Would breaking up the ESB bring down electricity prices?
YES:
New entrants must be able to access the natural monopoly network if they are to compete with the incumbent provider. It is obviously not in the former monopolist's interest to grant new entrants access to the grid, and there are many ways, mostly covert, to stymie such access. The result is a low take-up by new entrants to the Irish electricity market, as many believe, rightly or otherwise, that the rules still favour the ESB.
The ESB is a vertically-integrated entity which has obvious incentives to raise rivals' costs and, while not totally denying them access to the natural monopoly network, will only grant access on unfavourable terms. Due to what is euphemistically called a "knowledge deficit", in other words not having a clue, the regulator has been unable to establish the true costs of providing access and the ESB has an incentive to overstate them. The result has been an unmitigated disaster for the Irish electricity consumer, where prices have risen, with little new serious competition to generate price-reduction. World energy companies E.on, RWE, Airtricity and E-Island have all walked away because of the ESB's power.
So neither an invitation to new entrants nor regulation has worked in reducing prices. The solution in many countries has been to break up the former monopolist's generation operations into competing firms to ensure adequate competition. In truth, effective competition in the electricity market can only be achieved at generating and supply levels, as it does not make sense to have separate transmission grids. Other countries acted decisively, transferring ownership of the network to a separate independent company.
In Ireland the Government established an "independent" company, Eirgrid, to control the operation of the grid, but the grid is still owned by the ESB. Eirgrid has to rely on the former monopolist to carry out all repairs, construction and maintenance work. This smoke-and-mirrors exercise, while appeasing the unions, hardly represents a pro-competitive solution. So, why not just create a number of competing entities to replace the one State-owned ESB? This would guarantee competition, which inevitably leads to increased innovation, technological advances, a competitive attitude and a reduction in costs, giving the consumer lower electricity prices.
We have an incumbent former monopoly providing an essential utility, with extremely strong unions, who have shown that they will "turn off the lights", and an owner, the Government, who are hell-bent on retaining power (no pun intended), wedded to the "Partnership process", and therefore will not tackle the unions' vested interests. They know that ICTU will walk if the ESB is touched, as was the threat when telecoms, airports, bus competition and liberalisation were proposed in the mid-1990s.
What the unions are really afraid of is a break up of their power base which ensures some of the highest wages in the economy for their members, at the consumers' expense, through costly electricity.
In the UK and Europe, where former monopolist's generation operations have been divided into competing firms to ensure adequate competition, consumers can now choose their electricity supplier and this has resulted in price reductions in excess of 20 per cent. At the same time, customer service levels have improved despite the alarmist forecasts of a deterioration in service. Consumers can change supplier easily, therefore standards of service must remain high for companies to retain market share.
This has also led to the availability of "green" electricity, new payment methods and greater use of e-commerce in these competitive markets.
So, while these competitive advances are happening around the world, leading to technological innovation, increased sustainability and lower prices, Ireland remains at near the top of the electricity price charts, losing competitiveness.
The solution must be to separate out the grid under Government control, divide the existing ESB into a number of competing entities, both in generation and supply, and allow separate management to compete for customers at both levels with other market entrants.
The current system is not working; the degree of competition has a major impact on prices with the most competitive countries (UK, Finland) having the lowest prices. Therefore the obvious solution would be to break up the ESB and allow market forces to drive down electricity prices in a natural way.
Mark Fielding is chief executive of Isme, the independent business organisation.
