The ESB is facing serious challenges on rising costs, industrial relations,raising revenue for investment in facilities and in meetingincreased consumer demand, writes Arthur Beesley

With operating profits in 2001 nearing €200 million, why should the ESB be granted price increases averaging 9.85 per cent from next January? The rise will come 15 months after an increase averaging 8.6 per cent was granted by the energy regulator, Mr Tom Reeves.

Householders will bear most of the latest increase, with domestic prices rising 13.25 per cent. Yet big as these rises are, they are still below the average increase of 14.7 per cent sought by the ESB.

The company's new chief executive Mr Pádraig McManus has pledged to double post-tax profits by 2007 to €330 million from the €165 million recorded last year.

That target was set despite an obligation to reduce market share to 60 per cent by 2005. In spite of the opening of the industrial market to competition more than two years ago, prices have moved only upwards.

Still, the implication in Mr Reeves' determination is that the ESB could not move ahead without a significant increase in revenues. The rise was justified, he said, due to big increases in the ESB's costs and the need for major investment in its electricity infrastructure.

While the provision of a quality electricity infrastructure is crucial to public policy in a State that aspires to be model fast-growth economy, pay and fuel costs are internal to the ESB. Such factors can be seen in the company's annual report for 2001, which outlines a significant squeeze between the revenue and costs.

Turnover exceeded €2 billion for the first time in 2001 but day-to-day operating profits fell by €103 million to €199 million from €302 million.

Major factors in this decrease included a €61.97 million rise in the pay bill to €412.24 million after the initiation in the middle of last year of a package that will increase pay by 21 per cent. This was agreed after a long negotiation on a programme that will see up to 2,000 of the company's 8,000 staff leave by 2007. The €299.8 million cost of that project was charged to the 2000 accounts.

But other costs are rising too. Expenditure on fuel rose by €171.52 million last year to €752.74 million. With capital spending on the rise in a €4 billion programme, the ESB spent €547 million on capital projects in 2001 and plans spending €637 million in the current year.

These areas of major expenditure are outlined in the company's latest annual report. At the end of the year, the company's cash balance stood at €158 million, down from €303 million. The report states that 2001 was a difficult year for ESB in financial terms. But it was difficult too for other reasons, some of which are not mentioned in the annual report.

During last year the Government spiked plans by the ESB to spend up to €1.7 billion on a cluster of eight power supply companies in Poland. If the plan had gone ahead, the ESB's debt would have risen to €5 billion in 2005. As it happened, borrowings at the end of 2001 stood at €791 million, down €48 million on 2000.

The report states that the ESB has generated sufficient cash from operations to cover loan repayments and meet its capital investment programme. With the company looking at bringing forward major elements of its capital programme for completion by 2007 instead of 2010, it will have to raise an additional €2 billion in bonds or loans.

Under-investment in the network and rising demand for electricity means that the generation and distribution infrastructure has been significantly overstretched. Emergency generation has been required during wintertime, at large expense. While two major new gas-fired stations in Dublin are being commissioned this year - one by an ESB rival - ever-rising demand means plans to build another will have to be advanced soon.

Because the Irish market is seen as unattractive to new investors, the latest increase in tariffs is also perceived as an attempt to improve the prospects of new groups entering the market.

Meanwhile, the poor infrastructure means heavy industry cannot locate in large parts of the underdeveloped Border, Midlands and Western regions. Infrastructure projects are necessarily long-term.

In the short-term, however, the company is looking to end a stand-off with up to 100 staff at a defunct power station in Co Offaly. Wages in the plant at Rhode which has produced no electricity since May 2001, are costing €60,000 per week.

Talks are expected again today or tomorrow and the word is that certain Government figures are very unhappy with the continued drain of cash. With staff seeking compensation for exposure to asbestos, resolution will be difficult.

In addition, four other peat- and oil-burning plants are scheduled for closure in the coming years. Testing times.