Deregulation should mean more investment in the energy sector, Michael Tutty tells Emmet Oliver

When you are a regulator in an economy still heavily dependent on powerful State-owned enterprises, you should probably bear in mind the old Theodore Roosevelt saying, "speak softly and carry a big stick".

Since joining the Commission for Energy Regulation (CER) in October, Michael Tutty has probably reflected on that adage more than once.

As a career civil servant for over 30 years, he speaks in carefully constructed sentences and rarely resorts to exaggeration or rhetorical flourishes.

His arrival at the CER has been accompanied by dire warnings about the implications for the ESB, the largest CER-regulated company.

People in the industry talk about Mr Tutty arriving into the CER to "sort out" the ESB. He simply smiles at these suggestions and replies: "We will see over time." However, one senses he is quite happy for the impression to be created that he is carrying a big stick and that he may use it to strike the ESB.

Brought up in Dublin, in the same part of Drumcondra as the Taoiseach, Mr Tutty knows the political system well and has presumably built up a decent network of contacts.

While he may be in the latter stages of his career now, Mr Tutty shows no sign of slowing down. He is somebody who prizes fitness, for instance. "I just cannot understand people who don't want to get out and exercise," he says. He thinks nothing of doing a cycle to the Sally Gap in Co Wicklow each weekend and he has climbed some of the highest peaks in the Alps.

Neither he nor Tom Reeves, the CER chairman, see regulating the ESB in simplistic terms. Any action taken against the ESB must be based on evidence and proper research, much of it using international benchmarks, says Mr Tutty.

However, his long years at the top levels of public administration have given him a tough-as-teak exterior. For example, he flatly rejects the now common charge - often made by academic commentators - that regulators like Tom Reeves have failed to do anything about the dominance of ESB and to a lesser extent Bord Gáis. "We are not able to. It's not in our power," he says.

"That is a matter for the Government. If ESB want to build another generation station and they apply to us for a licence, we have no power to say no. The only person who can say that is the Minister. So we have limitations and we have to work within them. We can, of course, encourage the Minister to move in certain directions, but that's it." But he is not defeatist and believes things can improve. His own CV should help him in this task, he says.

"Well certainly the wide experience I have of the public sector in Ireland and dealing with Governments and State institutions through the partnership process over the years, all of that is very valuable as background."

Mr Tutty, while not CER chairman, will have a central role in regulating ESB and Bord Gáis. Under an internal restructuring, Tutty is responsible for all networks issues - the regulation of ESB's transmission and distribution arms. He will have a similar role in relation to the Bord Gáis network.

He will also be overseeing a major infrastructural project - the construction of an electricity interconnector with Britain.

While the burden of regulating ESB and Bord Gáis will now be shared between Mr Tutty, Tom Reeves and a new commissioner, Regina Finn, he believes past criticisms of Reeves over his sanctioning of various price rises were not valid.

"Before you criticise people, you have got to look at the background. What caused the price increases? When the price of oil and gas has gone up so much in the last 18 months or so, even if there was no regulator here, there would have been pressure on prices.

"But you also have to look at what happened before the regulator was set up, when prices were kept artificially low because nobody likes prices increases, so governments preferred not to allow prices increases to take place. But lack of price increases leads to a lack of investment. That is one of the reasons so much money has been spent on the networks in the last few years trying to catch up on the backlog. And that money has to be recouped in higher charges. So you really have to look at the background," he says.

He adds that price increases would have happened anyway, regardless of the regulator. "I realise that is not an easy message to get across, because people will simply say 'they would say that wouldn't they?'."

Mr Tutty accepts the ESB also has a responsibility to be cost-conscious and efficient. He says a review is underway in this area, led by consultants PA Consulting. The review will examine the ESB's expenditure across a range of areas and its return on capital, particularly from its network business. It will set the returns that the company can earn on its investment over the next five years, and thus the price it can charge.

"One of the things that we are starting out on is another review of the ESB's costs and capital investment. One of the headlines recently talked about us looking at the ESB's salaries.

"But it is much more than just that. It will also look how much are they spending on capital investment. Are they gold plating? to use that great term. Is it necessary expenditure? But then also how much are they paying their staff? Are they reasonable costs?"

Mr Tutty is careful not to prejudge the outcome of the review, which should be finished by the summer. "Well we are just starting out on this five-year review."

He says the CER does have the power to stop certain costs being passed on to the customer.

"There was one example before I arrived - the pay increases that ESB have been giving. Any that were over and above the terms of the national wage agreements, we have not allowed to be passed on to the consumer on the basis they were supposed to be recouped through productivity, so there is no need to pass them on. It has been made clear to them that's all we are willing to include in our annual review," he says.

He says the five-year review has the potential to go against the ESB.

"We have to look at what level of return a monopoly should be getting on assets. We have to look at whether they are running an efficient operation. We have to benchmark them against similar operations abroad to see are their costs totally out of line with the rest of the world. If they are, we should be saying to them you can't be passing on costs like that to the consumer. We would have to say to them 'you've got to get more efficient, we're going to require you to lower your costs by X per cent every year'."

But he has to wait until the review is done. To approach it any other way would just be "prejudice" against ESB, he says.

The market opens up fully at midnight tonight, but Mr Tutty is not getting too animated about this event.

"We are opening the market this weekend, but it will take time for other suppliers to start taking a keen interest in the residential sector. But we would hope, once the facility is there, they would start getting down to looking at the opportunities and this is where there may be room for small niche players to get in there. Airtricity is already supplying a number of residential customers," he notes.

Asked if there is a danger the whole deregulation process will be seriously anti-climactic, he replies: "There is no 'big bang' coming, but what we can give the consumer is a sense that, over time, things will improve".

One reason competitors don't want to enter the Irish market is its small scale. But the other reason is the dominance of the ESB.

For example, what are outside companies to make of ESB National Grid, a supposedly ring-fenced entity from the ESB Group, sharing office space with the main company in the centre of Dublin?

Mr Tutty says he is not satisfied that ESB National Grid has still not evolved into EirGrid, but he senses progress on this may not be far away.

"I had discussions with the EirGrid people last week to keep in touch with what's going on. The negotiations within ESB are progressing and it looks as if we are nearing the stage where agreement can be reached which will allow EirGrid to be set up formally as a separate entity. And the intention is they will be moving out of their current premises into a separate building. One of the things we have to look at in that is, are there significant extra costs involved in them moving out of Fitzwilliam Street into a new building?

"My understanding is things are moving reasonably well at this stage and this will be resolved before too long," he adds.

When asked could EirGrid be decentralised from Dublin during this process, Mr Tutty laughs and says, "we want to get an agreement".

There is no doubting his frustration at the situation. "We have always seen that as being important. We have been disappointed that EirGrid was not established as quickly as expected. But with a new chief executive to be appointed in the very near future, that will happen".

His frustration is understandable because the EirGrid situation may be frightening away some new entrants.

"Perceptions are important as well as realities - we certainly would like to encourage more outside investment into the energy sector here. So getting rid of any misconceptions that are there would be good," he emphasises.

Factfile

Name: Michael Tutty

Born: May 1946

Marital status: Partner of Dr Mary McAteer

Hobbies: A self-confessed sports fanatic, Mr Tutty's passion is cycling and he regularly cycles in Ireland and Europe. He is also a GAA fan and was recently president of the Gaelic Sports Club of Luxembourg. Regularly attends Croke Park, but also watches sports as diverse as soccer, rugby and American football.

Career: Mr Tutty worked in the Department of Finance from 1968 onward, holding several different roles. Between 1994 and 2000 Mr Tutty was second secretary general in the Department with responsibility for overall strategy and co-ordination of the Budget. He also had responsibility for tax policy, economic policy and forecasting. Between October 2000 and July 2004 he was vice-president of the European Investment Bank.

Why is he in the news: The electricity market becomes fully deregulated at midnight. Mr Tutty, as one of the three commissioners for energy regulation, will have an important role in encouraging competition in the market.