Dublin Opinion

Michael Taft of Notes on the Front has written an excellent article about the disparity between the ESB’s operating costs from 2001 to 2005 and the comparative price increases that the consumer has been forced to pay. He’s highlighting the ESB Branch of the ATGWU report called ‘Through the Looking Glass’, which not only provides a critique of the Government’s behaviour while regulating the energy market but also offers a number of solutions, each of which would sit easily with the political philosophy of each opposition party.

This post started as a comment on his article in Irish Election, but got too long, so I’m posting it here instead. I’ll try and summarize Michael’s main points before proceeding.

Michael reminds us that the ESB doesn’t set the price of electricity. Rather, that’s the job of the Commission for Energy Regulation, which is a state regulator. The reason why the price has increased considerably more than the cost of production is to provide an incentive for competitors to enter the market.

However, the way it works is that the competitors buy the electricity off the ESB at a wholesale price, somewhere between the production cost and the price set by the regulator and sells it at the set retail price, thereby enjoying a profit from the difference.

The huge increase in electricity prices from 2000, when Ireland produced some of the cheapest electricity in the EU 15 to the high price charged now was explained (or rather implied) in the Government commissioned Deloitte report of October 2006 to be caused by rising labour costs. I say implied because, as Michael suggests they didn’t actually demonstrate how labour costs were responsible because they didn’t analyze wage costs.

In the report they said things like “Overall, we believe that payroll costs are approximately 20% to 30% higher . . . . we believe these staff costs are very high . . ” and so on.
The ATGWU report states that instead the real cost of labour was 16% of the total production costs in 2005, falling from 22% in 2001. Michael, in his November post cites figures from the ESB’s annual report for 2005 regarding the ESB’s wages bill:

• Since 2001 the ESB wage bill has increased by 2% annually in real terms. That’s less than the rise in the average industrial wage.
• In the last reported year – 2005 – the wage bill actually fell by nearly 6% in real terms.
• Net payroll costs (the capitalised cost of all payroll expenses – wages, PRSI, pensions, etc. – which are charged to the profit/loss account) have actually fallen every year since 2001.

“Of course”, Michael continues, “these figures must be put in commercial perspective. The wage bill, as a proportion of the company’s revenue, has fallen by over 7.5%.”

Over the years I’ve heard anecdotes of how ESB works have cushy working conditions, excellent pension provision and sumptuous redundancy packages. I overheard one man on the Dart recently detail how, at 48 he was entitled to a redundancy package giving him a large payout or a high percentage of his current wage until he retires at 65, and in the meantime the ESB organized a job for him at the Bank of Scotland. I can’t vouch for the accuracy of this, as it was overheard. But if only partly true it sounds very sweet indeed and much better than many workers in the private sector could ever expect to enjoy.
However, such anecdotes do not a reality make, and when the relative labour costs are put against the built in profit margin they do not significantly affect the increasing price and the rate of that increase endured by the consumer.

If labour costs were further reduced would this effect the over price to the consumer? Maybe. But presuming that the regulator takes into account the margin there is a chance that if the production cost is lower than 37% then the price may be reduced. But is the State, in the interests of making the energy market even more attractive to competitor’s of the ESB not motivated to keep the price the same.

As Michael argues, the media parroted the speculation at heart of the Deloitte report regarding labour costs because of the perception that the ESB as a state run semi-private monopoly fostered inherently inefficient work practices and provided preternatural benefits that were not connected to performance.

Underlining this perception is a contempt for the idea that a company should provide worthwhile benefits for a long term employee. The Deloitte omission is motivated by the idea that the worker is an expendable ‘cost’, unworthy of additional benefits that do not provide a fiscal return or a figure in terms of ‘performance’. If there is inefficiencies with the ESB, I presume there are many, it appears to be at the level of government policy and senior management.

Lorenzo, when commenting on Michael’s Electricity Prices: Deloitte’s Not Talking post in November said rightly that ‘17% of the population are ‘fuel poor’ (spending more than 10% of their income on energy)’ and we have news reports that ‘middleclass’ home owners are cutting their heating back to pay the mortgage on their overpriced homes. While cutting back on heating is good for the environment there is something wrong when people have to cut back on a utility because of a rapidly increasing price which has been set, not by the market, as you’d imagine in a liberal economy, but by the state.