Wednesday, May 17, 2006

A peace dividend?

One irony of the increasing integration that's already underway between the Republic and Northern Ireland is that consumers in the Republic may benefit from more effective public policy and regulation in the UK. A clear example of this is provided by the electricity market. The problems are laid out for Wall Street Journal Europe (subs. req'd) readers by Constantin Gurdgiev and Peter Nolan.

Notwithstanding the groaner of a title ("Erin Go Dark"), the article lays out in detail how the Republic's de facto electicity generation and distribution monopoly, the ESB, has ruthlessly gamed a supposed market in electricity. In fact every trick they use will be familiar to anyone who has looked at the California power crisis in 2001; take a look at this Paul Krugman article describing what went on there: the ESB is doing the exactly the same thing -- suspiciously well timed shuffling of power generation amongst its different plants to generate huge profits for itself while making it very difficult for competitors to benefit from times when capacity is tight.

And as with many regulatory problems in the Republic, one might ask what the government is doing about it. Well Step 1 with any potentially controversial issue is to shove it off to a quango (see also health, roads) -- in this case, a toothless regulator that has been captured (as they say at the University of Chicago) by the monopoly that it's supposed to be regulating. But the problems are so blatant that the Minister, Noel Dempsey, can't quite dodge them, although not for lack of effort:

Amid the abuses of dominant market power by the ESB, Irish authorities remain largely silent -- at least in public -- on the matter of Ireland's deteriorating energy security. An outside review of the country's energy sector, ordered by the minister for communications, marine and natural resources at a reported cost of €1.2 million, is being kept secret -- out of the hands of Parliament, the press and the public. The minister, Noel Dempsey, says the review contains confidential information from third parties.

It's time to break up ownership and management of the transmission grid and sell off the power stations to the private sector to introduce genuine competition. It is also time to lower planning, regulatory and pricing barriers to market access for independent producers and distributors. The moral of the sad story of electricity in Ireland is that power corrupts, but monopoly power corrupts absolutely.

Now while the facts are damning, we're not sure about their proposed solution. The abuses that Krugman described happened with more than one producer -- several operators can collude to manipulate the system in the same way that the ESB is now doing. This is where the role of Northern Ireland comes in. There's a planned shift to an all-Ireland electricity market next year, but having been burned by these same abuses in the 1980s, the British regulators are not about to let it happen again (Irish Times, subs. req'd):

In a recent debate about the all-island arrangements in the House of Commons, David Hanson, minister of state at the Northern Ireland office, warned that the ESB's market position would be a key factor in the new market.

He said ESB would have almost 60 per cent share of generating capacity in the new market and this needed to be given serious serious consideration.

"We need to consider how to prevent ESB from abusing its market power. The dominance of ESB is a challenge to the operation of the new markets, and the Irish Government too is considering the position of ESB in their review of the Irish electricity sector," he said.

Unfortunately, that reference to the Irish goverment "considering the position of the ESB" is just the situation of the report that Noel Dempsey wants to keep secret. And with powerful and well-paid unions at the ESB bound to be affected by any move to sharpen competition, there's little chance of any policy change that would upset the calculations for a general election that will likely happen within the next year. Dempsey could try the quieter approach of better regulation rather than privatization; while the unions might still object, it would be a much easier sell to the public. But the main hope is that whatever discipline the UK is able to impose on the ESB from the Northern Ireland side will have some spillover benefits for consumers in the Republic.

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