
When fuel costs rise the low capital investment will be externalised over the long term.
Bank utilties have made unnatural profits through decapitalisation of their balance sheets – it seems we are going to make the same mistake with physical electricity generation.
You really can’t make this stuff up.
If everybody extracts profits & wages the company becomes super efficient – banks were super efficient / that is the definition of leverage – then they blew up.
We need to redirect huge amounts of money into rational CAPITAL investment.
We spent 50 billion on all physical capital investment in 2006 alone – now we cannot spend 7 billion on a EPR over 10 years.
Something is deeply wrong with our investment culture.
This is really tear your hair out stuff.

@Tim

Always have been a part-time freelancer sans rights of any kind. (not that I’m advocating that – but it’s almost the standard in the industry).

@Jackh

“He took umbrage, but then spoke unprompted on the 5% employee share while sounding like a man who was considering how to make money from that share. ”

Course he was. The collusion of the Eircom unions in looking after the workers at the expense of the shareholders (the Irish people) provided a template/aspiration for other semi-states. It’s lip-licking time. The ESB has been a classic example of a company run by and on behalf of the workers who see it as “their” company. Once they get a pay off I’m sure they’ll go along with the policy.

On the larger issue, I haven’t made up my mind yet, but I have previously stated that I didn’t see the point in government ownership unless it
a) used its ownership to deliver cheaper electricity to customers (which they didn’t: they insisted on a hands-off/nuttin to do with us approach and left the rest up to the regulator
b) demanded a bigger dividend (which they didn’t, they let the spoils be divided up between a comfortable management and the workforce).

@Sarah Carey,

One issue you may wish to ponder as you make your mind up on the larger issue is that the ESB is valued by its lender bank’s at up to €12 billion, with a large amount of that valuation being attached to its transmission and distribution assets.

The amount of transmission and charges charged to your domestic electricity account are small, at the level of Intel or similar, who in effect do not buy from the retailers those charges are very significant and affect investment decisions.

There are some jurisdictations where the Transmission network is partly privatised but in every case the national regulator has been given clear direction and powers to keep transmission and distribution charges low.

There is a particular danger to Ireland in this respect because of the SEM market mechanisms.

British privatisation and ‘competition’ provides no model for lowering energy costs to either industrial or residential consumers. Pre-tax energy costs to industry are frequently higher in Britain than the EU average and nearly always so for residential consumers, as data from the Dept of Energy & Climate Change shows

http://www.decc.gov.uk/en/content/cms/statistics/energy_stats/prices/prices.aspx

The debate on reducing the pay of ESB workers is as folish as it is vindictive. The average pay (including all layers of management and taking account of all overtime) at ESB was €62,000 in 2010(p.84 Annual Accounts).

http://www.esb.ie/main/about-esb/annual-report-2010.jsp

Clearly, this is a mean average and the median would be far below this.

Since there are only 6,900 workers in total cutting their pay by 20% would yield a saving to the company of approx. €85mn. In light of a €28bn recession, this is a trivial amount.

But this is a company, not a government saving. Given that in 2010 Group profits were €858mn but only €15mn was paid in tax, the guess would have to be that not much of the €85mn ‘saving’ (increased profit) would be coming the Exchequer’s way, about €1.5mn on this ratio – a function of an ultra-low corporate tax regime.

Instead, there would be a loss of revenue arising from the lower consumption of ESB workers themselves.

The idea of cutting ESB wages is an old populist trick trying to pit higher-paid workers against lower-paid ones, which would leave not only those workers but the the entire economy worse off. It would be a transfer of incomes from labour to capital with the hope that ESB itself will soon be privatised.

@Sarah,

I suspect you may not have read my comment of 8:46 this morning (I know it’s a bit long and wonky), but the key issue isn’t who owns the business, it’s how can low-cost financing be secured to finance the huge amount of investment required into the future. And this is linked to the structure of the business and who performs various activities and how efficiently these activities are performed.

Government ownership has been a disaster for Irish consumers as successive governments have failed to contribute their share to finance investment – and the regulator has been forced to extract the extra dosh from consumers. And there has been an awful lot of investment – making up for serious under-investment in the past, investing to support huge demand growth, investing in various pet political projects and ESB investments in various foreign ventures.

But selling a part of the integrated business to a private sector investor won’t improve this. It’s likely to make it worse as the new investor will want the regulator to up the regulator’s cash extraction from consumers to pay his divvies – and a new investor will probably prove just as reluctant to provide some new equity (over an above his purchase payment) to part-finance investment as the government is.

The Government will get some dosh – though maybe not as much as the IMF would like, the ESB will be able to carry on regardless, workers will probably have to get some ‘gravy’ and consumers will be worse off.

But any possibility of the major structural shake-up that would benefit consumers and the economy is totally out of the question.

@Paul

You suspected right 🙂 but your point makes a huge amount of sense.

The Eircom debacle turned me right off privatisations. (nightmare stories of British Rail seemed a pre-cursor) and if your analysis is correct we are set up for a repeat – but even without acquiring a fair price to pay our debts.

You see, what I wanted was a government shareholder that actually managed the company with the interests of the shareholder at heart (ie. deliver the cheapest possible electricity/best service to citizens and businesses).

If they had done that, and contributed their fair share, as you say a good owner would have, we’d be in a better position. Instead we had this bizarre hybrid of the “commercial semi-state” whereby the ESB (and Bord na Mona, IAA, Coillte etc) were publicly owned, but out of control.

I don’t like handing national infrastructure to investors who’ll leave the ESB like Eircom is now – asset stripped and useless…
But keeping it in government hands is an option only if it starts managing it…

So a) does the government show any sign of seeing the strategic potential of public ownership and b) could the troika be convinced?

So far “no” and “no” seems to be the answers…

Therefore, should we focus, on the best package to sell and figure out the best time…

“Since there are only 6,900 workers in total cutting their pay by 20% would yield a saving to the company of approx. €85mn. In light of a €28bn recession, this is a trivial amount.”

ESB already has a target to reduce pay & expenses by 140m in the next three years. They have to in order to retain the rating and be able to finance development.

@ Sarah

It would be nice if instead of the petty generalised abuse at all and sundry you directed some towards the imbeciles in our media, especially those you might have some fondness for, Harris Myers et al.
If the market was truly rational none of these incompetent, idiotic, frivolous morons would still be in a job.
The Irish media is a joke and for a prominent member of it to make any comment on the efficiency or value of any other sector of our economy without first attacking the diseased hyperbole that is my Thursday morning leaves me searching for the nearest sickbag.

“Instead, there would be a loss of revenue arising from the lower consumption of ESB workers themselves.”

Provided lower operating costs would result in cheaper electricity, there would be no lower consumption as the electricity consumers would have a few more quid to spare.

@John

hey, don’t worry – I’ve plenty to say about the Irish media, but the Irish Economy blog isn’t the appropriate place for it!

As for abuse towards ESB workers, I was saying exactly what Brendan Ogle said (and anyone else withe vaguest familiarity of the commercial semi-state sector agrees) for several years.

This is awful…Esb workers average pay/pension cost is €100,000 per worker…and now at this hint of privatisation they say they’ll strike ?

That is simply banditry, and whilst such behaviour was always immoral, it now can’t be afforded. The solution is to make them redundant, and hire in new workers (with some skilled from abroad on 1-5 year contracts). This would increase the money we’d get for the ESB, and dramatically improve the country’s cashflow (either via energy price reductions or dividend to state).

http://www.rte.ie/news/2011/0915/esb.html

http://www.independent.ie/business/irish/average-pay-and-pension-of-esb-workers-near-euro100000-2065160.html

@Desmond
ESB is also overstaffed.

I have asked a number of large power companies in Europe whether they would consider buying ESB. All had looked at it and all had decided against it, citing the large number of staff and their wages.

The ESB will have to be reorganized before it can be sold at a decent price.

“I disagree with the idea that the ESB has no value without the grid.

Indeed, I think we will not get anything like the true value of the Grid in a sale, unless we simultaneously sell Eirgrid.

What private operator wants to buy a transmission grid, only to discover that they have no right to operate it? While Eirgrid has control of the grid, the ownership of it is not nearly as valuable as its true worth.

Therefore, full decoupling, prior to the sale of ESB will not have an unduly negative impact on the sale. Indeed, it is crucial if the sale is to achieve a fair value.”

This is something people are obsessing about but this is a red herring. The owner of a transmission grid does not care how the network is operated (in the sense that Eirgrid operates the grid and settles market transactions) as long as the assets are operated within the specified technical parameters (loading of cables, transformers, etc). For the owner the transmission grid is an asset for the use of which they get paid a fixed fee and for them it does not matter how Eirgrid chooses to dispatch the electricity. They make money by optimizing asset maintenance practices and ensuring long asset life-span.

The transmission network is, as rightly pointed out, a tool for leveraging further developments and ESB is an O&M company which happens to own it. But it may as well be carrying out the same activities without owning the network.

@ Paul Hunt
“For example, in Ireland, the CER provides a capacity pot (paid for by consumers) to pay generators to construct plant and make it available. And it awards the ESB and BGE Networks whatever revenue they will settle for (again paid for by consumers) to make sure the electricity and gas stays flowing..”

your comments are generally well thought through but the capacity pot mechanism does not indicate that the CER have been captured by the ESB / Bord Gais. They do not get what awarded whatever they will settle for.

The SEM “directed bid” mechanism was designed to limit market power of ESB, by removing the possibly of strategically removing capacity to drive up prices. Pricing is dicatated by plant characteristics and is designed to deliver a “true” SRMC price for the marginal plant. Since competitors in the market do not benefit from the incumbent’s market power they can, and do, report any bids which appear to be high. As the market price is SRMC, a capacity payment mechanism is then a logical necessity to deliver a market return. It is not evidence of capture.

The second point is that the capacity payment is based (roughly) on 3 things:

(i) the per MW value of capacity is based on the cost of a “Best New Entrant”, which is calculated on the basis of the cheapest technology for providing reliable capacity – open cycle gas turbine. If a market for OCGT exists in Ireland, it is a very niche one and consequently this is likely to underestimate the cost of any capacity that is likely to be built. However, in itself this is not a bad approach as more expensive capacity will earn a return in the market (while OCGT will rarely be dispatched). However the baseline is not set on any ESB plant, but on something much cheaper.

(ii) the required capacity is based on the amount of capacity which the CER determines is desireable – essentially a margin over peak demand. The required amount of capacity is substantially below the current installed capacity, which results ina proportion of the BNE being paid per installed MW. This is not intrinsically a bad approach as there should be no reward for over-capacity. In the current market (which is awash with reliable capacity) there is little reward for the incumbents (never mind the new entrants).

(iii) All available capacity gets a share of the pot. This is crazy. It is paid not only to the “reliable” (thermal/hydro/pumped storage) bidders (which a capacity payment should be rewarding), but to all capacity including wind. Paying wind for capacity from this pot increases the investment in wind while diluting the payments available to providers of reliable capacity. Therefore it incentivises unreliable capacity, while reducing the payments to the market segment which will be needed when wind dies.

At each stage it could hardly be said that the ESB as the main provider of installed thermal plant is getting an unfair advantage via this mechanism . It is a consequence of the fact that there is no reward for capacity in the market price. It could be argued that the ESB thermal capacity is older and therefore has lower costs than a new entrant. While this is true, it should be clear that the capacity payment underestimates the value of capacity in the SEM. To an extent this reflects the fact that no investments will be made in thermal capacity in Ireland for 5-10 years. In the meantime, all recent investors in generation (Bord Gais included) can expect to see their investments stranded.

@ Dom K

“Provided lower operating costs would result in cheaper electricity….”

There were €2,707mn in ESB revenues in 2010. So, even if all the €85mn in savings were passed on from a 20% pay cut then bills would be lower by just 3% (ignoring the wider effects on demand in the economy). But it is notable that all the scourges of ESB pay never propose any mechanism for ensuring that consumer charges would be lower.

By contrast, using the tax regime (windfall taxes) to lower charges and increasing productive investment, based on €858mn in profits, would benefit the economy and govt finances.

@ michael burke

“There were €2,707mn in ESB revenues in 2010. So, even if all the €85mn in savings were passed on from a 20% pay cut then bills would be lower by just 3% (ignoring the wider effects on demand in the economy). But it is notable that all the scourges of ESB pay never propose any mechanism for ensuring that consumer charges would be lower.”

It does not matter what the percentage of reduction of an average bill would be when the aggregate saving for all consumers would equal the aggregate reduction of ESB salaries so there would be no net effect on consumption, which was the argument you were making.

“By contrast, using the tax regime (windfall taxes) to lower charges and increasing productive investment, based on €858mn in profits, would benefit the economy and govt finances.”

I have no idea what this means. You want the windfall taxes to stimulate companies to make less profit so that they can pay less tax? And that somehow benefits the economy and the government finances? That makes absolutely no sense.

And as far as your other point is concerned regarding the mechanism for ensuring operational savings are transferred to the consumer – this is normally taken care of by the markets when sufficient competition is there. In Ireland we also supplement the market forces with a finger-wagging Taoiseach looking really angry on RTE.

Me thinks the Irish will have to be exposed to the monolith before they evolve………..progress through wage cuts. ! I love it.
How does that increase the energy density ?
Did I miss something ?
I can see the future slogan for Ireland now.
PROGRESS THROUGH ENTROPY
We can invert reality to maintain our neo-liberal illusions.
We have passed the event horizon me thinks.

@ michael burke

I can see how increased taxes can help govt finances (on a short run at least). What I can’t see is how increased taxes would lead to “lower charges and increasing productive investment” and at the same time helping govt finances. That makes absolutely no sense.

@Dork

Why are you surprised that progress can be achieved through wage cuts? If wages have built up above productivity level, this is an imbalance which has to clear for progress to be restored. Every system strives to achieve a condition with least imbalances, this is a natural law valid in physics and as well in the economy, and you anti-this-ant-that guys are so immersed in your orthodoxies (in your case anti-neo-liberal) that you can’t see the basics.

@Richard Tol

Ta for bringing up Waldrop & Complexity – didn’t know that Brian Arthur of ‘increasing returns’ fame was a Belfast Lad … of course things were a wee bit ‘chaotic’ up there at times – and when he got mad, he got even. Ability, environmental influences, and real class I assume. Possible that Van Morison similarly influenced? & that thought just emerged …

http://www.tnellen.com/ted/tc/complexity.html

Tick the Box (only one please)

Money is a vital, stategic, whatever… … hence Money Shops are logically, a vital., strategic, whatever …. Hence sky WILL fall if the aforementioned are not ‘saved’ … ….

Electricity is a vital, stategic, whatever, … … Hot Dinners? Lights on those long-dark winter, turns the wheels of, whatever … … Sky WONT fall if someone fails to repair a broken (or more likely – stolen) cable then?

You give ANY part of the electricity generation, transmission, repair, maintenance, whatever, to ‘private thieves’ – well, then you a guaranteed to get;

Asset stripping
Increased internalities (customers) and externalities (taxpayers – same bunch of Sheeple)
Leverage – close to 99.9%
CDSs by the dozen (the boyze KNOW the state WILL HAVE to re-purchase)
Productivity gains – aka: higher prices, bigger bonuses and lower wages
………………………….

Please fill in anything I have missed!

Re-structure the damn organization by all means! But sell any part of it and yez are f****d!

Brian Snr.

‘Asset stripping’ is in fact a process in which a company becomes leaner and scales down the asset base to match the returns it can realistically obtain. In a market view what matters is the return on assets. In the Marxist view however, which is rather materialistic’ the more tangible assets the better and if anyone wants return on those assets he is a ‘private thief’. Having a bunch of assets without the adequate returns cannot generate growth. Unless assets are creating value there will be no surplus to create new assets. The commies in USSR, Yugoslavia and bunch of other countries have learned this lesson in a rather painful way. Given that you refer to yourself as Snr, Mr. Brian Woods, you should be aware of this development. And as far as excessive leverage is concerned, I think this is now a thing of the past. Credit is necessary but in the future it is unlikely to be as abundant as was the case in the previous decade and hopefully it will come from savings generated by productive activities rather than from Central Banks randomly hitting accelerator and brake pedals as they see fit. I am not as optimistic about the last one though. But I am optimistic about the markets because they always seem to make different mistakes, unlike the socialist brethren who are committed to the same failures over and over. Socialism was in agony for over three decades in USSR and Yugoslavia and yet only the complete crash has led to reform. Market capitalism on the other hand reforms itself every decade or so and emerges leaner and better.

@DOM K
Outputs + or – inputs = capital appreciation / depreciation over the long term
Is that basic enough for you ?
By all means reduce input costs such as as Labour if your goal is capital appreciation (in the case of electricity increasing energy density on a long term basis)
But if you want to reduce labour in a natural utility to increase profits – it will not increase the utilities capital base.
Indeed in a open economy such as Ireland the natural consumption from a subtraction of labour to service profits will reduce the demand in the country as it is likely to go overseas.

Modern market capitalism is not working Dom K – the currency pair model of indices creates too much instability to create any long term capital appreciation.
Its just a depletion game.

@Dom K,

I think you’re taking us off the pitch. A lot could be done with the ESB in public ownership before one would consider privatisation.

And an earlier comment seems to have disappeared:

The problem is that most people cannot get their heads around the idea that an organisation, almost as old as the state itself and which is a deeply embedded and respected part of the fabric of society and the economy, is ripping them off to the extent that it is – with the full sanction of the regulator and the approval of successive governments behind it. The banks exploited this long-standing trust and respect – and look where that got us. The ESB is doing exactly the same. But people just don’t want to believe it. And the Government lives in fear and dread of bringing it to heel in the public interest.

Those who prevent government from doing what is necessary in the public interest are the government.

Paul,

You are ignoring two realities:

1. The country is obliged to sell silverware under the agreements it has signed to get borrowings at the time it could not do so through regular channels.

2. The government has shown no will to properly restructure ESB for decade or more. Now the train has left the station and it is too late to have this debate, let alone implement whatever consensus was to emerge.

Regardless to whether I agree with your argument (and I do only partially) it is now to late to discuss the existence of ESB in full government ownership. Bits will have to be sold off because of 1. above. To get the volume required the assets will now have to be a part of the sale because as per 2. above the government has so far failed to maximize value in the organisation itself by breaking it into optimum functional entities and imposing efficiencies.

Dork,

I am not talking about appreciation of capital goods as the business model here. I am talking about increasing the company value through a productive use of assets. Assets should generate returns which should lead into procurement of more productive assets and expansion of the company. Capital appreciation in the sense that it has been perceived in the past decade is a credit driven folly.

Productive assets can only appreciate in value in two scenarios. One is in case of expansion of credit and the other scenario is when the capacity to produce the productive assets has been limited or the demand has gone up because more investors are getting into that business. Once you as an investor / company have made a strategic decision to enter this business, the matter of demand/supply is out of your control and should not form the basis of your business model. There is no scenario in which a power transformer will be anything else than scrap metal after 30 years. You can increase the value of your company by managing it properly and these are the operational efficiency savings that come from labour cost and operational practices / company structure. And this is what we are talking about.

The failure of capitalism you are talking about (funny capitalism has failed so many times and each time the left prepared a coffin) is the failure of credit expansion / FIAT currency model and I am afraid that both are in the remit of the government and government bodies. The businessmen have only acted as they always do – play to maximise gain within the current business environment created by the government and by the market demand (often also stimulated by the government).

Someone said on this topic that we should not blame the ESB workforce for extracting the maximum possible outcome under the circumstances. I agree with that assessment and disagree with the emotional language surrounding the debate on ESB wages (I agree these are out of line and have to be reduced for pure business reasons – which is something ESB is already doing faced with market realities of having own rating and borrowing needs). But the same argument should extend to the ‘greedy’ businessmen. Unless they broke the law they should be treated in the same way as ESB workforce: it was nice while it lasted but now its time to be real.

@Dom K
I defined capital appreciation as I see it in the electricity sphere – not using credit metrics which I beleive are grossly flawed…… indeed I can’t stop going on and on about such credit games……………….

You are looking on the ESB as a company – I see it as a arm of strategic policey.
You are probally right that it is in fact a seperate fiefdom – and my view is merely a aspiration.
But the concept of wealth generation will have to change now that the oil spice is no longer expanding monetory aggregates.
Wealth generation must be more organic and static now – not unlike the more capital intensive 19th century coal period.
Cities can no longer farm Arabia and not their Hinterland – the hinterland must become the wealth base again.
And some of that must be technological capital appreciation.

Dork,

There is no significant strategic value that ESB can provide. The energy strategy is determined through a set of policies all companies must follow. In terms of strategic development and operation of the transmission network (and let us not confuse this with distribution which merely follows the urban/rural development plans) is within the remit of Eirgrid and this is driven by energy market exchange mechanisms set by the government and also by the envisaged growth and geographical allocation of load centres. ESB has little to do with this. Transmission master plans are done by Eirgrid. The investment to develop the transmission network comes from leveraging/use of the transmission assets and there is nothing that ESB do here that can’t be done by other competent companies. Other activities include construction and maintenance and this can be done by any competent company. No strategic value there either.

Secondly, I think the reality is that you will have to continue to pay market rate for resources such as oil and that the mass use of oil is here to stay for a while. Even if you wish to run all road transport on electricity (and you can’t because the technology for 30 ton trucks which go 400km/day on average is not there and won’t be there for foreseeable future – this is 40% of road transport) the electricity has to be generated from somewhere. Your options are oil, gas, nuclear and renewables. Nuclear is off the table for now and renewables are expensive and erratic in supply.

@Dom K.,

I don’t think we are disagreeing. I find your comments to be a breath of fresh air here. You’re basically saying that successive government failed to restructure the ESB sensibly and now there isn’t time because they’re under the cosh from the Troika to produce some privatisation proceeds in short order.

The reality, I believe, is a tad more nuanced than that. The relevant action deadlines specified in the EU/IMF MoU are proposals on semi-state privatisation by end 2012 for discussion with the Commission Services and a detailed assessment of the electricity and gas sectors kicking off at the end of this month and to be completed by June 2012.

Under this timetable there would be ample time to investigate and identify meaningful re-structuring and regulatory reform for the energy sem-states. What appears to have happened is a coincidence of wants. The Troika wanted a ‘quick win’ on privatisation in Ireland to put pressure on Greece – and others – and the ESB is the biggest and shiniest piece of Irish silverware. The ESB (and BGE) were totally opposed to any restructuring (and privatisation if they could avoid it) – and all they had to do was mention the ESB Group of Unions to put the fear of god into the Government. The Government was also able to advise the Troika that any major restructuring of the ESB could provoke the type of industrial unrest and serious damage to the economy that could scupper the sunny, sanguine economic narrative they both were crafting.

Managed retreat all round: the ESB wins (BGE also wins because there is likely to be a read-across from the ESB) – a new owner is likely to go with the profitable flow; the workers win – as they are likely to get some more ‘gravy’ (aka share options) to forestall industrial action; the Government avoids a serious headache; and the Troika get a result on privatisation.

As always consumers and the economy lose out.

@Dom, Paul
I’m with Paul on the timing issue. The IMF can be persuaded with good arguments that it is premature to sell the ESB. And parts of the ESB can be sold without regulatory reform, such as ESBI, ESB PowGen and ESB IT.

The Troika is keen on the money, but there are other ways to raise that: ports, airports, CIE, bits of Bord na Mona and Bord Gais, RTE, Teagasc and so on.

If I was sitting on the other side of the table being presented with the argument that it was too early to sell ESB, I would ask: what was done since the agreement was signed almost a year ago?

@Richard,

Is it not a bit late in the day to talk about persuading the IMF to agree to a sensible approach?

The Government has made a decision in principle to part-privatise the ESB. The team of officials which will flesh out the details for the subsequent more substantive decision at end-Nov or early Dec. presumably has its riding instructions.

A huge amount of effort has gone into crafting this win-win deal for the parties concerned (with consumers and the economy getting hosed as usual). Maybe the IMF is at odds with the EC/ECB – as was rumoured previously on other matters – but I can’t see how a formal Government decision in principle can be overturned easily.

I must admit I was very disappointed with the IMF apparently going along with this nonsense. Maybe they’re not happy, but it’s a bit late now to be getting cold feet.

Might I suggest that there could be a good idea to study what happened when Germany reunited?

DDR owned all capital in former east Germany, after the reunification a lot of the state-owned assets were sold to private investors. Some of the privatisations went well, some went badly and people involved in the process are still around. I’ve met people in east Germany who were and still are angry about some of the deals that were made.

I believe studies have been done about the privatisations in former communist countries, some of the experience gained from there should be possible to apply in Ireland.

Richard,

ESBI has its own structures like finance and HR and can function on its own. This however, is not the case with ESB IT. The ESB IT is an integrated department of ESB. I don’t see how it can be floated on its own.

The second issue is that surely there are targets in terms of how much is to be raised through sale of state assets. I do not think ESB IT and ESBI would contribute much to those targets. I don’t know who would pay any money for ESB IT department and for what purpose.

Perhaps they should float the generation and consultancy and leave the rest for later, provided enough can be raised by selling other semi-states.

@Dom K.,

Good question, but the narrative and the nature of the players provide the answer. The intense lobbying by the semi-states (in particular, the energy states) kicked off shortly after the Colm McCarthy-chaired State Asset Review Group was established in Jul. 2010. The report of the Group was expected by end-2010, but it had to be dove-tailed with the Troika deal and slipped into Jan. 2011. The general election and the need to give the new government some review time pushed the report publication out close to Easter. And the 9-month detailed assessment of the electricity and gas sectors was pushed out to begin at end-Jun. And a further revision of the EU/IMF MoU pushed this out to the end of this month.

It’s very easy to lose a year when a lot of very powerful and influential people are intent to prevent something they don’t like happening.

Paul,

Again, sitting on the opposite side of the negotiation table, I would say that this is not my problem. You have committed to sell xx Euros worth of state assets by end 2012. Show me the money,I don’t care about Brendan Ogle and other stakeholders.

I’m intrigued. The suggestion seems to be that the decision in principle by the Government to part-privatise the ESB could be applied in practice by identifying a vanishingly small piece of the ESB and selling it. And that the demand for near-term privatisation proceeds could be satisfied by selling all or bits of other semi-states where the structural, regulatory and policy issues are much less complex than those surrounding the energy semi-states.

Since there is no limit to the slipperiness of an Irish civil servant, I could see how this might be achieved. I must admit I just couldn’t see how the EU/IMF could abandon the detailed assessment of the electricity and gas sectors. Slippage, revsion, refocusing, yes; but abandonment, no.

@Dom K
The oil will hopefully continue to flow – but the input costs will change dramatically if or when we get a new monetory system.
Trust me on that – activities that will appear the most efficient now will not be in the future.
People are not prepared for a breakdown in the dollar / oil monetory system – if or when it comes it will throw all metrics into the air and they will land in different places.
Domestic capital appreciation such as highly capital intensive nuclear will become more attractive when or if this happens as that is where the only viable growth will be capable of happening.
As for the weird command structure withen utilities – why does it have to be so Byzantine – what are the advantages of all these layers ?
A power plant and distribution go hand in hand don’t they ?
It strikes me that these command structures were built with the object goal of future privatisation and not to create a more efficient chain of command.
I feel sorry for a poor energy minister – who does he call if he wants to sort out domestic energy policey ?

@Dom K.,

Agreed, but see my last comment which reflects what Richard is suggesting. I would like to believe this is possible and is being considered, but my hopes have been raised and dashed too often previously.

@Dom
ESBI Computing Ltd is a separate company and can therefore be sold no problem.

I use that as an example because it is so silly that ESB seems to think it has a competitive advantage in IT.

My point is more general, though: There are bits of the ESB that can be sold now without requiring a major overhaul of regulation.

Very cunning. All the Troika wants is the sound-bite “Ireland is privatising state-owned businesses; Greece isn’t.” Anyone who says: “Wait a minute. What, how much and when?” will get blown away by the spin.

@Jesper,

The prices charged by state-owned business in the CPEs usually involved some form of cross-subidisation and were generally well below efficient, economic costs. The prices charged by most semi-states in Ireland are well above efficient, economic costs – even if some unjustified cross-subsidisation is involved.

The first task is to get these back to efficient, economic levels – and this is best done under state ownership. If not, the vultures will have a field day. Then we can talk about privatisation. But, as Richard points out, some non-core activities can be sold off at any time.

Richard,

I must say I was intrigued when you mentioned ESBI Computing Ltd so I looked it up. I don’t want to go into too much detail but I stand by my previous comment. This is not an off-the shelf business you can float. The bits you can sell are generation and ESB without any overhaul of regulation.

Dork,

Power plants and distributions are radically different businesses. Unless you run an isolated network with one plant hooked up to a distribution network there is absolutely no reason they should be bundled.

Richard,

A legal entity / trade name can easily be confused for a working company. Look at ESB books for 2010. ESB Energy International is a working company that can be sold on its own but even that has made 150m profit last year on 4.5b of assets. Good luck selling even that. ESBI Computing isn’t worth mentioning in this context.

@Dom K.
I hate to break this to you – I know this might come as a bit of a shock and all – but Ireland is a relatively small island.
A Irish energy minister needs to go to one man with the full brief and command of all electricity infrastructure.
Sure you can have different sub command structures – but nation states were traditionally military constructs.
Their ministerial offices are essentially of a military nature and hierarchy or at least should be.
A HSE like organisation never won a war.
The whole apparatus of state is getting tangled up in pointless but fashionable managerial fiefdoms.
It was never designed to operate in such a inefficient manner – indeed it cannot.
Read some biographies of famous civil servants if you get a chance.
I would recommend James E. webb for starters – his brief was a much more complicated affair.

The fractured now semi private nature of the entire mess is a sick joke.
Utilities ain’t like other businesses Dom.
They are the state rather then a profitable enterprise working inside the state ecosystem.
If you don’t agree with me tell me where exactly does the Buck stop in this managerial maze………… no no let me guess the taxpayer.
ENOUGH.

Dork,

Your opinion that the Energy Minister should go to one mane with a brief on electricity infrastructure is just that – an opinion. And it is so absurd that is it beyond logical reasoning.

@ DOM: re – your 11.03 comment.

Been away from desk: Day Job!

I notice some interesting comments from Dork and PH which seem to have covered the appropriate bases, so I shall provide a brief history lesson.

Our current (global) financial mess is the 4th in a series of bi-phasic processes: trading + commodities v financilization. Venice:Genoa; The United Provinces (NL); The British Empire, and lastly (now) the US.

The first phase sees the rise and rise of trading/manufacturing. The most successful commercial entities switch to financial trading (it becomes more profitable that trading goods and eventually they begin to aid in the change-over to the next trarding/manufacturing phase.

The powerful and dominant political regimes are enrolled early, (their muscle is needed to ensure the expansion of the trading + commodities phase). They are firmly locked in by the financialization phase. And so it goes – until to-day. Financialization ran into a demographic cul-de-sac about 4 decades ago and with no obvious outlets available, created a massive Ponzi debt scheme (to-day). The financiers have run out of customers to lend to. The customers are tuckered out on consuming. Full stop!

So, debt peonage is the outcome, but not the disease. Its our absolute dependence on ‘easy oil’ (Dork mentioned this above). We are in a very bad bind indeed.

I skipped over the involvement of our legislators. These critters have always and everywhere been eager, willing and most obliging to the financers. Our modern financiers have provided the loans for our modern politicians to continuously ingratiate themselves to their voters. Notice any change in the relationships between citizens, political parties, legislatures and governance? But, guess what? The bills have finally come due. Now our politicans have to walk backwards. This they no likee one little bit. So … …

You can fill in gaps.

Brian Snr.

@DOM K
The old fashioned top down – buck stops with me culture was much better then this farce.
Once States began to atrophy they outsourced judgement and decision to private actors – a disaster.
I blame Yes Minister for much of this absurd crap.
It was extremely funny but very damaging.
I cannot imagine any state now embarking on a French scale nuclear programme – imagine how many consultants with skin in the game they would have to consult.
The just do it culture is lost in the west.
American managerial theory beginning with the McNamara era has gutted all ambition.
Its all body counts – the strategic goal is lost in the bullshit ether.

Chaps, I think we have exhausted this topic. I have no interest in debating subjects so widely outside of realms of the reality.

Dom K.
Reality is what you make of It I guess – I have no interest in inhabiting the market state reality – it has been tried and tested and found wanting.

@Dom K.,

Indeed. It is unfortunate that the Government found that it had no option but to make this decision in principle on ESB part-privatisation. There is so much work to done over the next 9 months on the structure, financing and regulation of the energy semi-states while they are fully within public ownership that anyone who mentions privatisation and the ESB, or BGE, in the same sentence should be obliged to put a Euro in the swear box.

@Dom K: “Chaps, I think we have exhausted this topic.”

Actually, no! Your interest, maybe.

“I have no interest in debating subjects so widely outside of realms of the reality.”

Pity. You would have learned something. Perhaps you need to re-frame your image of reality.

Brian Snr.

Pat Rabbitte says sale of ESB to take place next year. But what will the buyers pay for a minority stake in a company with fundamental problems which is also supposed to be a part of this New Era business envisaged to fund god knows what pet project the govt comes up with?

@Dom K.

You’ve hit the nail on the head. I don’t doubt the Government has the best of intentions, but it’s all been cobbled together behind the scenes. Whatever will be decided finally will be announced as a fait accompli and whatever legislation is required will be rammed through the Oireachtas. If NewERA is to be a non-statutory body within the NTMA, this raises even more concerns.

There is obviously a huge amount of squaring of various players going on behind the scenes, but all those with some ‘standing’, knowledge and competence are either conflicted or compromised and, as a result, are either unwilling or unable to apply any scrutiny or to assess various structural or policy options – or to inform and enlighten the general public who will end up paying for whatever confection will emerge.

It’s with sadness I write this reply as we look at our country going under because of the private vultures that destroyed our great country.
Is it now time that we looked at the formation of the ESB in the past and why we decided then to create a semi-state company to develop and run this business in the interest of the Irish people and the greater development of our country?
Why did the Minister then, in his wisdom, in the Irish Government refuse to offer the private speculators (i.e IFA, Newspapers, and people like Eddie O’Connor) the opportunity to start Electricity Company?
Why now does it seem right for Mr. Pat Rabbitt to reverse this policy and give it to the very people who were not accepted in the early years of the country’s development?
I believe the vision of the first government of the time has proved them right and what we now need is a debate around the creation of more new semi-state projects that will help pay over dividends (i.e. ESB in 2012 paid 80 million and over 2 Billion in the last number of years to the Irish government to support our schools, hospitals, and the poorer sectors of our society. This money in the past has helped fund those people who need to be cared for. Other Semi-state companies have also paid over dividends.
What will selling the Gas Company and some ESB Generating Stations prove? Yes we will be able to pay a bill belonging to someone else and keep the German’s off our back.
I believe what we need now is more aggressive Semi-state company’s with new ideas that will again dig us out of the hole that private corruption has made for us.
We now need vision and leadership in bringing the likes of ESB and Gas Company together with the huge amount of expertise, with their financial strength that they have and form a new energy company in bringing both our oil and gas ashore for the benefit of our country in the long term (not short term bill paying with the obvious destroying of these two great Irish company’s).
Forget about this stupid wind farm in the midlands that has nothing to offer in job creation in the long term and which will contribute to destroying the Irish landscape.
We now need to start building a future for our country and use these assets to help support and bring back home all our young intelligent people so that we (the older people & disable) will have some support in the years ahead.
.
Remember it’s only a short few years since we closed our sugar factory (another fine semi-state company) because our government did not understand the incorrect figures that were supplied from Europe. People need to read up on these decisions.
Now we are going to build a Sugar plant again, this time in private ownership. What will be the dividend paid to the Irish Government from this plant in the future?

Out of all the cars we drive today is it not possible that we could design and build one type of car for this country. Where are the Tyres made now that are required?

WAKE UP MODERN IRELAND.

It’s now time that the ordinary people spoke up and take back their country and our future direction in the interest of all our people. Remember it’s our children that we have sent to far off lands to work in.
Politicians its not there choice they would rather be working here like any Irish person in developing their own country for the generations of people who would follow them…

My only hope is to create some HOPE for the future, no money gain for me.

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