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Tuesday, March 15, 2016

Power of the regulator is a burning issue

THEY do things differently in the North . The discovery of “an act of serious financial impropriety” in the company formerly known as Bord Gáis Éireann had implications on both sides of the border.
The impropriety involved a group of employees of the company effectively covering up overruns on a pipeline project, known as “Project South”. The pipeline, running from Barnkyle to Coonagh West in Co Limerick, was constructed in 2002 and 2003. In the course of construction, it was discovered that there was a cost overrun of €522,000. Instead of informing the company’s board — and incurring reputational and perhaps other career damage — a group of employees decided to cover it up.
This was done by diverting the costs to two other projects, one here and another running between the Republic and the North. The implications for this was to give the impression that these projects cost more than they actually did, and in turn this cost was passed on to customers.

The matter may have ended there had not a former employee decided to blow the whistle on the whole affair. In 2014, this man wrote to the chairman of Ervia, which is the parent company for Gas Networks Ireland, the entity which replaced Bord Gáis Éireann . The whistleblower also passed his concern to the energy regulators north and south.
As a result, KPMG was retained to investigate the impropriety. Its report was completed last May and GNI passed it onto both regulators, which in turn completed their own investigations.

The KPMG report confirmed the allegations. It also noted GNI had stated that “neither the board nor the CEO of Ervia had any awareness of the misallocation. This misallocation would never have been sanctioned by the proper authorities”. GNI told the Irish Examiner four of the six employees involved were still with the company and have received appropriate sanctions.

On March 1, the Northern Ireland Authority for Energy Regulation issued its report, with a recommendation that GNI’s UK arm be fined £500,000 (€644,000). This fine is due to be confirmed following a statutory period of consultation which expires at the end of this month.

The regulator reported that “we take these provisions seriously. The purpose of reporting actual costs is to ensure that the licence holder is appropriately recompensed for expenditure actually incurred and to ensure that any such expenditure which is ultimately paid for by Northern Ireland consumers reflects the actual costs incurred by the licence holder.” Last Tuesday, the Irish Examiner contacted the Commission for Energy Regulation (CER) in this jurisdiction and was told that a report was imminent on the matter. That report was published on Thursday, under the heading Final Report on Project South, which gave no hint as to the nature of the report.

The report stated that “the whistleblower alleged that the senior member of staff within Bord Gáis Éireann deliberately concealed from Bord Gáis Éireann’s board the cost overruns associated with a Bord Gáis Eireann gas infrastructure project”.
It also discovered a “financial transaction” in Bord Gáis Éireann for the 2006/7 period, which was not reflected in the company accounts. This has since been rectified.

Yet the Commission for Energy Regulation is not in a position to impose a financial penalty on the company despite it being responsible for overcharging customers on foot of the dodgy transactions.
The CER reported that it would “engage with DCENR (Department of Communications, Energy and Natural Resources) regarding the development of enhanced administrative sanctions for the CER to implement (including the ability to impose financial penalties) as it is the view of the investigation team that the CER does not have sufficient vires to impose appropriate sanctions of financial penalties on regulated entities.” 

The report went further, saying that it would be further engaging with the department “to ensure that the regulatory powers of the CER are sufficient and that they evolve in line with the growth of the energy sector”.
The difference between the teeth shown by the regulator in the North and its opposite numbers in the South could not be more stark. In the North the matter was taken so seriously as to impose a considerable fine. In the South, the regulator simply does not have the powers to impose any such fine. Is it the age-old problem that in this State we do not take seriously matters of regulation and any improprieties that occur?
These days, the CER is also responsible for the workings of the highly controversial Irish Water. Numerous issues have arisen about that entity, yet the body to which it is ultimately answerable simply does not have the powers to issue a financial penalty.

Questions also arise for Gas Networks Ireland and its parent. How closely are matters of control policed? The company claims that the kind of stuff that was undertaken in this incident would not occur since new controls have been put in place, but whether or not that is sufficient remains to be seen.
Gas Networks Ireland issued a statement to the Irish Examiner which condemned that which occurred within the company.

“This incident was a clear breach of the company’s values and the company deeply regrets and apologies for this misallocation of costs.
“Having completed its own internal investigations the company believes that the misallocation was an isolated incident and did not reflect a pattern or practice within the company.”
That confidence may be misplaced. If the whistleblower had not come forward, this incident would never have been uncovered and everybody would carry on as if nothing had happened.

For years there were rumours about the manner in which contracts were awarded and run in the gas networks. Before now, nothing was ever discovered to substantiate any of the rumours.
Sources in the industry claim there have been changes in recent years as the corporate structure was overhauled which ensure tighter controls, but that remains to be seen.

The most crucial question, however, remains the powers of the regulator. The area is one that should receive immediate attention whenever a new government is installed. With the proliferation of energy companies it is vital that customers can retain confidence that their energy requirements are being met without any impropriety along the way, particularly when such improprieties result in the customer picking up the tab.
Michael Clifford