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11

NEWS

Oct/Nov 2011 www.esb.ie/em

financially strong ESB to the benefit of all stakeholders and is assumed in the Credit Rating Agencies current assessment of ESB.

As well as allowing us to successfully compete in our day to day operations it also allows us to fund our investment plans. These were pared back from €8.5bn to €6.5bn in order to minimise the savings needed. However, any further reductions would have constrained our core activities and severely impacted on supporting these investments, which would also critically impact on jobs.

To fund investments we need to borrow. Without committing to a reduction in our cost base as proposed we could not borrow and fund our plans. In today’s financial climate lenders would simply view our costs as too high.

Payroll represents two thirds of ESB’s controllable cost base. Having looked in significant detail at all the non payroll savings we can make and building on 2010 total savings of €95m* this leaves €185m to go of which a minimum of €140m must come from payroll.

ESB’s rare and proud history of funding itself needs to be protected now more than ever to secure its future as a competitive VIU. ESB needs this financial strength to ensure that it can fund its investment plans and ultimately to be in control of its own destiny.

Corporate Change Manager
Pat Fenlon

AS CORPORATE Change Manager, Pat Fenlon’s focus is on ESB’s priority target of reducing our cost base in response to today’s economic, competitive and regulatory reality. The aim is to protect the financial strength and enable the future success of ESB.

Since February 1st 2011, the company has been seeking to engage in partnership to address the payroll gap. While initial progress was slow, an understanding was reached with the Group of Unions (GoU) during July which provides a solid framework to conclude the Payroll Cost Base talks. In particular, it was agreed:

• To appoint an independent financial assessor to verify the scale of the payroll crisis.
• To commence an intensive programme of negotiations on 1st September 2011 to be completed no later than Thursday November 24th 2011. The outcome will be fully communicated to all staff and followed by a ballot.

Negotiations commenced on September 1st and Paul Jacobs of Grant Thornton was appointed as a jointly agreed independent assessor. Grant Thornton are a well-recognised firm of accountants and Paul Jacobs, who heads up their Forensic & Investigation Services Unit, has previously carried out a number of similar assignments for various clients, including commercial state companies.

“ Addressing the payroll gap is not easy and requires every one of us to take some pain

Pat acknowledges that “addressing the payroll gap is not easy and requires every one of us to take some pain,” but states that “acting now means we can secure a better future - a strong ESB that we can be proud of with sustainable employment”.

Business Unit Challenges

ESB NETWORKS LTD.

Compelling Case for Change:

Networks must:

• Deliver its PR3 Contract
• Achieve cost savings of €85m per annum by 2015 of which €55m must come from payroll
• Deliver a significant capital programme which it cannot fund from its own cash
• M aximise incentive earnings during PR3 and avoid penalties
• C hange work focus from new connections to HV and the work programmes are not uniformly spread around the country, presenting a new challenge

Response/Actions:

• Reduce costs in all areas, including payroll
• Achieve more flexibility in delivering work
• Continue with retraining and re-skilling
• Good progress is being made in PIP savings for 2011
• Organisational re-alignment already in place

BUSINESS SERVICE CENTRE

Compelling Case for Change:

• Internal service costs out-of-line with the market due to efficiency issues in some services, high IT spend and also significantly higher than market salaries for some jobs
• Business Units unable to afford costs and will be forced to seek alternative provider
• Failure to address BSC cost-base will lead to collapse in demand and will mean a reduction in services and staff in the BSC

Response/Actions:

• Key focus on customer service, working with all business lines to ensure cost-base challenge issues are addressed
• BSC Strategy in place with key deliverables to improve service and reduce inefficiencies including automating and standardising services
• Benchmark all services against best practice and get BSC to market rate for each service within a defined period - otherwise it will not be viable
• Reduce costs of third-party services
• Reduce pay costs in line with market
• There has been excellent progress so far in reducing both our payroll and non-payroll costs

ESB ELECTRIC IRELAND

Compelling Case for Change:

• A high level of fixed costs in the business
• Customer numbers have fallen over the last two years
• The cost of serving our customers has risen significantly
• To be competitive and maintain market share, EI musts tackle its cost-base

Response/Actions:

• Maintain position as the leading energy-service provider in Ireland
• Launch new capabilities – electricity and gas systems, new customer bill, new website, new sales channels and marketing capabilities
• Launch new products – dual fuel, differentiated price plans, energy services
• New business model – integration, single location, flexible resource model
• Agreed PIP Programme established setting out target savings over the next five years, with quarterly review meetings

ESB ENERGY INTERNATIONAL

Compelling Case for Change: Engineering Services

• Both Engineering Services and Generation business are exposed to competitive markets
• Engineering consulting work has contracted worldwide with increasing competitive forces and squeezing margins in the sector
• Internal business is declining, the cost of these services is under pressure and to survive we must grow business with external parties. With low margins, costs are the key factor in winning new business
• To survive and grow the Engineering business must reduce annual M&O costs by a further €5M and payroll by €15M

Generation Business

• Electricity generation is capital-intensive business. Assets are expensive to replace. Significant, sustained profit is necessary to fund maintenance and new build. Current and projected profit levels are simply not sufficient to meet this need
• Fall in generation capacity to 42% is having an adverse effect on income stream, which is further compounded by fall off in demand and oversupply in the market
• Income too heavily dependent on favourable fuel contracts, short-term carbon allowances and PSO levies
• A commercial generating, trading & supply business, is a critical part of our Vertically Integrated Utility. As end user prices are market driven, the business must compete effectively and retain market share, cost base must be competitive with the market
• Generation business must reduce its payroll cost base to increase competitiveness and ensure survival in the market place. M&O spending must be reduced by €15M and annual payroll reduced by €40M by the end of 2015

Responses/Actions

• Significant savings have already been achieved in the Generation and Engineering Services cost base
• Substantial cuts have been made to payroll, capital and M&O expenditures
• Payroll reductions largely based on VS driven exits and payroll costs still account for a large and growing proportion of overall costs and margin
• Increasingly competitive market, current staff earnings levels are simply unsustainable, compared with our main competitors