I welcome Mr. Tony Ennis and Mr. Colm Kennedy from Vayu Limited. The purpose of the meeting is to discuss developments in the retail gas market in Ireland. Before we commence, I draw attention to the fact that while members of the joint committee have absolute privilege, the same privilege does not apply to witnesses appearing before the committee, which cannot guarantee any level of privilege to witnesses appearing before it. Further, under the salient rulings of the Chair, members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable. I invite Mr. Ennis to make the presentation.
Retail Gas Market: Discussion with Vayu Limited.
Mr. Tony Ennis
I thank the joint committee for giving us the opportunity to address it. As I am aware it can be a chore to get up and through the traffic, this opportunity and the presence of members are very much appreciated.
I will first introduce myself, my colleague and my company. I am the founder and managing director of Vayu Limited, a new entrant gas supply company, licensed by the Commission for Energy Regulation and in direct competition with Bord Gáis. The company was established a little over five years ago. I am joined by Mr. Colm Kennedy, commercial director of Vayu Limited. I am here to highlight some serious issues in regard to the structure of the retail gas market and, in particular, the actions of the semi-State incumbent, Bord Gáis, and its attempts to stifle competition. I believe members have been given the presentation in printed format. I propose to cover the items in it in a jargon free way in so far as it is possible to do so. I have been told the committee is often subjected to a number of three-letter acronyms which I will try to reduce to the minimum.
As I mentioned, Vayu Limited was established in 2003. In the five years it has been in business it has won some 28% of the small sector in which it is allowed to compete. While this is a fantastic achievement and one of which we are proud, as the committee will see from the slides, Vayu Limited has 28% of a sector of a market that only accounts for 14% of the entire market. Its market share is more like 3% or, to put it in context, 50 customers out of a possible 620,000.
Our business is to provide natural gas for customers. However, there is no such thing as cheap gas. The market decides the price and all gas is shipped from the United Kingdom into the market. Vayu Limited competes on service and in providing customers with more flexible and strategic ways of procuring gas through a range of products and information services. Through its business model, it has saved customers several million euro in unnecessary costs that they would have incurred had they adhered to the traditional way of procuring. In addition, it has attracted inward investment into Ireland. In 2006 it sold 27% of equity to Glencore International, the world's largest privately held commodity trader. To put the matter in context, Glencore turned over some $140 billion in 2007 and would trade the equivalent of the output of Iran and Kuwait in oil every day.
These great beginnings are now under threat, not from rising oil prices, credit crunches or economic downturns but from Bord Gáis getting jumpy about losing market share, even though, after a decade of the market opening, it still retains approximately 90% of the addressable market. It is about this herd-like threat to the infancy of competition about which I wish to speak today. I will prompt the committee when I move to the next slide. I am currently on the slide that deals with the protracted development of the retail gas market.
The gas market opened for competition ten years ago in 1998. It further opened up five years later in 2003, at which point Vayu Limited entered it. In 2004 and again in 2007 the market opened incrementally. Now everyone can choose his or her supplier. This is just the legal framework. It is only theory. In reality we cannot change supplier. The supporting regulatory frameworks are not in place. Bord Gáis still dominates the market and uses its strength and position to ensure new entrants will never have the confidence to address it. The CER has not implemented the regulations to allow new market entrants the oxygen to gain a foothold in the market.
Now, after ten years of the monopoly's dominance, Bord Gáis wants to win back the 10% it has lost and a consultation paper has been issued to this effect. Bord Gáis argues there is competition in the marketplace and asserts it should be allowed use its scale and efficiencies to win back these customers. The consultation paper issued by the Commission for Energy Regulation is an endorsement of the concept of cross-subsidisation.
The following slide gives a self-explanatory table that shows the breakdown of the Irish market by sector. The middle column shows the year the sector was opened and the final column on the right hand side shows the percentage of the market retained by Bord Gáis. In the middle members will see two sectors where Bord Gáis is experiencing competition; one is called the regulated tariff formula, RTF, and the other is combined heat and power, CHP. These are the only two sectors of the market in which the regulator has imposed any meaningful controls. The upper of the two, the regulated tariff formula, has the most controls and this is the area in which Vayu competes. The lower of the two, the CHP sector, has fewer controls. The table shows that where controls are imposed the playing field is levelled and competition can flourish. It also shows that despite some sectors being open for a decade there has been no competition. The worrying fact is that the CER is seriously considering the relaxation or removal or controls on Bord Gáis on the basis that competition exists and it is time for it to win back customers through the use of scale and cross-subsidisation. As mentioned earlier, it has already issued a consultation paper.
The basis of Bord Gáis's argument for the removal of the controls placed on it in the RTF sector is a survey it conducted. The survey was not released, yet the CER found it appropriate to issue Bord Gáis Energy Supply's interpretation of its findings. By the CER's own admission, this survey, which it has not had sight of, was the main catalyst for the current consultation paper and is the sole basis for the proposed loosening of control on Bord Gáis and a step backwards for Ireland. In the interest of transparency, Vayu conducted its own survey of between 12% and 15% of the industrial sector, comprised of its own customers and those of Bord Gáis and other suppliers. We have furnished the CER with the results and some irrefutable statistics relating to our so-called open market.
A series of slides show graphs relating to the survey and I will run through them quickly. Vayu asked seven questions including "Do you welcome an open competitive market?" Customers could reply in four ways, namely, "Strongly agree", "Agree", "Disagree" or "Strongly disagree". Members will see that everyone welcomed an open market. The second question addressed the role of the regulator. We asked whether people believed that the Commission for Energy Regulation understands the challenges organisations face in the natural gas market and works to their advantage. Some 70% of respondents felt that it does not. Regarding the introduction of controls, the RTF, we asked whether "the introduction of the RTF has contributed to the development of competition and new entrants". Everyone agreed that the controls have worked. We went further to ask about developments in the natural gas market and whether they have worked in favour of all customers, not just those in the industrial sector. Only 4.35% of respondents felt that they have. We asked whether reducing the dominance of Bord Gáis Energy Supply would be beneficial for customers and competition and the answer was a resounding yes. The next statement was: "Following ten years of market competition, only 10% of the market has switched away from Bord Gáis Energy Supply (less than 100 customers). Knowing this, do you agree that the current level of regulation on Bord Gáis Energy Supply is sufficient?" None of the respondents agreed. The final question related to the controls that have been placed on the one sector of the market that is experiencing competition. We asked whether this approach should be maintained with a similar methodology expanded to other areas of the market, both above this sector and below it, right down to the domestic market. The answer was a resounding yes.
The total retail market, not a subset or distorted figures, should be considered in any consultation paper or evaluation of the market. The questions we asked are clear and we believe the findings are in stark contrast to the arguments Bord Gáis made for removing controls. Removing controls will only result in Bord Gáis using its dominant position to cross-subsidise customers it has lost in the past ten years. The relaxation or removal of controls will only serve to increase the dominance of Bord Gáis, rather than erode it or create sustainable competition. The results of our survey cannot be ignored. The controls must stay and be quickly extended to all segments of the market, especially as Ireland Inc. is facing down the barrel of the energy crisis gun.
I have included a slide that highlights the issues in summary but before they can be addressed we must decide whether Ireland is to support the European directives on energy or, effectively, vote "No" to competition.
I welcome the delegation. The essence of business is competition as this leads to all players raising their game. What I have seen of this presentation shows me that Vayu's involvement in the gas market has raised its game. However, it seems that Bord Gáis is, effectively, trying to strike back and compete in a market that Vayu has entered, giving significant savings to companies that have benefited.
If the CER proceeds on the line it has taken what effect will there be on Vayu? Would Vayu compete for other markets if the CER allowed them to be opened? We have heard much about speculation on energy market futures in recent months. Would the backing of Vayu by a company like Glencore have a benefit internationally for Irish consumers?
Mr. Tony Ennis
I will address those questions as best I can in order. The first question related to the effect on Vayu of the removal of these controls. For all competitors in the marketplace, particularly those seeking to enter the market in the future, the removal of controls highlights a regulatory risk. There has been a small amount of competition in recent years but removal of controls would see that eroded. We only have a small portion of a small sector. We are quite happy that the model has been proven, that we can work and operate effectively and that we can create value for customers but if the CER proceeds to remove or relax controls there will be a slide backwards that will result in an increase in the dominance of Bord Gáis.
I would very much like Vayu to operate in other sectors of the market. When this company was founded it was intended to be a player in the gas and energy market in Ireland but having controls in only one sector of the market was not the model we had hoped for when we entered five years ago.
Regarding speculation on futures and the international benefit of a company like Glencore, our organisation has saved multinationals — all blue chip companies, household names and large users of energy — a great deal of money, though not necessarily through cheaper prices.There is no such thing, as the market decides the price. Vayu Limited, with its partner, Glencore International, brings to the market flexibility in terms of products. This allows people to better understand the markets and meet their requirements in ways that were not possible prior to our becoming involved in the gas market five years ago. That is the difference we make.
On future prices and high increases, I read the transcript of the committee's recent meeting with Bord Gáis at which it referred to a single digit increase this year. It is now speaking about a 19% increase for users. The select committee in the United Kingdom recently met six of the largest utility companies. Members will note in this regard that they are proposing a 40% increase in the year ahead. This will prove damaging for the fuel impoverished and have a massive impact in the difficult economic times ahead. We must face up to the fact that competition can and will drive down prices. Our customers are, in the main, protected from those increases. There are various mechanisms that can be used in this regard. The remainder are not protected. Competition will ensure protection, longer term contracts and savings for customers. A combination of reduced prices and long-term protection for customers is important.
I welcome the delegation. Mr. Ennis mentioned that the regulator had not implemented the regulations. Perhaps he will clarify if it was required by legislation to implement them but has not done so.
Vayu Limited is a recent entant to the market, in which it has been involved for only five years. Are there other companies in the same boat? I am not clear on how the regulation tariff formula works and what it means. Perhaps Mr. Ennis will elaborate on that point.
How many customers were surveyed? While it sends very clear messages, it might have been more scientific to survey customers who are not customers of Vayu Limited. However, that is Mr. Ennis's business.
It is stated at the end of the presentation, although Mr. Ennis did not read it, that Bord Gáis is the largest recruiter of CER staff. This fact which has implications is merely stated and not explained. Perhaps Mr. Ennis will tell us exactly what is meant by this, why it is important and what it is he is implying?
On costs, the tendency is that where the incumbent player in any area seeks an increase, smaller companies follow suit. Is Mr. Ennis saying his company will not be increasing its prices, even though Bord Gáis will? If so, how is that possible in a growing business?
Mr. Tony Ennis
The Deputy has asked a number of questions, all of which I will try to answer. However, if I miss any, she might remind me of them later.
On regulation and legislation, technically the market is open and households should be able to change supplier. However, while this is the case in theory, in practise there are no suppliers in the marketplace. The reason Vayu Limited and other companies cannot supply the household or other sectors, other than by way of the regulated tariff which I will explain, is the regulator has put in place rules to address the dominance of Bord Gáis in one particular sector of the market. This relates to large industrial and commercial users. In so doing, the playing field was levelled and everything became transparent.
The regulated tariff formula provides that companies can only offer gas at the market price, regardless of the cost of distributing it to meter points. Also, it must include fixed margins and so on. The regulator put in place a clear and transparent formula.
Just for that sector.
Mr. Tony Ennis
Yes. This meant that organisations such as Vayu Limited could enter the marketplace and assess the offering but they could not change the price of gas. If Bord Gáis or Vayu Limited was to offer gas from today, the price would be the market price. However, Bord Gáis was not allowed to use historic contracts, its portfolio or scale in that sector. The operation had to be clear, transparent and open.
Cost plus a set margin.
Mr. Tony Ennis
Yes. There are only two competitors to Bord Gáis in the market; Energia which deals mostly with the supply of electricity and Vayu Limited which deals exclusively with the supply of gas. Both organisations — although this relates more to Vayu Limited than Energia — have brought about change in the sector by ensuring flexibility, service, information, strategic procurement models and other complex measures for larger users. In bringing these benefits to the sector we have ensured transparency.
The regulator has put in place similar methodology for another sector which includes 1,600 customers. However, as it is not as clear or as open, no customers have changed service provider. It is our aspiration to move into this sector.
In legislation everything has been done. Technically, the market is 100% open. However, the controls required to ensure a level playing field to allow competition to take hold have not been applied.
Deputy McManus asked if there were other companies in the marketplace. The companies involved are Vayu Limited and Energia. Flogas, to a lesser extent, supplies towns under a different arrangement.
I have dealt with the regulated tariff formula. It is clear in regard to how the tariff is structured and what Bord Gáis can and cannot offer. It also includes a code of conduct, although I do not believe it goes far enough.
We surveyed 23 of the largest blue chip companies, some of which were located on multiple sites. We interviewed customers of Vayu Limited, Energia and Bord Gáis. The survey carried out by Bord Gáis covered 43 customers in the same sector. Unfortunately, we did not have the resources or time to react to the consultation paper or conduct a more conclusive survey. The questions we put to the 23 companies were transparent and open, to which we received a clear and positive response. We have furnished the details to the CER.
Deputy McManus has referred to the statement in the presentation that the largest recruiter of CER staff is Bord Gáis. That is a fact. In the current environment where regulation is the key and the decisions made by the office of the regulator are so important to the future of the market, I do not believe it is appropriate that the organisation regulated most should be allowed to recruit directly from CER before a set period.
I think the term used is "gardening time".
Mr. Tony Ennis
"Gardening leave". It is inappropriate that people who leave the regulator's office which makes decisions affecting the future of a particular company can take up work in that company.
I apologise, I cannot remember the Deputy's final question.
I asked about cost increases.
Mr. Tony Ennis
Yes, the question related to the increase being sought by Bord Gáis. On the information we have provided and analysis of the market, we have customers who have chosen to buy gas out 60 months in the future. Essentially, they are freezing the price of gas when it is at an appropriate level for their business and budget. Even when the price of gas is high customers sometimes like to fix the price because there is certainty and an absence of risk.
The markets are incredibly volatile and the price of oil and gas is being driven through the roof. We will only see an increase in that. There are no indicators in the market that show a downward pressure on that now.
Domestic users do not have the ability to freeze the price of gas for the consumer for five years. Our customers may do so. Are we going to increase our prices? If customers have already locked and have chosen to take a static product, there will be no change to the price. If customers have not locked, as with most Bord Gáis customers on a year to year basis, every year we are open to the volatility of the market and what has happened on the international stage. We cannot influence that.
It is important we look to the factors we can influence here, particularly in the reduction of the costs of transmission and distribution. Getting the gas to people makes up a third of the cost of gas, and this could be addressed locally. When we are faced internationally with an issue we do not have an influence on, it is very difficult for us to control it.
I thank the witnesses.
I thank the delegation for coming here and being direct, which is helpful because it focuses our minds on the issues. I have a few questions. In speaking for myself, before this meeting I did not have a clear understanding to differentiate between the workings of the regulated tariff formula in that segment of the market and how, for example, there is regulation of the large industrial energy users or the independently supplied power stations.
There is clearly a regulated tariff or price in the sector the delegation is competing in. I presume this is a similar formula to what is used in the electricity market, as there is the cost of supply and then a factoring in of a margin. I assume this includes the cost of transmission, as well as the cost of sourcing the gas.
Mr. Tony Ennis
Correct.
Is gas, in the regulated tariff formula, more expensive or cheaper than in the other sectors, which do not have the same price regulation? If we were to do away with the regulated tariff formula — if Bord Gáis got its way and made the case successfully to the CER that there is no need for a regulated pricing mechanism in the sector — would it result in the price of gas coming down in the sector or increasing? That links with my first question.
In terms of the anticipated 19% increase in the price of gas, to what sectors does that apply? Is it 19% across the board or are we talking about households? Within the regulated tariff formula, where the delegates' company is successfully competing with 28% of the market, it was indicated Bord Gáis has 29% of the market. That leaves 43% of the market, so who has that? I presume it is not Energia, as it was suggested it did not have as big a market share as Vayu. Who supplies that?
The other sectors are controlled almost entirely by Bord Gáis. How does Vayu anticipate getting into those sectors of the market? For example, with regard to domestic supply of gas, what does Vayu envisage? Will there be an independent carrier of gas, a bit like EirGrid in the electricity market? I make comparisons with the electricity market because we are facing the same challenges there. We have a slightly more mature competitive market in electricity, although we started with the same scenario of total dominance by the ESB. Is that the direction in which the delegates would like to see the CER going in terms of the gas market?
My main concern is that we have tried to aggressively introduce competition to the electricity market, although the result has been high electricity prices. In other words we have had the cost of introducing competition but we have not had the benefits in terms of price. My concern with gas is that if we aggressively try to introduce competition through more regulation in the other sectors, will the same thing happen because of the size of the market? Will we have increased prices but not the benefits of competition? I say this as somebody who is a big supporter of competition. It is important to answer those questions.
Mr. Tony Ellis
The Deputy's first question related to the regulation tariff and he compared it to the electricity sector. He asked if the price of gas would go up if the RTF went away. The regulated tariff formula did not increase the price of gas as the price of gas is dictated by the market. The difference is how somebody manages their gas portfolio and the types of product and services sold to customers.
Gas is slightly different to electricity in that with the electricity market, we had a significant infrastructural cost. There was a big cost in introducing the systems and processes, along with the separation of the various companies. There was also the separation of the ESB National Grid into EirGrid and the way in which new participants came into the market was incredibly costly.
I know this because in a previous role I supplied IT systems into ESB and Bord Gáis and I understand the complexities and costs involved. The gas market is different. The price of electricity is based on the input fuel and the total costs and so on.
It is a more complex formula. There is a standard gas price on the international markets and I presume the rest is essentially the cost of supplying it after that and the different products offered to customers in terms of supply.
Mr. Tony Ennis
That is correct.
The delegates do not have an influence over producing gas more cheaply. It is there to be bought from international sources, which is the point I am making in terms of gas supply. Are we not getting the benefits of competition in the regulated sector because we are factoring in a set margin, when Bord Gáis could potentially shave the margin if it was not regulated?
Mr. Tony Ennis
Correct. The model being used in the gas market, particularly in domestic houses, small businesses and the people affected most by these massive changes, usually uses the formula of looking at the gas price on the international market and makes assumptions about its growth over a number of years. Hedging, speculation and trade comes into play.
Bord Gáis has 30 traders who trade gas on a daily basis. To make it incredibly simple, taking the weighted average cost of the gas, those traders will try to beat that figure through trade over the course of a year, making various assumptions about its increases.
That is a step change every year and every year we see the price of gas going up. What increase are we facing at the moment? Is it 19%, 25% — I feel it will be in this range — or 40%? That is a massive increase. At the end of next year we will sit here considering what the increase will be at that stage also.
Essentially, competition in the gas market has been different to the electricity market in so far as what we have managed to do is bring real savings to our customers. We have several customer testimonials we could share and our strategy is to look at various times and points where customers can stop that big step change from occurring by buying in a more intelligent way.
At the moment we have a very blunt instrument which is not serving either the country or consumers well. We are very confident our customers have saved money, first and foremost, and have protected themselves from the large increases that occur. This is not highlighted as much. The market is cyclical. There will be occasions when it will rise and when it will fall. It is a case of having in place a proper strategy and proper products in order to address the demands of the market. The latter actually provide protection as well as helping to reduce costs.
Deputy Coveney inquired if the 19% increase was across the board. The answer is "Yes". It will apply to anyone involved in small to medium-sized businesses, industrial enterprises and domestic users. However, it will not affect those in the regulated tariff formula area because they will have either purchased or not purchased.
With regard to other sectors, how we intend to enter the marketplace and questions as to whether there is an independent carrier, in theory there are actually two parts to Bord Gáis. First, there is Bord Gáis Energy, which supplies gas and, second, there is Bord Gáis Networks, the concept behind which is similar to that relating to EirGrid. The latter is now, however, legally separate from Bord Gáis.
At present, we have access to the network. Every operator in possession of a licence can come onto the network on an equal footing. Regardless of whether it is Bord Gáis, Vayu Limited or some other company, there is a uniform cost involved. The model in this area has probably already evolved to a stage where it is quite similar to the EirGrid model and where there is a common carrier or owner of the network. We refer to this as third party access rights.
As regards what model we see developing in the future, we have a number of different models in design which, as it trickles down, could be employed for smaller business users first. This model is based around different options. It is not too dissimilar to what one might experience with one's mortgage in that one might opt for a fixed-rate mortgage, a tracker mortgage or an index-linked mortgage. There are various products and services in existence, which could be made available to customers, which would enable them to manage the volatility of the market over a longer period.
Who are the other players in the regulated tariff formula area? Bord Gáis has 29% and Vayu has 38%.
Mr. Tony Ennis
Energia has the remainder.
So Energia has 40% of the market.
Mr. Tony Ennis
By volume.
This is an interesting topic but, like previous speakers, I am not perhaps as au fait with it as should be the case. The picture painted by our guests is disturbing. From our point of view, it needs to be tested.
I would not be critical of Bord Gáis. Regardless of whether a company is public or private, it will always do its best to preserve its position and it would be foolish not to do so. The issues to which our guests refer raise serious questions with regard to the Commission for Energy Regulation. I suggest that the committee adopt this as an important topic in order that members might be much better briefed on it. I also suggest that representatives from the Commission for Energy Regulation be invited before the committee to indicate why there is not greater competition in the market. If someone holds a dominant position, under EU regulations we should be trying to reshape the market.
According to the figures provided, independently supplied power stations and domestic users represent 60% of the total market for gas. Unless these areas of the market are cracked, Bord Gáis will remain in an extremely dominant position.
It is stated that Bord Gáis has 100% of the domestic market. Does this refer to piped natural gas? Many domestic users employ bottled gas and tanks provided by Flogas and other suppliers. Will our guests clarify the position in that regard? Will they also provide better and more in-depth information under each of the headings provided in the presentation in respect of the lack of competition? Will they indicate what they believe should happen in respect of these headings in order to create real and effective competition? The committee might then have a platform to advance matters.
Mr. Colm Kennedy
I would not be critical of Bord Gáis either. The Senator is quite right and I totally agree with him. Bord Gáis is the incumbent and it must conduct its business to the best of its ability. In many areas, it does so. Our job and ambition is to bring about competition through the provision of an enhanced service and a better designed and developed business, and create better options for customers. That is what we do. I completely accept that Bord Gáis has a slightly different job to do in many ways.
In respect of the competitive market, there are some matters which are beyond our control, namely, the internationally traded cost of gas. I accept that regardless of how big or small an operator is, it must pay this cost. However, serious and fundamental issues arise with regard to the cost structures relating to energy with which consumers and industry here must cope.
Bord Gáis is made up of two components — the first is a supply business and the second is a networks business. As Mr. Ennis pointed out earlier, about 30% of the cost to any user relates to the networks side. It is the duty of Bord Gáis to examine the position carefully and consider whether, in these difficult and challenging times, it might alleviate some of the pain.
Bord Gáis is a healthy and profitable company which generates considerable profits. It reinvests the latter in other aspects of its business, including that relating to electricity. My question to the committee would be whether this is in the best interests of the country, the consumer or the industrial market. These are the challenges that must be addressed. Ireland has a small, open economy which is under real pressure from international competition. We must, therefore, ask how we can best serve our customers and the community.
Vayu is a small company. It is extremely ambitious and keen to bring about a certain level of competition. However, it is not going to change the world or the entire market in this country for that matter. We, therefore, face some stiff challenges in moving forward. We will continue to focus on the industrial and commercial side of things. If Bord Gáis is allowed to regain its dominant position in this area, it will appear that competition is not looked upon in a favourable way.
Vayu is a private company and——
Mr. Colm Kennedy
Yes.
——is not involved in this area of business for altruistic reasons but to generate profits.
Mr. Colm Kennedy
Absolutely.
I have no difficulty with that. However, Vayu's sole focus is on industrial and commercial users. Is its main raison d’être for appearing before the committee to ensure that the 10% in question does not go back to Bord Gáis or does it have an interest in the other sectors where the incumbent has 100% of the market? I invited our guests to expand on their position in writing to the committee at a later date in order that members might better understand matters and then move forward in consultation with the Department, the Commission for Energy Regulation, etc. If competition is lacking in a particular sector, the committee should focus its attention on what the Commission for Energy Regulation is doing.
It is disturbing that our guests have highlighted that a conflict of interest may exist in the area of energy regulation. This is a matter of extreme concern, especially if all the staff employed by the body responsible for such regulation come from a particular source. I was involved in discussions with representatives of the Department yesterday in respect of a similar situation involving EirGrid. When we are establishing bodies of this nature, it is essential that they should be independent — not just in theory but also in practice.
We have a responsibility to address the questions raised by our guests in respect of this matter. However, further information is required to support their case. The committee might then pursue, in a reasoned and determined way, the issues of concern that have been raised.
Mr. Colm Kennedy
We would be happy to provide further details to the committee.
Mr. Tony Ennis
We would be delighted to do so. In addition, I wish to clarify that we are interested in all segments of the marketplace. It is our intention to be a supplier across all sectors.
I am trying to gain an understanding of what is meant by cross-subsidisation. Does it refer to subsidisation between the domestic, regulated tariff and large industry supply markets or between the two elements of Bord Gáis, whereby the networks area subsidises the supply side? In the area of energy generation the ESB made a significant percentage of its profits from its networks business and deliberately shaved its margins where it faced competition in order to make it difficult for competing generators. Is there a similar problem in the gas market in terms of Bord Gáis being competitive in its pricing structure where it faces competition? Does Vayu Limited have an understanding of the composition of Bord Gáis's profits? If profits are tighter in the supply business, that would be the obvious result of competition. This is not a criticism of Bord Gáis because its job is to protect its dominant position. The issue we need to address is that of regulation and how heavy-handed we should be in ensuring the competition survives.
Mr. Colm Kennedy
This is a complex issue but I will approach it by explaining how cross-subsidisation becomes a feature. Economy of scale is a major issue in utility businesses globally. Bord Gáis's capacity in terms of billing and the use of call centres and other resources creates challenges for other operators. In regard to where it generates profit, I do not have the details before me but it is fair to say substantial profits are made on the networks side of the business. Perhaps there is a lack of transparency in respect of where the profits are made.
Mr. Tony Ennis
The issue is not as cut and dried as in the case of the electricity sector. Bord Gáis suggested in its submission to the regulator that it wanted to use the benefits of the scale efficiencies achieved in one sector of the market, namely, the domestic sector, in which it has a large portfolio of capacity to deliver gas from point A to point B. It wants to use the benefits arising from its large market share in that area to win back customers in other parts of the market to ensure a quick win. It is explicit about such cross-subsidisation.
In regard to the networks, regulated returns are an issue for another day. However, there is a third area, namely, the regulated activities of the energy supply division of Bord Gáis which has 100% of certain markets, alongside requirements to protect customers in the regulated tariff sector, but it also supplies electricity on a competitive basis. It can, therefore, make a dual fuel offering which takes advantage of its billing system, sales force and call centres. It explicitly cross-subsidises a regulated and unregulated business in the same business unit.
I thank the delegation for its presentation. Apologies have been received from Deputy Kelly and Senator O'Reilly. As representatives of An Post are unable to meet us next Wednesday, the committee will adjourn until 9 July.