Would breaking up the ESB bring down electricity prices? YES: Mark Fieldingsays market forces will drive down prices and encourage both innovation and sustainability NO: Paul Sweeneysays a large, integrated company is the most efficient way to supply the cheapest electricity
YES: Mark Fielding
Economic theory predicts, and our recent experience confirms, that lack of competition in monopolised industries leads to higher prices. In Ireland, the price of electricity, gas, fixed telephone and postal services have all increased sharply in recent years. In the case of the electricity market, deficiencies exist in market structure and operation, and reforms implemented to date have been inadequate. The Energy Regulator (CER) has failed to reduce prices through an enticement to competition by actually raising prices to consumers by 70 per cent. This theory might be tenable in a large market; but the Irish market is so small that scale could never be achieved, especially with a monopolistic incumbent.
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 Fieldingis chief executive of Isme, the independent business organisation.
NO: Paul Sweeney
The decision by the Government to break up the ESB by the end of next year - in the name of supposed "competition" - will push up power prices further and destroy one of Ireland's national champions.
Significantly, the reasoning behind the proposed break-up is no longer valid. Some weeks ago, the EU announced that competition is not always best served by dismantling successful power companies and selling them off piecemeal. This major policy change was prompted and informed by the purchase of EU power-generating companies by Russian competitors.
Large companies can deliver economies of scale that smaller companies will find impossible, along with lower prices and greater security of supply. A small island economy imposes additional constraints on power producers and Ireland has been very well served by the ESB since 1927. To break it up for ideological reasons, or just to ensure the profitability of certain small producers, is bizarre. Quite simply, companies of size are better able to compete with their peers.
It was the French and German governments that successfully lobbied to ensure that their energy companies - pivotal to their economies - were not emasculated. Although the ESB is but a fraction of the size of giants such as EDF in France, or Germany's E.ON, our Government stays silent and refuses to think strategically.
Dismantling and weakening is not the way to prepare the ESB for the "open" market, where it will not have the financial strength to compete. In fact, what we are witnessing is another act of wanton destruction of a valuable and strategic State asset, along with Eircom, the DAA/Aer Rianta and others.
It is repeatedly claimed that the break-up will benefit everyone with lower prices all round. That is demonstrably untrue, as evidenced by the refusal of the Energy Regulator to cut the price of electricity by as much as the ESB says it can and should be cut.
The truth is that the price is being kept artificially high in order to entice other companies into power generation. If the Government wants real as opposed to artificial "competition", it should immediately introduce the north/south and east/west interconnectors.
An integrated company is the most efficient way to supply the cheapest electricity in a small island economy where the market is about the size of Greater Manchester. The existing EirGrid/ESB have worked well both in terms of infrastructure investment and independence. Costs to customers of transmission and distribution networks infrastructure and services have been reduced by 10 per cent over the last five years while, simultaneously, there has been investment of some €3 billion of a planned €6 billion programme. This investment could be put at risk if the company is to be broken up now, pushing up prices further.
Competition commissioner Nellie Kroes and other conservatives have a naive belief in the workings of perfect markets. As the perfect market does not exist, they insist, like right-wing parodies of the old Soviet commissars, that the state must interfere in the imperfect market to try to create a perfect one. Thus they seek to destroy efficient large companies in an industry where scale and scope is vital, particularly on an island.
Kroes insists that state electricity supply companies must be entirely separate from the grid, but can continue to own it. All activities related to it, including investment decisions and financing, must be kept separate. But as the head of E.ON has rightly pointed this will "deprive the companies of all ownership rights" in practice. Further, the commission has been rightly criticised for its obsession with regulation, instead of the much more serious issue of security of energy supply for Europe. This despite the crisis that threatened when Russia's Gazprom stopped sending gas to Ukraine in January 2006. A quarter of EU gas and oil supplies come from Russia.
The ESB is an indigenous company of scale and global reach, a national champion that has served the Irish people well. It is highly regarded internationally and has major operations abroad. It is a big company here but a small one by world standards.
It is a State-owned energy company, but is no longer a monopoly. It is not even dominant with only around a third of the all-island market which begins on November 1st.
Successive reports on industrial policy have recommended that we develop indigenous industry. It is argued that firms need critical mass to develop into global players. In recent years we have had a number of Irish companies which have performed well on the international stage. The ESB is part of this group. Of course, the Government will promise that it will not privatise any part of the ESB.
It will be a real test of Minister for Energy Eamon Ryan to see if he interferes in the market to force artificial "competition" by breaking-up the ESB, destroying a major indigenous company and pushing up prices further.
• Paul Sweeneyis economic adviser to the Irish Congress of Trade Unions and has served on the board of the ESB. His latest book, Ireland's Economic Success, will be published shortly.
online: join the debate @ www.ireland.com/head2head
Last week Pádraig Cosgrove and Maura Harrington debated: Is Shell's Corrib Gas project good for the local community? Here is an edited selection of your comments
I am a young person from the Erris area. At the moment I work in Dublin but plan to move back home in the near future. It was when the Rossport 5 were sent to jail that myself and my father took an interest in finding out about Shell. We found out that Shell plans to bring untreated, raw gas into a refinery. In my opinion this is a deadly threat to life. The raw gas (which has no smell until treated) is to be piped approximately seven miles inland, in front of peoples' homes and close to the lake (the only source of drinking water in Erris.) We are all for the gas coming ashore and for the development of our area, as long as it is done properly. At sea!
Claire, Ireland
This development is being opposed by a small number of locals and a number of outsiders who travel the country opposing anything they can! The development of gas off the west coast is essential and welcome progress. I hope it proceeds without delay.
John Paul Feeley, Ireland
This project is no good for this area as the pollution alone will destroy a pristine location. This is an unprecedented project - we are the guinea pigs. It will be impossible for us to live here. How can one live with a constant threat of a gas explosion? It is a basic human right that everyone should be able to breathe clean air and drink clean water. Why is this being taken away from us?
Siobhán in Erris, Ireland
Of course it's good for the local community. It will bring jobs, prosperity, new developments, new communities and overall a new lease of life not to mention the benefit to local economy.
Sorcha Leonard, Ireland
I had to emigrate from Ireland 20 years ago; I would love to go home and find a job there. Those refuseniks are trying to destroy and stop progress and keep the place as a reserve for themselves.
Bridie, Australia
To quote An Bord Pleanála senior planning inspector Kevin Moore: "It is my submission that the proposed development of a large gas processing terminal at this rural, scenic and unserviced area on a bogland hill some 8 kilometres inland from the . . . landfall location, with all its site difficulties, public safety concerns, adverse visual, ecological and traffic impacts . . . defies any rational understanding of the word 'sustainability'." So what has changed? Precisely nothing. This project, which has proceeded with indecent haste and possibly illegally, is a disgraceful example of how short term vested interests can take precedence over environmental and social considerations.
Andy Wilson, Ireland
Pádraig sets out the arguments from a bread and butter viewpoint - people do not have to go to England for work like me. Maura is the utopian type who has a good job and wants to preserve the scenery for the few.
James, United Kingdom
I have been watching the events in Rossport unfold over the past six years or so and think it is an absolute disgrace the way Shell have forced themselves upon the local community, backed by the Garda. On several occasions I have seen people who are peacefully protesting being beaten and thrown to the ground by gardaí who are blatantly taking sides with Shell.
Brendan Carney, Ireland
Attacking a community is never good for it. Removing the rights and resources of Irish citizens and giving them to a foreign multinational for no perceived gain is not an act that could ever be imagined as beneficial. The hypocrisy practiced is stunning.
Seán Ryan, Ireland