California's electricity sector has been hit by an energy crisis prompting fears that Ireland, still at the embryonic stage of electricity liberalisation, could experience similar problems.

There are undoubtedly lessons to be learned from the Californian example but it should not be used as a stick with which to beat the concept of regulatory reform.

As in California, competition in Ireland is to be introduced in generation and supply, while transmission and distribution are to be kept in public control, with the assets remaining in the hands of the former monopolist. Other similarities are:

Economic reliance on the growing technology sector - a major consumer of electricity;

An old and inefficient stock of generating plant;

Difficulty in getting generating plant past the planning stages.

In California, up to 40 generating plants are stuck at the planning stage, due largely to local opposition.

Here, many see the strong position of the ESB, as a potential hindrance to emerging competition. Potential competitors have focused on the actions of the ESB in securing a connection to the national grid at Pigeon House before regulatory reform was fully under way, and the potential of that to hinder new operators.

The complex process whereby Californian suppliers purchase power from the generators effectively forced generators and suppliers to transact on a short-term basis, resulting in higher prices and reduced incentives to invest in plant suitable for supply under long-term contracts. Simultaneously, bottlenecks in the transmission network meant that electricity could not be imported. Thus, investment was damaged and capacity shortages arose.

What precipitated the crisis was the reaction of the State legislature. When suppliers attempted to pass on increased cost to consumers, the State's response was to impose price caps. Consumers, facing a fixed price, had no incentive to reduce their consumption of power, while suppliers, unable to cover their costs, could not fulfil their contractual obligations. Blackouts ensued.

However, regulatory reform can yield greater efficiency, lower prices and more choice for consumers. In the UK productivity has soared and prices fallen. Household electricity prices decreased by 20 per cent and electricity prices to other consumers fell by 27 per cent between 1990 and 1997. Even more dramatically, in Victoria, Australia, prices fell to less than half their previous level. It would be wrong to ignore the lessons of California. Firstly, while the system for transactions between generators and suppliers will be complex, it should not artificially force parties to rely on short-term contracts. Generators must have an incentive to invest.

Secondly, no special interests should be allowed undue influence over the reform process. The system must be designed to encourage new firms to enter with a reasonable chance of making a return on their investment. In this respect, the ownership of transmission and distribution assets is crucial. The Competition Authority has previously stated its view that it is inappropriate for the former monopolist to retain those assets.

When an operator desires to enter the generation market, the transmission system must be upgraded to accommodate it. If Eirgrid, the national transmission system operator, owned and controlled the transmission assets, it would have an incentive to facilitate access to the grid.

Finally, regulatory uncertainty can have detrimental effects on competition. New entrants must be afforded an equal footing in the market. Successful reform of any sector depends heavily on the appointment of regulators who make themselves redundant by creating a competitive market. Ireland is likely to experience growing demand for electricity. International experience indicates that the appropriate policy response is rapid and meaningful deregulation.

John Evans is an economist with the Competition Authority