Power broker

The ESB will be competing against a new entrant in the electricity market within the next five years, the semistate's chief executive, Mr Ken O'Hara has said. He also contends that some companies in Ireland are paying more for their electricity than they should be and domestic users are not paying their fair share.

Under the terms of an EU directive, Ireland must legislate for competition in the electricity market by the year 2000. It means that others can enter the market and supply electricity.

Competition will be one of the key issues which Mr O'Hara will have to grapple with in his new role as chief executive of one of Ireland's most important semi-state companies. He recently took up the post following a protracted battle between the ESB board and the Government over his pay deal.

Among those mooted to be interested in entering the electricity market here are privatised companies such as Scottish Power and Northern Ireland Electricity. Scottish Power for example, could supply electricity to Ireland, through an interconnector.

However, Mr O'Hara points out that the EU directive also means the ESB could enter the Northern Ireland or Scottish markets or any other European market

"Under the terms of the directive it is very clear that we must facilitate choice for larger customers - up to 32 per cent of companies must be able to seek out a supplier of their choice in the early years of the next decade."

Mr O'Hara warns that exactly how competition in the sector would work is still unclear. The ESB, he says, has a public service obligation - whereby it must supply electricity to all consumers regardless of cost. Some large corporate users are paying more than they should because of this burden, he adds. There are additional costs associated with generating electricity from peat. Traditionally, the ESB has had to buy peat from Bord na Mona to fulfil part of its electricity generation requirement. Mr O'Hara says the competition issue and its function must be examined. He asks if the aim is to introduce competition per se, to reduce prices or to reduce the size of the ESB.

Problems could arise, he adds, in a situation where several new players were allowed into the market to generate electricity. If there was over-production, the plant which was costing the most to generate electricity would be closed down.

He argues that there will have to be some rebalancing of tariffs when competition is introduced. He says: "In a truly cost reflective environment" domestic users would be paying more for their electricity. Domestic users are paying considerably less than their fair share of costs at present," he says.

"There will have to be a rebalancing of tariffs to reflect the true cost of supply," he says.

Mr O'Hara says industrial users and some commercial consumers at the lower level of usage are paying more for their electricity than they should be. He points out that tariffs are uniform, although it obviously costs more to supply some customers.

He says electricity prices "in real terms" have dropped dramatically over the past 10 years. EU surveys show the ESB is at the lower end of average supply cost. "For particular groups of users, we are significantly lower than the EU average and there are very few cases where we are above the EU average."

Mr O'Hara says very few people complain about the price of electricity, although a small price rise is due soon.

Legislation allowing for competition in the market must be in place by 2000. Mr O'Hara says the current competition for the new peat generating station in the midlands - where the ESB is one of five shortlisted firms to build the station - is "clear evidence" of the coming era of competition.

The ESB is seeking to build and operate the £120 million station and is vying with some heavyweight international competition including a Finnish and a Japanese company. Even if the ESB does not win the competition it will have to buy the output from the station.

The new station will add about one million tonnes of peat to the current three million tonnes the ESB currently uses for peat generation. However, Mr O'Hara says the ESB is quietly confident its bid will succeed. Current projections are that electricity usage is growing at 5 per cent per annum. The ESB had budgeted for growth of around 3 per cent per annum, but the economic boom has meant the increase has been bigger than anticipated.

Although Mr O'Hara maintains there is a limited demand for electricity in Ireland, he is in no doubt that new entrants will come in.

He says the ESB is preparing to ensure that its cost base is competitive, and identifying areas where costs can be reduced. The Cost Competitiveness Review (CCR), a programme agreed with staff to reorganise the company, is ongoing. A key element is staff reductions in various areas. This will entail staff cuts from 9,500 to 7,500 over three years. The most significant reductions are in generation, where the figures will drop from 2,800 to 1,800.

Despite the trend in other countries, Mr O'Hara is not an advocate of privatisation. He sees no reason to sell off part of the ESB or to form a strategic alliance.

A strategic alliance would be of no benefit to the ESB in its Irish operations, he says, and the company forms partnerships on a case-by-case basis in its international operations.

The ESB, through its international arm, ESB International, is changing its focus and will spend a lot more money taking equity stakes in projects, rather than just contributing to them on a project management basis. ESBI's annual turnover is around £80 million per year and it employs up to 500 people. Mr O'Hara sees it as a "significant springboard" for further investments. "We are known and highly regarded in many countries," he says. Mr O'Hara is nonplussed by the suggestion that perhaps privatisation would benefit the ESB. You have to ask yourself for whose benefit privatisation is, he says. "Is it for the benefit of shareholders or customers?" He says the reason electricity became cheaper in Britain had more to do with the switch from coal to gas for power generation, than privatisation.

For its part, the ESB uses a mix of fuels. For example 40 per cent of electricity is generated at Moneypoint which uses coal. However, gas supplies are due to run out in the year 2000, unless new supplies are found in the meantime.

So what does the future hold for the ESB? Mr O'Hara says value for the customer will be the bottom line. He pledges that customer services will be improved and the company will take steps to "prevent electricity prices from rising".

He says satisfying customers will be a very important issue in the future, particularly the ESB's larger customers who will be targeted by new entrants.

He says there will be a considerable amount of investment in the networks. Much expansion has taken place over the past few years and the networks need to be refurbished.

It is for these reasons that generating money from abroad, and not just electricity will be imperative for the ESB, if it is to remain a strong player in the market post 2000.