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Deregulation of ESB Retail Electricity Pricing
Following publication of a number of consultation papers over the last few months, the CER on 21 April 2010 published its decision paper “Review of the Regulatory Framework for the Retail Electricity Market, Roadmap to Deregulation” (the “Roadmap”) amidst considerable publicity. In the Roadmap, the CER outlined its decision to implement, on a phased basis, the removal of price controls from the Irish retail electricity market.
One of the key remaining areas of regulatory intervention in the Irish market is the CER’s ability, by virtue of the Electricity Regulation Act 1999 and the relevant supply licence, to effectively determine the retail prices charged by ESB Customer Supply (“ESB CS”), which (with a market share of approximately 77%) remains the main electricity supplier to the domestic sector. The Roadmap contemplates the removal of this price-setting ability, so that ESB CS will face no regulatory restrictions in its ability to set prices and thereby engage in price competition with other suppliers.
The CER’s decision was based on an assessment of the level of competition in the Large, Medium and Small Business sectors of the retail electricity market, as well as the domestic sector. Due to the entry of suppliers such as Airtricity and Bord Gais Energy, ESB’s market share in 2010 is less than 50% in the large business market and less than 40% in the small and medium business markets. As such, the CER has decided that price regulation will be removed from all business markets from 1 October 2010.
By contrast, the domestic market has not has yet experienced a degree of consumer switching that is sufficient, in the view of the CER, to warrant price deregulation. ESB CS remains dominant with a 77% share. The CER has, in the Roadmap, committed to removing price regulation in the domestic sector when ESB CS’s market share falls to 60% (and subject to additional requirements in relation to switching activity and active competition), at which point ESB CS must also commit to removing the ESB brand from its retail business. To enable it to implement the Roadmap, the CER will test conditions in the domestic market at quarterly intervals to assess whether the requirements for deregulation have been met. Under this approach, October 2010 is the earliest date at which full domestic price deregulation can occur.
In connection with the decision, the CER stated that deregulation, through the introduction of a fully competitive market, can bring benefits to the consumer in terms of choice and quality of the offers available from suppliers, improved services and lower prices. Based on deregulation experience in (for example) the telecoms sector, it will be interesting to see whether any further regulation intervention in the competitive conduct of ESB CS – such as, for example, restrictions on aggressive “customer win-back” activity – is considered necessary. Notwithstanding any price deregulation, the CER stated its commitment to continue monitoring the electricity retail markets to ensure they are delivering benefits for consumers. The CER also suggested that whatever the degree of retail market competition, fossil fuel prices will still be the dominant factor in determining the level of Irish electricity prices.
The removal of pricing regulation from ESB CS will be a major step that reflects the changing role and status of the ESB in the Irish electricity sector. The eventual implementation of proposals set out by the CER will require legislative and licence changes, and has been flagged by the CER as being subject to ultimate approval by the Minister for Communications, Energy and Natural Resources.