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Government must block ESB hike
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The news that the ESB is to seek a 20pc price hike will if granted, drive the average annual bill up to a staggering €1,100. It is up to the Commission for Energy Regulation to sanction all such rises. Before it does so, it had better think hard about the hardship they could bring and factor in the human as well as the financial cost. If granted — and it could be in early autumn — it would add about €45 to the average two-monthly bill and push the average bill for a year to more than €1,100. And this from a semi-state that made profits of €440 million last year. Sustainable Energy Ireland (SEI) has estimated that 10% (144,171 homes) were experiencing fuel poverty — meaning they spend more than 10% of their disposable income on heating costs. In Ireland, electricity prices have increased 61% over the past five years- this is the highest energy price inflation anywhere in Europe. The cost of electricity has also recorded the highest rate of increase since 2000- up 41% in a move that could threaten the competitiveness of Irish businesses. A study of European gas and electricity markets shows the cost of electricity in Ireland since 2000 has soared to almost nine times the average EU inflation levels. A major and immediate concern facing the Irish enterprise sector is the need to have an energy supply that is secure and also competitively priced. The price of electricity in Ireland has risen from below the EU-15 average in 1996 to 13% above in 2006. The SEI report focuses on key energy trends in the residential sector since 1990 and found that while energy used by the sector grew by one-third, the residential sector’s share of overall energy usage dropped. This is because energy use in other sectors such as transport is rising even faster. Irish households spend €2.5 billion a year on energy, and this figure is likely to rise sharply as fuel prices continue to increase. The report notes that electricity prices have doubled since 2000, and natural gas prices have risen by 87 per cent.
Of course, this once more highlights the gross inefficiency of the ESB in particular and the public-sector in general in this country - a cause of growing annoyance to the public. There exists a litany of damning evidence for this - in 2006 a consultants report found that high labour-costs and inefficiencies were adding €100 million on bills, compared to other European homes. These inefficiencies are certainly not unconnected with the position of the ESB as a state-owned monopoly that lacks incentive to lower prices and therefore - as the profit-motive would dictate - costs. In that context, the failure of former and current Energy ministers Noel Dempsey and Eamon Ryan to implement the Government White Paper on Energy Regulation is to be lamented. It stands to reason that were the transmission-grid to remain in the hands of the ESB, a conflict of interest would exist between allowing competitors in the electricity-market to utilise it on the one hand, and maintaining such ownership on the other. A preview of what I am talking about can already be seen in the telecoms market where the mistake was made of maintaining Eircom’s ownership of the local-loop at the time of privatisation. As a partial consequence of that decision, Ireland has remained in the slow-lane in the growth of broadband in this country - even behind some Eastern European EU members. A Government-commissioned 2006 Deloitte Report calculated that the average wage of an ESB worker was more than double the average industrial wage at €92,000 - rising to €142,000 at the Poolbeg power plant. As an economic liberal, I firmly believe the solutions to rip-off Ireland can be found primarily in the opening up of the electricity, gas, public transport, legal-profession and other sectors to greater competition, in a context where barriers-to-entry and the dead hand of the State are removed. This seems as good an example as any of why this is needed. In the context of a continuing semi-state monopoly, price hikes like these constitute a tax-increase to all intents and purposes, and experience from the 1980’s shows the folly of such an approach during a recession. The public and the private-sector can no longer afford to be sacrificed on the altar of public-sector extravagance.
Your concern over high energy prices has, unfortunately, driven you to identify the wrong target. First the Energy regulator, in line with Goverment policy, has been artificially increasing tariffs in an attempt to woo private investors into the electricity market (hence the otherwise inexplicable rise from 2000 - from a position where Ireland had one of the lowest prices in the EU). Second, the ESB is not only prevented from competing, it is being forced to give up market shares, prevented from investing and forced to divest - all by bureaucratic dictat. The latest stunt by the Regulator prevents large industrial consumers from swithing to the ESB from a private company - all in the name of competition. Third, you quote the Deloitte report regarding ‘labour costs’. However, Deloitte admits to not carrying out a European comparison of ‘labour costs’. Further it admitted to not assessing the effect on prices by the Regulator’s price-rigging. Fourth, you will be aware that labour costs have been reduced since 2001 - in real terms, quite substantially and as a proportion of turnover, even more so. And, no, Deloitte did not calculate the ‘average wage’ at the ESB. They reproduced from ESB management a ‘labour cost’ figure - which included wages, overtime, pensions, performance pay, executive salaries and bonuses, work-related expenses which was divided up by the number of employees. The CSO figures on utility workers (of which the ESB would make up a disproportionate amount) shows that non-management/professional grades earn an average of €63,000 per year. Given that the average wage in 2006 was over €40,000 - this is not an unusual gap in European terms (given the high-skilled work involved among many grade). It should also be noted that production workers in the utility sectors work nearly 44 hours per week on average - well above the national norm. Fifth, the grid is not operated or managed by the ESB - it has been operated and managed by Eirgrid. If there is a lack of confidence in the management of the grid, then the last thing you want to do is vest formal ownership of the grid into the hands of those whose management has caused any lack of confidence (the whole issue is a diversion anyway - and transferring the grid as already been declared by the Regulator to have no impact on prices).
As an ‘economic liberal’ you will be aware that the electricity market is not allowed to be dictated by normal ‘market’ processes - by Government design. Further, as an ‘economic liberal’ you will no doubt be impressed by the analysis put forward by the largest union in the ESB - ATGWU (now part of UNITE) - in its ‘Through the Looking Glass’. No doubt you will agree, then, that (1) the Government’s policy of electricity market liberalisation should be abandoned and the market should be allowed to set the price of electirity, (2) the ESB should be given full freedom to operate commercially - domestically and internationally; (3) the Regulator’s role should be limited to ensuring that no company abuses their market position; (4) If the government wants new private sector entrants into the electricity market it should subsidise them directly and not use high electricity prices as an inducement. In short, ESB consumers have been subsidising Government policy - this should end.
And lastly, given that it was the ESB who electrified the country following the failure of the private sector in the 1920s (there were over 100 private electritiy suppliers then and very little power), this company should be mandated to drive the new generation of electricity technologies, namely renewables. Only then might we have a chance to not only meet our international targets on renewable, but Ireland might have a strong, vibrant multi-naitonal company that actually exports renewable electricity across the new connectors.
You might be interested in the following:
http://www.notesonthefront.typepad.com/politicaleconomy/2006/11/electricity_pri.html
http://www.irishelection.com/03/electric-surrealism/
FT - Provocative and interesting post. Michael Taft - brilliant response.
Just another aside. Despite the very real distortions which Michael Taft mentions, it is undeniable that the fundamentals in the energy market are pushing up prices. But not only is the uncertainty about the future of energy supplies put up energy prices, but so too will commitments to addressing climate change - in the short and medium term through what will be a volatile transition to more renewable and more diverse sources. Taking just the climate portion of this - this rise in prices - we are left with a huge cunundrum (we meaning those concerned with fairness and community). It is this: who is going to be hurt most by the resulting rises in prices? And if the answer is the poor and the already vulnerable (which FT concedes in his post), how can this wrong be righted?