Joint Committee on Environment and Climate Action debate -
Tuesday, 23 Jan 2024

Large Energy Users Rebalancing Subvention: Discussion

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I have received no apologies other than from the Chair, Deputy Leddin, who asked me to substitute in his place in lieu of the Vice Chair, who is also unavailable. I hope that is acceptable to members.

The purpose of this morning's meeting is to have a discussion on the large energy users rebalancing subvention. On behalf of the committee, I welcome from the Department of the Environment, Climate Action and Communications, the Minister of State, Deputy Ossian Smyth; from the Commission for Regulation of Utilities, Mr. Jim Gannon, Ms Aoife MacEvilly, Dr. Karen Kavanagh and Mr. John Melvin; and from ESB Networks, Mr. Eddie Byrne and Mr. Nicholas Tarrant.

I remind witnesses of the long-standing parliamentary practice that witnesses should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. If witnesses' statements are potentially defamatory in respect of an identifiable person or entity, I will direct them to discontinue their remarks. It is imperative they comply with any such direction. For witnesses attending remotely - I am not sure we have any this morning - or outside the Leinster House campus, there are some limitations to parliamentary privilege. As such, they may not benefit from the same level of immunity from legal proceedings as witnesses physically present do.

Members shall be 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 remind members that they are only allowed to participate in the meeting if they are physically located on the Leinster House complex. In this regard, I ask all members prior to making their contribution to the meeting, if they are joining online, that they confirm that they are, indeed, on the grounds of Leinster House.

I remind everyone present to please turn off their phones as it will interfere with the recording and transmission capacity of the Oireachtas.

I call on the Minister of State, Deputy Smyth, to make his opening statement.

Minister of State at the Department of the Environment, Climate and Communications (Deputy Ossian Smyth)

I thank the Chair and committee members for the invitation to speak today about the large energy user rebalancing subvention. The Minister, Deputy Eamon Ryan, was unavailable to attend today so I am deputising. He has asked me to pass on his apologies.

The large energy users rebalancing subvention refers to a 2009 Government decision to rebalance electricity network tariffs to support large energy users with effect from 1 October 2010. This decision was made at a time when the then global financial crisis and domestic banking crisis were both starting to take effect and the competitiveness of large Irish firms, together with the employment implications, were a serious policy issue. This decision was made to help safeguard jobs in some of Ireland’s most critical and export-orientated industries at a time when unemployment was rising at a fast rate. As part of the discussion today, we must bear in mind that when this decision was made in 2009, there were only roughly 1,300 large energy users in the State. That figure today is roughly 2,100 between large energy users and extra-large energy users. Of the top 65 large energy users at that time, 21 were indigenous and 44 were multinational firms. Of the 65 large energy users of the time, 21 were in the pharmaceutical sector, 11 in ICT and eight in cement, mining and refining, with the remaining 20 spread across the food and agriculture, education, timber and steel manufacturing sectors.

These companies represented jobs in our communities at a time when they were few and far between. While people today who hear "large energy user" may automatically jump to data centres, this was not the case back in 2009. As members can see, the top large energy users of that time mainly represented manufacturing and education sectors. In 2009, following engagement with the regulator on measures that could be taken to protect energy users, the Government made a decision to rebalance network charges in favour of large energy users. This was one of a number of measures and interventions which were taken at that time in support of households and businesses. The effect of the Government decision was that €50 million would be added to the domestic household network charges annually and the network charges of the large energy users would reduce accordingly.

At the time of the decision, there were 2 million domestic households and as such, the decision would have seen €25 added to each household's annual network charge. At that time, it had been highlighted to the Government that Irish electricity prices in respect of large energy users were high and were not in line with EU averages. On the other hand, domestic costs were below EU averages. In July 2009, the Government decision was conveyed by the then Minister for Communications, Energy and Natural Resources to the regulator, in a letter, a copy of which has been provided to deputies here today. While the Government decision outlined that €50 million was to be rebalanced in favour of large energy users, it was for the regulator to determine how this would be implemented. As Deputies will recall, at this time we were transitioning to an open and competitive electricity market, with independent suppliers starting to be active in the market and competing for business. In conveying the Government's decision to the regulator, the Minister acknowledged that some of the cost implications for customers could potentially be offset by switching electricity supplier.

The regulator implemented the rebalancing with effect from 1 October 2010, and it remained in place until its removal by the regulator in 2022. While the decision to introduce the rebalancing was made by the Government, it was for the CRU to keep network charges under review in the period that followed, and this is something which it did. In August 2021, the CRU commenced a review of the appropriateness of retaining the LEU rebalancing. This ultimately led to its removal and the discovery of the overcharging error, which are matters the representatives from the CRU and ESB Networks can talk to. This Government decision was taken in 2009, a very difficult period for our State, and since then the Irish electricity market has evolved. Today we are on our way towards an electricity system in 2030 in which 80% of electricity demand will be met by renewable resources. I trust this has been of assistance and am happy to answer questions members may have regarding the decision to introduce the large energy users rebalancing subvention.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank the Minister of State, Deputy Smyth, and call on Mr. Gannon to make his opening statement.

Mr. Jim Gannon

I thank the Cathaoirleach Gníomhach and committee for inviting us to join them today. We are here to discuss the large energy users rebalancing arrangements. As we have previously advised the committee, this measure was originally introduced at a time of crisis together with a series of other measures to address some of the impacts of the global financial crisis. In 2022 and 2023, in the context of the Russia-Ukraine crisis and the consequential impact on energy prices, the CRU took a number of actions under the government's national energy security framework package of measures aimed at mitigating high prices for consumers. The measures taken by the CRU included overseeing the implementation of the Government electricity credit on all domestic consumer bills; enabling the implementation of a PSO payment to customers; supporting peak demand reduction through changes to network tariffs and supporting ESB Networks in an acceleration of work on demand response; minimising network charge increases, where possible, in CRU tariff decisions; and unwinding the LEU rebalancing arrangements. The CRU has previously signalled that it would review the LEU rebalancing arrangements.

In preparation for this review, ESB Networks, ESBN, became aware and notified the CRU of an error in implementing the rebalancing arrangements. This error meant that more than the amount approved in the CRU decision was passed on to LEU customers while domestic customers paid a higher rebalancing amount. To review and rectify the issue, the CRU conducted a close-out reconciliation review in advance of determining the 2023-24 allowed revenue and network tariffs. The CRU undertook its review of the error between April and June 2023, establishing the cause, total quantitative impact and preferred solution for reconciliation, alongside the 2023-24 annual revenue process. The CRU subsequently published an information paper on our website on 31 August 2023. The CRU considered a number of potential options with a view to reconciling the error and compensating domestic customers as soon as possible for the overcharge. The CRU decided to compensate the domestic and small business customer groups immediately and in full in the tariffs set out for the 2023-24 tariff year. For LEUs on the other hand, immediate reconciliation would significantly increase tariffs. The CRU therefore decided it was more appropriate to smooth out the LEU tariff increase over a longer period of three years. This option therefore substantially limits the tariff increase for LEUs in a single year, while ensuring immediate compensation for domestic and SME customers. The CRU requested the distribution system operator, DSO, to carry out tariff and bill impact analysis of implementing the selected reconciliation option. This showed that when the LEU reconciliation arrangements are considered in isolation, the domestic bill impact was a reduction of €54 on average. However, as the networks tariffs were also increasing in that year, by €45 on average for domestic bills, there was a net decrease of approximately €9 in the distribution network element of a domestic customer's bill. As the transmission network charges also increased by €3, the combined effect of this year's network tariff decision was a reduction of approximately €6 to the domestic consumer. For LEUs, the impact of this decision was an increase of circa 25% in the distribution charge, which when combined with other increases, led to an overall increase of 45.8% on average in distribution charges this year.

The network charge decision comes into effect on 1 October each year, which is often the period in which suppliers will adjust their overall tariffs for customers for the winter ahead. This tariff year, as wholesale gas and electricity prices have been falling, suppliers announced bill reductions of between 10% and 30%, which would have encompassed this network tariff decision, along with decisions on other market charges, wholesale prices and hedging. The committee will be aware that further retail price reductions have been announced recently, which are welcome. For next year's network tariff decision, there will be no further adjustment to domestic customer's bills related to this measure, while LEUs will continue the second year of reconciliation.

As part of its review of the implementation error, the CRU asked ESB Networks to review its annual tariff governance arrangements. In June 2023, the CRU requested ESB Networks to submit a stand-alone report on the error, the lessons learned and mitigation measures put in place to avoid a similar occurrence in the future. This report has also been published on the CRU's website. The CRU also has strengthened its internal annual revenue and tariff review processes. The CRU updated the annual revenue models to improve controls, functionality and transparency of the models and held dedicated workshops with ESB Networks on the tariff model for 2023-24. The CRU also built in a more thorough review of steps to ensure that the CRU's decision on revenue allowances were accurately implemented within the tariff model. This included additional cross-checks on the adjustments being made to the tariffs to recover approved revenues. The CRU also hosted a workshop with ESB Networks in December last year to further discuss mitigation measures and quality assurance procedures to be implemented for similar types of major changes to tariffs in the future. This concludes our opening statement and we are happy to take questions.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank Mr. Gannon and call on Mr. Tarrant to make his opening statement.

Mr. Nicholas Tarrant

I thank the Cathaoirleach Gníomhach and members of the committee for the invitation to today's meeting. I am the managing director of ESB Networks. I am joined by my colleague, Eddie Byrne, the financial controller for ESB Networks and we welcome the opportunity to speak to you today. Given the agenda for today's meeting, we focused our opening statement on the large electricity user subvention and we are here today to address the committee's questions on this matter. Given the wider role of ESB Networks in supporting the delivery of Ireland's climate action plan targets, we are happy to address any other questions as considered appropriate by the committee. I can also cover a brief update to the Committee on the current Storm Isha restoration efforts, if there are any questions from members. Moving to the summary of the annual distribution use of system revenue and tariff setting process, ESB Networks is part of the ESB Group, a commercial semi-State company that has been regulated by the Commission for Regulation of Utilities since 1999. Our role is to design, build, own and operate the electricity distribution network and as transmission asset owner, to build and maintain the onshore electricity transmission network for all 2.4 million customers.

There are approximately 180,000 km of network across Ireland and ESB Networks does not generate or sell electricity. All electricity customers contribute to the costs of operation, maintenance and development of the electricity distribution network through a portion of their overall electricity bills. This annual process of calculating the distribution use of system, DUoS, network tariffs for different customers for a tariff year, which runs from 1 October to 30 September the following year, is done in two main steps, both of which are approved by the CRU. The first step is a setting of the overall DUoS revenue that ESB Networks can collect. The second step, the tariff setting process, determines how this revenue is allocated across the different customer segments in the market. ESB Networks invoices each electricity retail company for these DUoS tariffs based on their customer mix and numbers. DUoS tariffs are one input to the cost of electricity. Electricity retail companies, independent of ESB Networks, decide how to pass on these costs to their customers.

On the background to the large electricity user rebalancing subvention, a Government decision was made in June 2009 to operate an enduring LEU rebalancing arrangement to commence in the tariff year starting in October 2010. The objective of this mechanism was to deliver an annual saving of €50 million for LEUs, which would be funded via recalculation of domestic network tariffs. This was implemented in the tariff year from October 2010 to September 2011 and remained in place until the end of September 2022. In August 2021, the CRU commenced a review on the necessity to retain LEU rebalancing and wrote to ESB Networks and EirGrid requesting analysis of the impact of the mechanism on the different customer tariff groups since it was first implemented in 2010. Following completion of the initial analysis, ESB Networks informed the CRU in September 2021 that an administrative error by ESB Networks had been identified in the implementation of the LEU rebalancing. This error resulted in the misallocation of the tariffs between different customer groups in a calculation in a complex financial model. ESB Networks did not collect increased revenue and did not gain financially from this error in allocation of the tariffs. While the tariffs are submitted to the CRU each year for approval, this was an error made by ESB Networks in the calculation process for the tariffs. We regret that this happened and I would like to apologise to the committee that it occurred. The cumulative impact of this overadjustment between customer groups covering the period from October 2011 onwards is €100.86 million, which equates to an average impact of €54 across the different domestic customer groups. The reversal of this misallocation is under way and is taking place across one year for domestic customers over the tariff year from October 2023 to September 2024. For LEUs, the recovery of the matching amount is taking place over three years.

Turning to lessons learned and improvements, the cause of this error was the changing of the calculation formulas in the financial model in the second year of implementation, that is, from October 2011 to September 2012, to one where a percentage change of total revenue was used in a calculation instead of a fixed annual amount. Over the years, as the other variables changed, this adjustment unintentionally increased the tariff costs for domestic customers beyond the fixed €50 million amount and correspondingly reduced the cost for LEUs. Given the complexity of the calculations, together with the way it was programmed in the model, it was difficult to detect this error after the second year of implementation. ESB Networks carried out a detailed review of the operation of the tariff model in 2022 to ensure it was fit for purpose and that appropriate change control governance was now in place. ESB Networks has identified two key areas when considering lessons learned from this incident. The first relates to the need for stronger governance to oversee how changes are made to these financial models and to ensure that there is a clear record of what, why and how a change was made. The second relates to the need for ESB Networks to enhance the engagement with the CRU during the tariff setting process. There has been extensive engagement with the CRU and its consultants on the calculation of the tariff and on the nature of the error in the calculation. There has been extensive engagement with the commission on the changes to customer tariffs for both the tariff years from October 2022 to September 2023 and from October 2023 to September 2024. We will continue to work with the CRU to ensure that the annual tariff process is operating effectively and we have included a copy of our report on the LEU rebalancing as an appendix for submission.

In addition, ESB Group internal audits, supported by its co-source partner, Grant Thornton, delivered an agreed-upon procedures audit in June 2023 for the in-scope audit period, which was 2022-23. The purpose of this audit was to review and assess the governance and underlying operational controls that supported ESB Networks' DUoS tariffs setting process, specifically in the context of the 2022-23 DUoS tariff review. The assessment of the integrity of the key operational controls attaching to the selection, approval and application of the tariff model assumptions, changes to the tariff model methodology and the tariff model input calculations for the in-scope audit period, which was 2022-23, did not identify any material deficiencies. ESB Networks is confident that the enhanced DUoS revenue and tariff setting process, as well as the associated key controls and governance measures now in place, are fit for purpose. Again, I would like to conclude by apologising for the error that occurred.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank Mr. Tarrant. As agreed, each member will have five minutes for questions. I will ask a couple of clarifying questions that perhaps might be helpful to members in their questioning. First, am I correct that Mr. Tarrant mentioned the figure was approximately €54 for the consumer base and €108 million in total?

Mr. Nicholas Tarrant

It was €100.86 million.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

Sorry, it was €100.86 million. One is being paid back in a year and the other is being paid back over three years.

To the best of Mr. Tarrant's knowledge, has there been any indication of legal issues with any of the LEUs regarding that repayment?

Mr. Nicholas Tarrant

To the best of my knowledge, no.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

Okay.

Has ESB Networks done an analysis from a legal perspective as to whether that might arise?

Mr. Nicholas Tarrant

We have not.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

Have any LEUs gone out of business or left the country since? Are there individuals or LEUs who might not be present in the State but who might have a form of liability?

Mr. Nicholas Tarrant

I am not aware of a liability in that regard. Ultimately, the way this will be rebalanced is that the cost will be collected from the existing LEU customers that are operating on the market.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

Okay. I thank Mr. Tarrant for that.

Senator John McGahon

I have four questions, two of which are for Mr. Byrne as financial controller and two for Mr. Tarrant. First, to Mr. Byrne, according to the opening statement, "the cause of this error was the changing of the calculation formulas in the financial model in the second year of implementation ... to one where a percentage change of total revenue was used in a calculation instead of a fixed annual amount". Who made the decision, nearly a decade ago, to make that change from a percentage of the total revenue to a fixed annual amount?

Mr. Eddie Byrne

The decision in ESB Networks was made and approved ultimately by senior management at the time. Ultimately, the financial controller at that time made and approved that decision.

Senator John McGahon

Okay. What was the reasoning behind the financial controller's decision to make that switch after the first year? What was the logic behind that decision back then?

Mr. Eddie Byrne

Based on our investigation, we can see the reason was a simplification adjustment. There was a certain element of complexity in the first year of implementation where there was a static €50 million adjustment to one customer group and another. The logic for the second year was that we have made that adjustment and should revert to a more simplified method that we have used time and time again before that adjustment. That reversion back to the simplified percentage change approach was the logic that was deployed in the second year.

Senator John McGahon

Forgive me, as I accept this is a complex financial calculation. Based on that response, the whole point of this in the second year was to make it simpler to calculate in the first place, which ended up causing this overcharge for the last decade. It was really done to try to make it simpler.

Mr. Eddie Byrne

In hindsight, yes.

Senator John McGahon

In hindsight, yes.

Mr. Eddie Byrne

The methodology that was deployed for the previous 20 years or thereabouts was fit for purpose and worked. The circumstances here were something new that was changing for particular groups. The implementation of that, in hindsight, needed more consideration and more testing to understand the potential future impacts.

Senator John McGahon

Was that human error or an error within a financial model?

Mr. Eddie Byrne

Ultimately, it was an error in the model but it was configured by a person with a choice that ultimately proved to be incorrect.

Senator John McGahon

So it was a human error making a mistake inputting data into the model. Is that correct?

Mr. Eddie Byrne

It was not the data that was erroneous; the configuration was erroneous.

Mr. Nicholas Tarrant

In making the change in the second year of implementation, it was done with the best of intentions and with a view to implementing it correctly. When the change was made, the foresight was not there as to how it was going to impact with the other variables that change in the model over time. The change made in the second year was consistent with the approach that had been used in all the years up to the year that it was changed in the first year of the implementation of LEU rebalancing.

Senator John McGahon

I accept that it was the way the modelling had been done for a considerable time before that.

Paragraph 4.3, on page 3 of the presentation, states: "With the complexity of the calculations together with the way it was programmed in the financial model, it was difficult to detect the error after the second year of implementation." This mistake was not realised for more than a decade. Mr. Tarrant only took up his position in 2021 so it may be difficult for him to answer my question. Were there reviews of the model in that decade? If so, how many took place?

Mr. Nicholas Tarrant

The setting of the tariffs is an annual process. It is done every year. The tariff model is updated just like the DUoS model.

In response to the Senator's earlier question, and as we outlined in our opening statement, this was a systems error around change control. As we look back on it now, there was a change made here and the testing that was done, and the realisation about how it would impact on tariffs, was not fully understood in the way it was implemented. The calculation in the model is relatively deep in the model. It is not obvious. The model was updated every year. The reality is, when we look back - and the review that was commenced in 2021 uncovered this - it was not uncovered so there is no particular answer I can give as to exactly why that was not the case. I cannot comment in the absence of finding it because it was not. When one looks at the facts of what happened here, it was changed in the second year of implementation. That worked its way all the way up to 2021 when it was reviewed as part of the work sponsored by CRU and, ultimately, it was discovered then. As soon as it was discovered, we brought it to the attention of the CRU, set out the calculation as we saw it whereby it was not a fixed amount and it was changing based on the variables. That is as much as I can say about the matter.

Senator John McGahon

My time is up and thank the witnesses.

Senator Lynn Boylan

I thank the witnesses. I have a number of questions but I would like to pick up on the issues in the review. I welcome that ESB Networks has apologised for the error. Are the Department and the CRU willing to make an apology?

When this issue came into the public domain, we lodged FOI requests. In fairness to ESB Networks, it wrote to the regulator and asked whether the subvention was going to be scrutinised on an annual basis and the regulator gave a one-word response of "No". I believe some responsibility rests with the regulator regarding why this was not being audited on an annual basis in terms of how this is being implemented, and how the subvention was allowed to continue for so long.

We have heard from the Minister of State that the measure was being introduced because LEUs were facing high electricity prices. Yet again, through FOI requests, it was discovered that electricity prices for LEUs had fallen by 20% in October 2009. What analysis was done by the Department to verify that LEUs were facing very high electricity bills? What analysis was done by the regulator when the Department brought the proposal saying that this rebalancing in favour of LEUs was needed? Did the Department carry out its own independent analysis? How did the Department allow this situation to continue following the financial crisis? If it stacks up that LEUs faced very significant bills, why did this situation continue for 12 years after the crisis? Why was there no auditing, given the ESB requested initially that this would be looked at on an annual basis? Why was this set up and allowed to continue for 12 years? What independent analysis was done before this was set up?

Deputy Ossian Smyth

I think the Senator's question is what analysis was done in deciding that large energy users were paying high prices in 2009. My understanding is the power to make the rebalancing decision was with the CRU. A discussion was held between the Government and the CRU to discuss ways that prices could come down for LEUs at that time. The CRU then responded by making a proposal to Government and the Government accepted the proposal. The CRU would have made the proposal to the Government, having had a discussion with the Government, knowing that the Government was likely to agree.

It is important to remember that the CRU is the body with the legal decision-making power and made this determination. At the time, there was a public consultation on this matter. The CRU is answerable to this committee so I think the committee has oversight over the CRU. The decision was made for a period of five years and if the decision was made in 2009, I expect there would have been a need to renew it in 2014, and again in 2019. At each of these decision points there would have been another public consultation and more opportunities for the committee to scrutinise the CRU and ask it why this was happening. That is the way these decisions are made.

Senator Lynn Boylan

A briefing note for the Cabinet subcommittee pointed to the fact that this was going to be unpopular with the public as the subventions were being unwound. The analysis of the electricity bills at that time was that LEUs would see little or no difference in their bills, and some would see decreases of up to 20%. That was a Cabinet subcommittee so with that knowledge the Government still introduced the subvention and instructed the CRU to rebalance the network tariffs in favour of LEUs and bypass a process that, I think, can be found in section 10 of the Electricity Regulation Act. So this matter did not come before the Dáil, this committee or the Seanad. The normal process for the Minister with responsibility for electricity at the time would have been to inform the various institutions, and inform the former Department of Enterprise, Trade and Investment Trade and Enterprise in the North of Ireland, about bringing in a mechanism.

Deputy Ossian Smyth

I do not think that the Government had a decision-making power over this particular item. The Government might have wanted this to happen, and had a discussion with the CRU about it, but the CRU made the decision and put this to the Government, and said this is what it was planning to do. The Minister at the time wrote back and said he agreed to it but this matter did not actually require the agreement of the Minister. This was something that was within the power of the CRU to carry out themselves.

Senator Lynn Boylan

I understand there was a ministerial direction to the regulating.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I would like to give a little bit of time to the Senator's very important second question directed at the CRU. I will allow Mr. Gannon 30 seconds to answer and the Senator can revisit the matter in the second round.

Mr. Jim Gannon

We have seen the Minister's letter to the CRU at the time, which noted a Government decision had been made to implement a measure on the understanding that the regulator was accepting or willing to also implement that measure. That is, I believe, on the record and appended to the statement submitted earlier.

It is important to recognise that while the CRU published and consulted upon the methodology for this, as part of the price review 3 period, we engage in annual consultations around the revenue setting process for each year, October to October, which is the tariff year. Then we do have a price review control framework every five years and in each of these this measure would have been noted, so it would have been public and it would have been maintained.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

We will come back to this. To be fair to the Senator, I wanted to allow Mr. Gannon an opportunity to come back on that. I will go to Deputy Bruton-----

Senator Lynn Boylan

It is important-----

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

It is, and that is why I gave extra time. I will go to Deputy Bruton.

Senator Lynn Boylan

He is confirming that the decision and direction for this subvention came from the Department and not from the regulator.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

The Senator's time has expired. Mr. Gannon can revisit it in later answers.

Deputy Richard Bruton

If the decision was to switch €50 million from one column to another, why was it ever conceived that that was a percentage share being switched? From what everyone has said, it sounds like €50 million was the amount. It seems strange that a decision would be made in sharing out how much of its costs fell on business consumers of one sort or another, or on householders - that it would make this change when the original was €50 million. I do not quite understand. It does not seem complex to me that you go from sharing what was to be a fixed amount. It seems a bit strange.

In terms of the beneficiaries there is a 25% increase in their charge to recover the overpayment over the coming three years. Does that just apply to the original €1,300 or to the number that is now there of €2,100. How is that being recovered. Different people presumably had different benefits from the overcharging of consumers over the course of the period. The issue, more for the regulator and the Minister, is whether any issues of state aid arise in respect of payments of this nature. Segments seem to have gotten benefit of money allocated to them by administrative fiat. Could that be construed as state aid and could any wider issues arise here?

Mr. Nicholas Tarrant

If you go back to the history of this financial model and how it was implemented in the calculation of the tariffs, there are a certain number of inputs. I will ask Mr. Byrne to explain a little more about the inputs into this model. When this first arose for the first year of implementation, a specific calculation was done to show the impact. When we look back on the models we can see that. It was changed back. We do not know exactly why, except to say that it was to get it back to a position where it was in a similar way of doing the calculations as it had been up to that first year of the calculation of the LEU rebalancing. Mr. Byrne might talk a little more about what goes into that calculation and why it is done in general on a percentage basis.

Mr. Eddie Byrne

The very first step in the process is the determination of the revenue requirement. This happens every year roughly between March and June. That effectively takes the approved allowances from the CRU as part of that five-year cycle Mr. Gannon mentioned and converting that into annual amounts of money to see the totality of what should be recovered from the distribution customers. That process happens annually, and we are looking forward. We are looking at the following year and the current year, but we are also looking back for any changes in the number of customers, the demand coming from customers, or the import capacity from customers. All of those variables ultimately get adjusted as part of that exercise. The unique part of this, with the LEU rebalancing, was that we should make it a discrete adjustment for particular customer groups between the residential and the LEUs. That seems quite straightforward and was applied correctly in the very first year. As you roll forward each year, the second step in that process is to adjust the revenue requirements by customer numbers, demand and principally their import capacity. There could be changes in the mix of customers. The logic was that we had made the change of €50 million in the previous year, so the tariffs coming forward into this year have that reflected in them. We can now simply change those by the variables we need to consider in this current year. Hence the percentage change adjustment methodology. That was the logic we think people used at the time, and they then reverted to that more simplified approach of the percentage change mechanism. That was the tried and trusted approach prior to this being put in place in the first instance. In hindsight, when we look at that, obviously that was not correct. As time rolled on the number of customers changed. The demand at customer level, the import capacity, and the number of customers within each group all changed. As a previous speaker mentioned, there was a smaller number of LEUs back in 2010-2011. There is a larger number now. The adjustments we make are at the wholesale level. We could not be certain of the exact adjustments made to people's energy bills back in 2010-2011 because we were billing the retail company. It is ultimately up to the retail company to form a charge or levy for a particular customer. There was a different customer mix from 2010-2011, whether it was residential or LEUs, to today. We have seen that mix change over time. There are completely different groups of customers in place at the two points in time.

Mr. Nicholas Tarrant

Can I just maybe add to that? On the question-----

An Cathaoirleach Gníomhach

Quickly, please.

Mr. Nicholas Tarrant

The first year it was converted back to percentage. The second year of implementation the error in the calculation was just below €2 million in total quantum. As you went on over the 11 years it grew to the region of between €16 million and €18 million towards the end because of those variables changing. When those changes were made initially, it was not detected that this would change over time, or it was not realised. That is what happened.

I turn to the question about the mix of LEUs. As the amount grew as the years went on in the implementation, I think approximately 70% of the overall €100.86 million is from 2017 onwards if you look at the data. There is a difference in the customer mix between 2011 and today. The majority of the error grew towards the end.

Senator Timmy Dooley

Can I be reminded again of how the error was picked up on?

Mr. Nicholas Tarrant

The CRU initiated a review in 2021 to look back on the implementation from 2010 onwards. We looked at that in the finance team in ESB Networks. We looked at the calculations and looked at it in depth. Somebody spotted that this was incorrect in terms of the original implementation, where the intention had been a fixed amount of €50 million. That is how it was picked up. We brought that information to the CRU and presented it to it.

Senator Timmy Dooley

ESB Networks identified it on foot of an expectation that the CRU was coming to visit it to do an audit.

Mr. Nicholas Tarrant

A review was being done around the implementation and there was a look back as part of that. That is how it was uncovered.

Senator Timmy Dooley

Would they normally do that? Would they normally get into an in-depth analysis of their books when they know an audit is coming? What seems difficult for me to understand is that ten years hence somebody started going back to check on the mechanism used. It just raises the question. I am not accusing anybody of anything but it raises the question that somebody was minded to check on this algorithm that had been put together. It would perhaps seem unusual that they would do that just because the CRU was doing an audit on the entirety of the scheme.

Mr. Nicholas Tarrant

As we mentioned in answer to a previous question, once the change was made in the second year it stayed static right the way through. When the review was initiated and we looked at this in detail - Mr. Byrne can maybe comment on it further - it was someone diligently looking at this in a detailed and forensic way and they found it. That is ultimately-----

Senator Timmy Dooley

That is good.

My next question is about trying to trawl back ten years. I know that is not easy, because not everybody is around ten years later. Is the individual who created the algorithm that sought to do a percentage rather than a fixed number still within the company?

It was mentioned that this was systematic, yet it had human input. Was there an opportunity to discuss with the individual his or her mindset or understanding of the matter?

Mr. Nicholas Tarrant

When we did a look-back we had an opportunity to talk to the people involved as part of the review. Ultimately, the conclusion from that was that they thought they were implementing it correctly. With the passage of time, that is the only conclusion. There is no other information to be provided as part of that. The people involved genuinely felt that in making the change in the second year of implementation it was an appropriate and proper way of implementing it. They probably did not have an understanding that, as the variables Mr. Byrne outlined were going to change over future years, that change would have the impact that it did.

Senator Timmy Dooley

That seems unusual. If the quantum of money was €50 million, and that was absolute, then the notion of using a percentage to attribute at a later stage just does not seem right. In any event, that is what happened. Is ESB Networks convinced with respect to its entire calculation system? Has it done any further reviews of practices or procedures that existed previously?

Mr. Nicholas Tarrant

We have. As we outlined in our report, and as I mentioned, through our internal audit process, we have looked at the two models. One is the distribution use of system model, which we have outlined, and the second is the tariff model. Both models have been looked at in great detail as part of this. We brought this to the CRU's attention in, I think, August or September 2021. During the intervening period, there was very detailed engagement with the CRU's team and its consultants to go through the calculations in significant detail. As outlined in the CRU report, there were alternative methodologies looked for as well to confirm the amount of money that was in play. Mr. Burns will talk a little about the work the group internal audit did to cover it.

Senator Timmy Dooley

There is a cost of credit in that the company does not get it back immediately from the large users. Does the State or the taxpayer carry that cost?

Mr. Nicholas Tarrant

ESB Networks is a regulated company. That cost to carry is one we are carrying as a company. It is not being allowed as part of the price review, as outlined in the CRU's report.

Deputy Darren O'Rourke

The 70% of the €100.8 million accrued since 2017 finished up being based on a percentage change of total revenue. Has ESB Networks done an analysis of the distribution of the relief that has been given to individual large energy users? If so, is there a significant difference between individual large energy users and liability at this stage?

Mr. Nicholas Tarrant

As Mr. Byrne mentioned, our role in networks is that we invoice the retail companies for DUoS costs, based on their customer base, mix and usage, which is done on aggregate. As this change is made, we invoice the retail companies and they, in turn, have the relationship with the end users.

Deputy Darren O'Rourke

Mr. Tarrant does not know if the relief has been evenly distributed among LEUs?

Mr. Nicholas Tarrant

We cannot comment. To use the broad term, the issue of standing charges being passed on to customers, whether they are domestic customers, small to medium-sized enterprises or large users, has arisen before at this committee. Ultimately, our role in ESB Networks is that we invoice the retailers. As regards how they decide to apply charges, we cannot trace the money from this change right the way through to an individual customer.

Deputy Darren O'Rourke

Is it correct to say Ms MacEvilly was with the Department when this change was initiated? The Minister of State believes responsibility for this matter rests with the CRU. From answers to freedom of information requests from Senator Boylan, it is clear that there was an instruction from the Minister of the day that a €50 million relief be provided for large energy users and for that the burden be redistributed to domestic users. The CRU was given the role to implement that measure and assess, on an annual basis, the appropriateness or need for it. The instruction issued by the Minister seems to make clear that the relief will be €50 million annually for an indefinite period. There is no indication of when this measure might ever end. How did the CRU assess whether it was needed year on year? How did it assess that it should amount to €50 million?

The Minister of State pointed to reviews in 2014 and 2019. A legitimate point has been made about democratic oversight by these Houses. How was that overseen? Was this measure considered appropriate for the year ahead every year?

Ms Aoife MacEvilly

It is a matter of fact that I was in the Department when this measure was under development. As the Deputy will understand, I am here to give committee testimony in respect of the CRU today.

Deputy Darren O'Rourke

Yes.

Ms Aoife MacEvilly

The commission has been in place for the longest period of this matter.

As Mr. Gannon said, this was a Government decision conveyed to the CRU. It was taken in the context at the time of a package of emergency measures in which the CRU, industry and Departments worked collaboratively at a time of financial crisis to support customers. Some measures were targeted at large energy users. As the Deputy will be aware, many measures were also targeted at domestic customers. The CRU worked collaboratively with the Government, agencies and industry to implement those measures at a time of crisis.

As regards the Government's decision, when that was conveyed to us we understood it to be evergreen effectively. As the Deputy will be aware, having looked at the responses we got to the consultation in 2022 when we decided to reverse this measure, the Department of Enterprise, Trade and Employment was very clear that there was an expectation that this measure would continue. The sense from industry groups was also that it would continue, in effect. I do not think there was a sense that we were scrutinising the policy every year in that same sense. However, we made a network characterisation annually and continued to implement the measure. We made that decision every year and published and conveyed that in our papers to be really transparent. That is what occurred.

The five-year price controls are a little different in that they look at how much funding we should provide to the network companies to deliver their agenda, rather than how we should distribute it among customers. When you read the price control papers, you will see it is all about how much we are investing, and how much CapEx and OpEx we are investing as a whole, rather than how it will be distributed among customers. It is the annual process that looks at how we distribute this among customers based on a method or formula, as the ESB Networks highlighted, agreed between the CRU and network companies. We have learned a lot from that.

Perhaps there were opportunities for us to look at this before we did. I think we signalled that we would look at it. I think what happened was that, in the context of the Russia-Ukraine crisis, we had another opportunity, working with the Government in collaboration and again in a time of crisis, to look at what we can do in very different circumstances and with very different policy priorities. That gave us more of a basis to end this, if you like. I hope I have summarised our position.

Deputy Martin Kenny

I thank the witnesses for their contributions so far. Based on the evidence we have heard so far, the Government made this decision in June 2009 and it was communicated to the regulator.

Ms MacEvilly mentioned that there was a lot of collaboration and that there was an industry. How big a lobby was there for this to happen? Was the Minister lobbied by industry to get this change? While it was a time of economic crisis, it was a time of economic crisis for everybody. Basically, what was happening was one sector was lobbying to get a relief and that relief was then going to be passed on as higher charges to another sector, which was the general public or the domestic user.

I would like to understand how large a lobby was there. When Government stated that it was going to do this, on what grounds did it base that decision?

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

To whom is that question addressed, Deputy?

Deputy Martin Kenny

That is difficult to say. I assume the Department is where that would have to start.

Deputy Ossian Smyth

Is the question on what lobbying took place leading up to this decision from large energy users to ask for their prices to be cut? Is that roughly the Deputy's question?

Deputy Martin Kenny

Yes.

Deputy Ossian Smyth

I would have to research to see if we have any records of lobbying. Was the lobbying register even in existence at that time, in 2009? I think it predated the legislation for that. I would have been a councillor in 2014. I spoke to my officials a minute ago. They told me that due to the passage of time, they are not aware of any records, but I can ask for a more detailed search to be done to see if we can find something on that. It is a legitimate question.

Deputy Martin Kenny

Are there grounds for the decision? On what basis was it made? Where is the evidence that this was needed in the public interest?

Deputy Ossian Smyth

In 2009, it was a time of financial crisis and unemployment was rising. It was a time when, if one asked the public what they were most concerned about, I think they were 100 times more concerned about losing their jobs or getting a job than they were about the level of their electricity bills. I think if one asked the public now how they feel about unemployment versus the level of their electricity bills, one would get the opposite answer. I think that was probably the logic that led up to it. Then again, that is speculation on my part.

Deputy Martin Kenny

I accept that and I am not disputing that industry can put forward a very valid argument for making changes at any time. It is its entitled to do that, to lobby and to seek relief wherever it can. The question here is about how appropriate it was to put this in place and that it would recur every year, with very little opportunity for review of its impact. Even when we produce legislation in Leinster House, we are told that it will be reviewed after the first year to see what happens. It is very seldom that it is reviewed but surely in the context of this, where we had quite a large package of money which was going to be costing domestic users, there should have been some method to see what the impact of this was. Were the reasons when it started still valid three years later and what had happened?

Deputy Ossian Smyth

That is a very valid question. When the decision was made at the time, it was clearly a public decision. It was not a secret decision. The Government said it was doing this to try to help save jobs and to protect employers from having to fire employees. It was a public decision and everybody knew about it. For every year that the CRU came in to this committee it could be scrutinised and asked if it still made sense to continue with that decision. The decision was made in 2009 and only reversed in 2022, I believe. For that period of 13 years the CRU was coming in and out of this committee and could have been asked at any point whether it was a good idea to continue with that policy.

As I said before, the CRU or the CER, as it was at the time, collaborated with the Government to discuss what could be done about network charges to protect jobs at the time. Clearly, the Government wanted to rebalance charges in favour of employers and it communicated that to the CRU. Ultimately, the regulator had the decision-making power. An official or a ministerial instruction was not sent down to the regulator to carry this out. A discussion was had and the CRU was asked and the decision was made. It was absolutely within the discretion of the regulator to decide whether or not to do so. The regulator had the power and chose to do it, in line with the Government's decision that it wished for it to happen. Then every year thereafter, the regulator came into this committee on a regular basis and could have been asked by any member of this committee whether it was a good idea to continue with this policy or not.

In 2022, with the invasion of Ukraine, spiralling electricity prices and in a situation of full employment in this country, it was very clear that electricity prices were much more of a concern than protecting large employers from costs. As a result, the rebalancing happened in the opposite direction, as I understand it.

Deputy Martin Kenny

Perhaps the regulator could respond as to whether or not any reviews were done in those years. The mistake that occurred is the mistake we hear about. One of the core issues is around how valid this process was in the first place and whether reviews were done.

Mr. Jim Gannon

The letter of the Minister at the time noted that job losses in the economy would of themselves create greater energy affordability pressures for domestic consumers. Separately, it is worth noting that if we lose large energy users paying the network tariffs, then the tariffs would naturally become weighted on those who remain. In other words, if those large energy users are being lost that contribution goes and is dissipated among others.

On the decision, it was for the CRU, or the CER as was at the time, to determine the detail of how this should be implemented, in terms of the network tariff structures. We did this in consultation around the price review 3 period. It was implemented on 1 October 2010. As Ms MacEvilly said, annually, following that, we review the tariffs that are to be recovered by the network operators. We would have consulted on those. This recovery would have been part of the underpinning consultation process.

Separately, in a price review period every five years, we look ahead to see what is required in terms of investment and operational costs. This policy would have been part of that. In 2020, we proposed to do a full and detailed review of all network tariffs to see if they were cost-reflective. This would have been separate from the annual price review and the five-year review. This was to look at our network tariffs and to see, in the context of decarbonisation and lots of flexible load coming in, if the percentages we discussed still reflective. We commenced that process with the ESB Networks and EirGrid to look at these tariffs and network tariffs. That is where the initial analysis came about in the ESB Networks and EirGrid. It was in that context and where we were looking at all network tariffs to see whether they were cost reflective, that it prompted this analysis to see where costs were being allocated from this element, which was a bolt-on to the natural tariffs.

Towards the end of 2021, when the error was identified, we moved quickly into 2022 and in March, as noted, Russia invaded Ukraine which put significant pressure on tariffs and on retail prices, in particular. That then became part of the national energy security framework. Under that, we had different Departments, the regulator, the network companies and others to look at security and price at that time of crisis. In effect, it came about in a time of crisis, without a sunset being clearly placed on it. During that time of crisis, there was dialogue around the table, as part of the national energy security framework. An action arising from that was to examine and to reverse this decision.

Deputy Paul Murphy

I thank the witnesses for their presentations. I had to step out for a while so if I ask something that has been answered already, my apologies.

Can anyone tell me what the total cost of this was to an average household over the period that it was in operation, separate from the overcharging?

Deputy Ossian Smyth

The amount of money involved is €50 million. It is 2 million households and €25 per year was the addition to the average household electricity bill.

Deputy Paul Murphy

It was about €250, or something like that.

Deputy Ossian Smyth

No, it was €25 per year.

Deputy Paul Murphy

Yes, but over how many years? Was it 11 years?

Deputy Ossian Smyth

I think it was from 2010 to 2022, which makes it 12 years.

Deputy Paul Murphy

Okay, so it was somewhere between €250 and €300 over that time. That is effectively a transfer from households to corporations. Does the Minister of State politically agree with that?

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

The Minister of State has the discretion to answer that question.

Deputy Paul Murphy

Does the Minister of State agree it was the right decision?

Deputy Ossian Smyth

Do I agree it was the right decision to move €300 of costs from an average electricity-paying household over a decade to-----

Deputy Paul Murphy

Corporations.

Deputy Ossian Smyth

I can understand why the decision was made in 2009. It was a period of financial crisis when people were worried about keeping their jobs. I understand that and the motivation for making that decision in 2009. It probably should have been reviewed more carefully during the period since then. The CRU regularly comes to this committee and members, including possibly previous members, probably should have discussed with it whether it was a good idea to maintain the measure since then. We are now in a period of full employment so concerns about employment have gone away and we are now more concerned about the cost of electricity bills.

Deputy Paul Murphy

If people lose their jobs, as a lot of people did during this period, the idea that they would not care about electricity prices seems a bit bizarre. They will have less income so clearly every bill they have will be more impactful and they will be more concerned about it. I am somewhat sceptical about the idea that unemployed people would say not to worry about them and to take their money, whether €50 or €25 a year, and give it to big corporations.

Does the Minister of State feel a bit like a mudguard here? He was asked earlier about the rationale at the time and, in fairness to him, he can only speculate. The senior Minister was the person who made the decision and signed the letter at the time, yet the Minister of State has been sent here to answer these questions. He is obviously less able to answer them than the senior Minister would be. Does the Minister of State not think the senior Minister should have been here and that he has been put in a difficult position?

Deputy Ossian Smyth

I am happy to come here and answer questions on the matter. If someone is facing losing their job and not having enough money to bring home to heat their home, feed their family and so on, I think they would be more concerned about that than a monthly levy on their electricity bill of about €2.

Deputy Paul Murphy

Does the Minister of State accept that what happened here was effectively a form of shock doctrine? Effectively, something was presented as being essential for the moment - responding to a situation of mass unemployment where companies were feeling the heat, etc. - and that we had to do something. Then it was made permanent. The ESB's opening statement refers to this as "enduring", as in it would roll over year after year without any meaningful review. The point was fairly made that someone on this committee should have said "Stop" but similarly someone in the Government should have said "Stop". It was wrong to implement an effectively permanent measure, unless otherwise decided, in response to what was a particular circumstantial, temporary situation.

Deputy Ossian Smyth

Governments obviously cannot make decisions that bind future governments very easily. The decision memo for the Government at the time stated that it was a permanent decision. I think the word "permanent" was used. Of course, it is ultimately, legally and technically a decision for the regulator. The Government wanted it to happen and it collaborated with the regulator, saying that it was what it wanted to happen. The memo for Government uses the word "permanent" but it obviously was not permanent because it changed in 2022. It could have been changed at any other time during the previous 12 years but it was not. That was a decision between the regulator, the Government and the members of this committee.

Deputy Paul Murphy

The decision could have been made at the time. Even if we accept the logic of the moment, a decision could have been made that we will do this for three years, four years or whatever.

Deputy Ossian Smyth

Yes.

Deputy Paul Murphy

Instead, it was enduring. This is what happens during crises. Measures are put in place which are then enduring unless a political spotlight is placed on them. Does the Minister of State accept that was a mistake?

Deputy Ossian Smyth

Do I think it was a mistake to make it-----

Deputy Paul Murphy

To make it an enduring as opposed to a time-limited measure.

Deputy Ossian Smyth

In general, it is better to put sunset clauses on crisis decisions.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

Before Deputy Whitmore commences, I should say that we have approximately 16 minutes remaining and I know Deputy Bruton and Senator Boylan have follow-up questions to ask from the first round. I will do my best to accommodate another question from other members.

Deputy Jennifer Whitmore

The questions I will ask are not necessarily those I thought I would ask coming to the meeting. What has become really clear and is incredibly worrying is that we have a Government Minister saying that this was not a decision of the Government but a decision of the regulator and we have the regulator saying that this was not a decision of the regulator but a decision of Government. That is really problematic if we have either a Government Minister or a regulator who do not know what their role is when it comes to setting tariffs.

I read the letter that went out from the Minister, Deputy Ryan, who was the Minister at the time. It states that while it was for the CER to determine the detail of how this should be implemented, in terms of the network tariff structures, the Government had agreed that savings of some €50 million should be passed on. That would appear to me to be a direction. The Minister finishes his letter by stating that he looked forward to hearing from the CER in the coming months on the implementation of network tariff rebalancing. The CRU does not seem to have the discretion not to implement this suggestion by Government.

I know this was ten years ago, there has been a shift since then and the Minister of State and others were not then in the positions they are in now. If this letter went out today, would the Minister of State see it as a direction from the Government or would it be at the discretion of the CRU to decide how it applied it? I would like to hear from the CRU whether it would see that letter as a direction. What does the legislation say? We need to know who is actually responsible here and it is incredible that we are an hour into this conversation and it is still not clear. This is an issue that first came into play ten, 12 or however many years ago.

That is my question. If this letter were to go out today, who would be responsible for making the decision and implementing it?

Deputy Ossian Smyth

The regulator is independent and does not work for the Minister. Technically, within the law, the Minister can make a ministerial order to the regulator. I am not sure if that has ever happened. The CRU can tell the Deputy if it has ever happened. A Minister can certainly ask the regulator to do things. As the Deputy knows, there is a difference between requesting and instructing.

Deputy Jennifer Whitmore

Okay.

Deputy Ossian Smyth

That is why we have an independent regulator. It is separate from Government.

Deputy Jennifer Whitmore

I am conscious of the time. The Minister of State would not see this as an instruction. He would see it as a suggestion rather than a direction.

Deputy Ossian Smyth

It is a request.

Deputy Jennifer Whitmore

It is a request, okay. I ask the CRU to answer that too.

Deputy Ossian Smyth

It was a request that was made in collaboration and in the full knowledge that there had been a long, detailed discussion between the Government and the regulator about what could be done to protect jobs and what was a feasible move and what was a legal move. The regulator would have discussed this with the Government and agreed whether this was a reasonable thing to do. The Government made a decision and said this was what it wanted to happen. It requested this of the regulator and the regulator came back and said this was how it would implement it.

Deputy Jennifer Whitmore

It is a Government request rather than a Government directive.

Deputy Ossian Smyth

That is correct.

Deputy Jennifer Whitmore

I will put the same question to the CRU.

Mr. Jim Gannon

As the Deputy has reflected, the passage of time has left us without as much corporate knowledge as we might have had. The Minister has the power to direct the CRU. We have seen recently, in response to the capacity challenges, that power being exercised. There is normally dialogue between the regulator and the Minister to release that sort of power. In this instance, the Government did frame a decision in terms of the memo to Government that was discussed already. The Minister's letter stated that the Government had agreed that savings should be passed on in the context of the crisis and in the context of the time. That year, the CRU was implementing a range of measures that benefited both domestic customers and SMEs. This was a measure decided by the Government. It may be simpler if Ms MacEvilly provides clarification.

Ms Aoife MacEvilly

I apologise as this was 15 years ago and the people who were involved-----

Deputy Jennifer Whitmore

I know it is very difficult. That is why I framed my question as I did. If this were to happen today, would the CRU see it as a directive? If the CRU were to receive this letter, would it feel it had a choice other than to do what was-----

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

The question has been asked and we will allow Ms MacEvilly to answer.

Ms Aoife MacEvilly

The legislation around policy directions to regulators has changed since this letter was issued. I cannot remember the year but after this event EU legislation was introduced providing that energy regulators could not seek or take direction from any person, a minister or otherwise.

That has probably changed the legislative basis. Something like this now again would be a challenge for the Department to push or the Minister to put forward as a direction. I suppose at the same time the CRU operates within a policy framework that is set by the Government. In fact, it is set by the Oireachtas. While we are independent in making our individual decisions, I fully acknowledge that we took decisions every year on this basis, so we are not trying to step away from our responsibility here. We took decisions every year to continue implementing this. I suppose our view on it was that the policy decision, if one likes, on how to support large energy users was taken by the Government and we agreed to implement that. I hope that is clear and is not seen as walking away from anything. I think we would have engaged and that there is a note on file where we provided options for the Department on different ways that we could look at network tariffs in the context of the crisis we were in at the time. Rebalancing was not one of the options that we put forward but we were working with the Government to try to find ways forward in the context of the crisis. The Government took a policy choice on the particular measure and we agreed to implement that measure. I hope that is clear. We are genuinely not trying to create difficulty and walk away from our responsibilities in this regard.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank Ms MacEvilly very much for that response. Could Mr. Gannon respond very briefly?

Mr. Jim Gannon

I think it is worth reflecting on the unwinding of the measure where, at a time of crisis, the energy security emergency group was set up. There was a national energy security framework within which each constituent party was looking at what was within their vires or ability to see how we could mitigate some of the challenges arising from the Russia-Ukraine crisis. If I could put it that way, the unwinding was a proposal brought by us to that group. In that spirit, at that time of crisis, everyone was looking at their own vires and abilities as to what decision one would make. There was still an ability to make decisions around this. As Ms MacEvilly has said, we are not walking away from this or what we have stood over in recent years, but in that context, it was at a table with others around it that the decision was made.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank Mr. Gannon.

Deputy Jennifer Whitmore

Could I just make a very quick point?

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

Could I just pause that for a second and, to be fair, go back to Senator Boylan and Deputy Bruton. There are two specific individual questions outstanding, that are not additional questions, to which I would like to give time to the witnesses to respond. Senator Boylan could just refresh us, followed by Deputy Bruton and then Deputy Whitmore and when we get the answers we will conclude.

Senator Lynn Boylan

Do you want me to ask the question, Acting Chair?

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

Yes, Senator Boylan had a question outstanding. I am sorry but there have been a lot of speakers since and I have forgotten precisely what it was. I remember that it started with: "Could Mr. Gannon offer…"

Senator Lynn Boylan

We have some clarity in that in 2010 the CEO told the Oireachtas committee that it was categoric that this was a Government decision. I think we accept that this was a decision made by the Government and was given as an instruction to the regulator to implement. The key thing for me is what analysis was done by the Department or the regulator to warrant the introduction of the subvention, and if the analyses were independent of each other. This is important because in February 2009, the then Minister, Deputy Eamon Ryan, told the Dáil that LEUs were seeing double-digit reductions in their electricity. In March 2009 IBEC wrote to the regulator asking for something to be done about electricity prices. In July, the Minister, Deputy Ryan, held a round-table discussion with IBEC and the IDA. Later in July 2009, suddenly this direction goes to the regulator saying we need a subvention. It seems the Minister, Deputy Ryan, changed his view from February to July around the impact on LEUs.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank Senator Boylan. I think I have given her plenty of leeway. I have been helpful to her and she is abusing it.

Senator Lynn Boylan

I want to know what independent analysis was carried out to verify what IBEC was saying about the energy bills of LEUs.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I call Deputy Bruton.

Deputy Richard Bruton

I was not in government at that time 15 years ago, but I do recall unemployment had grown by nearly 200,000. Ireland had massively lost its export market share and these manufacturing companies were the key to a recovery. Borrowing levels were unsustainable at 14% of GDP. The Government could not find resources to do the sort of things it would like to do to promote employment. At the time, Sinn Féin was advocating default on our loans. That is the reality of the situation that the then Government was facing in 2009.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

That is less a question and more of a statement.

Deputy Richard Bruton

There have been unchallenged statements that this was an extraordinary decision to have made. In my view, it was not at all extraordinary at a time when we were trying to protect employment.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

That is fair enough.

Deputy Richard Bruton

I would like to just go back to the issue. Does any of this raise concerns in regard to state aid rules? I want to understand that.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank Deputy Bruton. I ask Deputy Whitmore to be very brief with her question. Unfortunately, I do not have a screen and I have missed Senator Higgins. I apologise to her.

Deputy Jennifer Whitmore

I just want to follow up on what Deputy Martin Kenny was talking about. I can understand that whether there was any lobbying about this in 2009 is in the vaults of history, but I wonder if there has been any contact or lobbying of companies in regard to paying back over the three-year time period. I ask each of the witnesses to please respond to that.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank Deputy Whitmore for her brevity. Who would like to deal with those three questions?

Deputy Ossian Smyth

Nobody has lobbied me on it. I have just asked my officials and they are not aware of any lobbying to the Department on it. I speak to the industry all the time and it has never mentioned it.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

Would Mr. Gannon like to address any of the questions that are outstanding?

Mr. Jim Gannon

Yes. I think Ms MacEvilly has outlined that the CRU did consider different options at the time that could be considered to mediate some of the effects of the global financial crisis. That was forwarded to the Department, but it would not have included the measure that was ultimately taken. It certainly did include other measures that were also taken at the time, but did not include the rebalancing measure in 2009.

Ms Aoife MacEvilly

We submitted some information to the Department in a paper that set out options. That was our analysis in this regard. I cannot speak to the Department's analysis on that.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

Then there was Deputy Whitmore's question about lobbying.

Mr. Jim Gannon

I am not sure that there has been lobbying in regard to this. The decision was taken in-----

Ms Aoife MacEvilly

I would say that, in fairness, we did publish all of the responses to the consultation in 2008 in respect of the network charges. We put forward a range of network charge options, if one likes, for consideration and there was significant response to that. All of that would have been published on our website.

Deputy Jennifer Whitmore

Is that in relation to the payments over three years?

Ms Aoife MacEvilly

Yes, in fairness we put that forward as a decision rather than an option for consultation, but we did nonetheless get a response on that. I think it is fair to say that the response from the enterprise groups was negative to our decision on that.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank Ms MacEvilly very much for that. I apologise to Senator Higgins. I do not have a screen in front of me so I did miss her. I ask her to please accept my apologies. She can take five minutes.

Senator Alice-Mary Higgins

That is absolutely fine. I apologise for coming in remotely.

A lot of the focus has been on the subvention, specifically the detail of the financial aspects of it but perhaps it needs to be looked at in a wider policy context. Could the Minister of State, Deputy Smyth, specifically address these issues? If we look to the wider set of policy decisions that have really incentivised the growth in very high energy usage by large energy users, in particular, data centres, in his opening statement the Minister of State talked about how there was an increase. This is a really substantial consequence of this measure where we are looking at an increase of 800 in the large energy users during the period when the subvention was in place. Again, surely that kind of expansion should have triggered a review and a questioning of the appropriateness of the policy. We are also in a situation where our legally binding emissions targets are not being met and 18% of our electricity in 2022 was being used by data centres. Could the Minister of State comment on the wider set of policies? I was disappointed that the Minister said data centres would have to go green or stay off the grid, but that is not enough if we have data centres that are creating their own fossil fuel infrastructure, such as we have seen in Tallaght, where a large-scale gas power plant is proposed to be attached to the new data centre. We have also seen a very strong move by the Government to overturn South Dublin County Council's attempt to say that data centres should not be a permitted development within its development plan.

We have really strong measures that are pushing the idea that data centres should be treated as priority strategic infrastructure. Much as the public paid the cost by way of their electricity bills in the past, it looks like the public will be asked to carry the burden in terms of the management of electricity demand and, indeed, the management of our emissions reductions. That is a real concern. If the public is yet again to subsidise and, in effect, take the hit for these large energy users, what policies are in place to review the different measures being taken to incentivise, encourage and allow them, for example, to develop their own fossil fuel infrastructure? They are in a privileged position in regard to planning decisions and certainly in terms of overturning local development plans. Are there changes coming in that regard? Will we learn from previous mistakes and try to fix some of the other mistakes we are currently making?

Deputy Ossian Smyth

I thank the Senator. It is good to talk about this. The economy has changed massively since 2009. In that year, we did not have €20 billion or €25 billion of income coming in from multinationals, their data centres and so on. At that time, large energy users were not data centres. Now, large energy use has become a synonym for data centres. In 2009, of the 65 top large energy users, approximately one third were Irish and two thirds were multinational. Of those 65 large energy users, 21 were in the pharmaceutical sector, 11 in ICT, eight in cement, mining and refining, and so on. Universities were also among those large energy users. It was a very different landscape from what we have now.

Senator Alice-Mary Higgins

I am conscious of the limited time remaining. We have spent a lot of time looking back to 2009. I would like if we could address the current situation.

Deputy Ossian Smyth

The Senator described data centres as having a privileged position in regard to fossil fuels. They do not and should not have such a position. Data centres, although they are necessary for the economy, must comply with climate legislation. They also have to support our security of supply, which means they should be providing backup power. The 2020 guidelines on data centres are essential in that regard in that they state that the centres must provide additional renewable energy to the grid and backup power. They will be the first to be turned off in the event of any kind of power cut or shortage.

As I understand it, consultations are taking place by either EirGrid or the CRU on new rules for data centres. I confirm that the consultation to update the rules is being done by the CRU, which its delegates might like to address. It is really important that data centres play a good citizen role in their contribution to both climate action and the stability of the grid and that they do not lead to power cuts, excess charges or a situation in which we cannot meet our thresholds. By changing the rules, we are moving to a situation whereby the grid will be made more stable and additional renewable energy will be put into it that would not otherwise have been added.

Senator Alice-Mary Higgins

I have a question for the witnesses from the CRU. I made a submission to its previous consultation in which it chose not to take a strong regulatory approach in regard to data centres. That review of data centres and their energy usage took place just a couple of years ago. Was that not the point at which there should been a question about the subvention? I point out to the Minister of State that industrial licences for gas plants were granted just last year to Microsoft.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I will ask our guests from the CRU to answer the Senator's question. That will conclude this morning's meeting.

Ms Aoife MacEvilly

As the Senator knows, we are reviewing connection policy for large energy users generally. When we talk to the data centre operators, none of them is suggesting that lower energy prices in Ireland are a reason for locating here. They generally consider that they are facing very high energy prices in Ireland. There is a range of factors that make Ireland an attractive location for them. We do not see the country's attractiveness being attributed to energy pricing. Of course, the situation has been reversed since last year, with charges going dramatically higher for data centres. That does not seem to be in any way changing Ireland's attractiveness for those operators.

Senator Alice-Mary Higgins

Why was this issue not caught in the previous review?

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I must bring the meeting to a conclusion, Senator.

Senator Alice-Mary Higgins

That was my question. I simply asked why this issue was not considered in the previous review.

Mr. Jim Gannon

It was considered at the time in parallel to the review of security of supply. In 2020 and particularly in 2021, we started engaging with ESB Networks and EirGrid on the LEU rebalancing. It was not part of the review around security of supply and connections policy at the time but the questions had started to be asked in parallel in terms of collecting the data together. That examination was happening at that time but it was not folded into the review.

An important piece of work now is the development of the national energy demand strategy, which is in consultation, and, separately, the large energy user connections policy, which is also under consultation and encompasses more than just data centres. We are seeking to align connection policy and a national demand strategy not just with security of policy and ensuring an economic delivery of infrastructure but also with our climate Act obligations and the carbon budgets that are being set. As we have said before at this committee, the regulator has a certain set of tools within a regulatory toolbox and certain vires and abilities. It is highly likely that to deliver on our carbon budgets and ambitions will require engagement with many other actors. The need for a cross-governmental approach is mentioned in the Government's digitalisation and decarbonisation strategy, with reference to the place of data centres in enterprise strategy in Ireland. A cross-governmental and cross-agency approach will be required to deliver that. It could relate to economic planning, spatial planning and the various stages projects need to go through, as well as enterprise planning and enterprise incentivisation. It is broader than our own vires but we are consulting on it.

An Cathaoirleach Gníomhach (Deputy Alan Farrell)

I thank Mr. Gannon, the other witnesses and members for their attention and engagement this morning. We will meet again in private session at 3 p.m.

The joint committee adjourned at 12.37 p.m. until 11 a.m. on Tuesday, 30 January 2024.