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Why was Bord Gais sold for so little?


BORD GAIS: On the cheap?

BORD GAIS: On the cheap?

BORD GAIS: On the cheap?

BORD Gais Energy was sold "on the cheap" and "at the bottom of the market", senior opposition TDs have claimed ahead of possible investigations into the matter by the Public Accounts Committee or the Comptroller and Auditor General, as new details have emerged to suggest the State could have lost as much as €360m on Whitegate power station in Cork.

"I was surprised that the Government sold the company and I don't understand why they've done so. Whitegate in particular was sold at the bottom of the market for a gas power station," Green Party leader and former Energy Minister Eamon Ryan told the Sunday Independent.

Fianna Fail's finance spokesman Michael McGrath agrees that the State got a very bad deal. "Bord Gais was sold on the cheap. This is not the first time the Government have done this. Irish Life was sold last year at a knockdown price and the State's holding in Bank of Ireland has been disposed of well below its long-term value.

"The Government spends huge amounts on consultancy fees for its privatisation programme but they refuse all requests in the Dail to examine these sales and others such as the IBRC liquidation to ascertain if value has been received for the taxpayer. There are potentially huge amounts of money at stake here and we need far greater oversight of the process," he said.

As this newspaper revealed last week, the "enterprise value" paid for Bord Gais by new owners Centrica was €210m. However, this included €60m of income that would have been earned anyway if the company wasn't sold. Furthermore, the book of 680,000 Bord Gais customers could have had a value of about €110m, so this suggests a value of just €40m was put on Whitegate, which cost €400m to build.

Energy economist Richard Tol, a former dissenting voice at the ESRI now working at the University of Sussex in the UK, questions other aspects of the deal while pointing out flaws in Whitegate that may have had an impact on its value.

"Valuing companies is difficult. Bord Gais is overstaffed with overpaid people that cannot be easily redeployed in the rest of Centrica.

"Whitegate was not properly designed, they thought in-house expertise was good enough; and is badly sited; they overlooked a key element in transmission costs. No wonder Centrica did not want to pay much.

"I was also surprised by the sale of the retail business. A key reason to give Irish Water to Bord Gais was the synergies between their retail operations. Those are now gone."

Another opposition TD voiced his concern that the Government was either badly advised about the sale or that it didn't follow advice that it may have been given.

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Head of the PAC John McGuinness has confirmed that if it decides in the next few days to investigate the matter, then it will be able to compel the Government and Bord Gais to reveal all of the advice they received.

Five separate firms advised them and it's likely they'll pick up lucrative fees that will amount to millions of euro. A&L Goodbody and Barclays were respectively the legal and financial advisers to the Government. McCann Fitzgerald and Allen and Overy provided legal advice to Bord Gais, with financial advice provided by Canada's RBC Capital Markets.

Any investigation – and it's been confirmed that the Comptroller and Auditor General can scrutinise the sale of State assets – could look at when the decision was made to build Whitegate and at what advice was given by officials in the Departments of Energy and Finance and any outside advisers.

Questions have also been raised about how Energy Minister Pat Rabbitte took the company off the market last November, saying that he "wouldn't sell State assets at bargain-basement prices", before news emerged three weeks later in December that a sale to UK utility Centrica had been agreed.

A former senior industry source says he has received numerous calls in the past week from surprised current and former industry professionals questioning how the State could have lost so much money on Whitegate and the nature of the sale process.

The Department for Communications, Energy and Natural Resources (DCENR) clarified how the sale was concluded during this time.

"On November 27, Minister Rabbitte announced that the bids received for Bord Gais Energy at that date were not at an acceptable value. It was considered appropriate at that stage to make it clear publicly that the business would not be sold if acceptable bids were not received, although a sale would still be considered if an acceptable value was offered.

"Revised, higher bids were then received and accordingly a preferred bidder was selected at this point. The decision to re-engage with bidders was made by the Steering Group established to oversee the transaction process, comprising officials from DCENR, the Department of Public Expenditure and Reform, the Department of Finance and NewERA," a spokeswoman said, adding that the sale of all the Bord Gais assets for €1.125bn represents "fair value for the business".

More worryingly, the sale of the semi-state has also shone a light on how taxpayers have been hit by a very costly bill for a so-called "gas bust" that is partly caused by EU-wind energy targets to which Ireland has signed up.

If the ESB were sold, we'd take a further hit, the former senior industry source has revealed. It would also realise a loss of hundreds of millions of euro on a €360m gas power station it opened in 2010 at Aghada, just down the road from Whitegate; in fact, the two being built close together also brought another problem.

Generation in the Cork region "will have to be constrained from time to time" because grid improvements are required, a report by grid operator EirGrid states. This impacts how much power both Whitegate and Aghada can produce and transmit.

Another question prompted by Aghada is the difference in the cost of the two power stations: it cost €360m to build, while Whitegate, which can generate a tiny fraction more power, cost €400m.

"Perhaps part of the loss on Whitegate is accounted for by Bord Gais overspending on it by €40m in the first place," a second economist with knowledge of the industry suggests.

The manager of a private Irish power station operator agrees: "If Whitegate was built today, it would cost between €330m and €370m."

Utilities in Britain are also losing hundreds of millions of pounds. Danish firm Dong Energy recently wrote down the value of a power station that it opened in 2010 by €180m, while others have been shut down entirely because of the gas bust. Electricity bills are also rising there, prompting the setting up of a new competition authority that is about to investigate the matter.

Meanwhile, in Europe, high electricity bills have prompted some manufacturers to look to the US – where power costs half what it does on the continent – instead of Germany to open new factories. Furthermore, Austrian utility Verbund made writedowns of €1bn on its gas power stations there and in France and Italy last year.

There are several causes of this bust, which in Ireland is reflected by an increase in coal-generated and wind-powered electricity, at the expense of gas power stations like Whitegate and Aghada, which are consequently devalued.

A spokesman for Bord Gais confirmed that this gas bust has "had a substantial impact on the current and forecast margins earned by gas-fired power stations".

The price of coal and the carbon credits that utilities must buy in order to burn it have crashed due to the shale gas boom in the US, which in turn means gas is also cheaper. The carbon credit prices crashed after the failure to get a new global greenhouse gas agreement in Copenhagen in 2009.

Gas power stations are further devalued and degraded because they are designed to run all the time, not to be stopped and started as the wind blows and stops blowing, which is what is increasingly happening. Plans to generate even more electricity from wind here mean that gas-burners must factor in selling less and less electricity: the wind farms are effectively eating the gas-burners' lunches.

As the debt on power stations is generally paid back on the sale of the electricity generated, if they aren't operating often enough to pay it off, then they get into further trouble.

In a week that saw the National Competitiveness Council highlight the high and rising costs of doing business here, with the fifth highest electricity costs in Europe for SMEs and sixth highest for large businesses, this trend is unlikely to change, the former industry source adds.

"Increasing electricity prices reflect the uncertainty about the incomes gas power stations can earn. Under current policies to increase wind-powered generation, I suspect that will continue," he said.

On top of the €360m loss on Whitegate, it's an uncomfortable prospect.

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