Driving Performance at Ireland's Commission for Regulation of Utilities

Chapter 1. Regulatory and sector context

Abstract

This chapter describes the main features of the sectors regulated by Ireland’s Commission for Regulation of Utilities. It also provides an overview of Ireland’s public institutions and institutional and regulatory reform.

In December 2015, the Department of Communications, Climate Action and Environment (DCCAE) published a new White Paper on Energy Policy in Ireland, following from the Green Paper on Energy Policy published the previous year. The 2015 policy framework takes into account domestic developments that have taken place since the 2007 White Paper, along with EU and international developments, to set out the actions and measures needed to achieve Ireland’s EU 2020 objectives.

The main objectives of the Irish Energy Policy are: security of energy supply, competitiveness, environmental sustainability, and regional integration on the island of Ireland as well as with neighbouring European countries.

The energy sector was one of the targets of the broader national reform that had taken place after the financial crisis. More specifically, Ireland was requested to undergo “an independent assessment of the electricity and gas sectors, taking due account of the European Union regulatory context for these sectors”, which was conducted by the International Energy Agency (IEA) in late 2011. The IEA subsequently recommended that Ireland ensures that its energy sector restructuring is compliant with the EU Third Energy Package Legislation (IEA, 2012).

Ireland’s ongoing policy development and implementation is also taking into account the package of measures and targets proposed by the European Union’s Clean Energy Transition as of November 2016. The EU’s “Clean Energy for All Europeans” legislative proposals cover areas including: energy efficiency, renewable energy, electricity market design, security of electricity supply, energy connectivity, clean energy technology, as well as governance rules for the Energy Union. The Commission has also set EU-wide targets such as cutting emissions by at least 40% by 2030 and various other measures to help accelerate the EU’s clean energy innovation and transition.

Box ‎1.1. European energy market integration

The European energy market integration is an ongoing project that aims to foster competition and achieve secure, affordable and sustainable energy supply for EU citizens. It follows the EU Third Energy Package of 2009, which aimed to make the EU’s internal energy market fully effective, as well as create a single EU electricity and gas market. The EU Third Package included two Directives and three Regulations that were adopted in July 2009:

• Directive on common rules for the internal market in electricity (2009/72/EC)

• Directive on common rules for the internal market in gas (2009/73/EC)

• Regulation on conditions of access to natural gas transmission networks (2009/715/EC)

• Regulation on conditions for access into the network for cross-border electricity exchange (2009/714/EC)

Regulation on the establishment of the Agency for the Cooperation of Energy Regulators (ACER) (2009/713/EC) EU Member states were mandated to transpose the Directives into national law by 3 March 2011. The Directives and Regulations covered a number of areas relating to electricity and gas trade and governance including: the separation of energy and supply from transmission and distribution networks (i.e. unbundling), wholesale and retail markets, market regulation, network codes, cross-border gas and electricity trade, and consumer protection.

A progress report in 2014 found that the EU energy market integration had helped to reduce wholesale electricity prices by one-third, stabilise gas prices between 2008 and 2012, increase the choice of energy suppliers, encourage construction of energy infrastructure linkages, and increase cross-border trade for both electricity and gas.

In July 2015, the EU introduced a new Energy Union strategy – or commonly called the “Summer Package” – which proposed a redesign of the European power market, an update to energy efficiency labelling, and a revision to the EU emissions trading scheme. The Energy Union strategy aimed to support EU 2030 climate and energy targets, and to enhance the role of renewables in the EU energy market. In November 2016, the EU followed with another package of measures called the Clean Energy Package – or “Winter Package” – which further elaborated proposals to increase the cost-competitiveness, efficiency, security and sustainability of energy supply, as well as improve the co-ordination and governance of the EU energy market (see Box ‎1.2). Both of these packages are intended to support the completion of the integrated European energy market. As of June 2017, the European Commission is running a public consultation to invite feedback on the EU strategy for cross-border energy networks.

Sources: European Commission (2017), “Markets and consumers: integrated energy markets for European households and businesses”; European Commission (2014), “Single market progress report”; European Commission (2009), “Questions and answers on the third legislative package for an internal EU gas and electricity market”.

Box ‎1.2. EU Clean Energy Package

In November 2016, the European Commission introduced a new package of measures and accompanying documents to help the European Union (EU) advance on a clean and competitive energy transition. The “Clean Energy for All Europeans” proposal – or commonly called the “Winter Package” – focuses on three key objectives: putting energy efficiency first, leading the world in renewable energy, and ensuring a fair deal for consumers. The package covers: electricity market design and integration, security of energy supply, governance of the Energy Union, innovation, energy efficient buildings, eco-design, energy pricing, investment, industrial competitiveness, and transport.

The EU Winter Package is the result of a Commission-led consultation process that began in July 2015, and contains eight new and revised legislative proposals:

• Recast of the Internal Electricity Market Directive

• Recast of the Internal Electricity Market Regulation

• Recast of the ACER Regulation

• Regulation on Risk-Preparedness in the Electricity Sector and Repeal of the Security of Supply Directive

• Recast of the Renewable Energy Directive

• Revised Energy Efficiency Directive

• Revised Energy Performance of Buildings Directive

• Regulation on the Governance of the Energy Union

In February 2017, Ireland’s Department of Communications, Climate Action and Environment (DCCAE) launched a public consultation on the EU Winter Package, requesting feedback by 8 May 2017. Presently, Ireland has already set a number of energy targets in alignment with EU targets for 2020, including for renewables, energy efficiency, and climate change (i.e. 20% energy efficiency, 20% renewables penetration;1 20% reduction in greenhouse gas emissions).

In particular, a key provision in the proposed regulation on the Governance of the Energy Union requires each Member State to draft a National Energy and Climate Plan for 2021-2030 by 1 January 2018 and finalize this plan by 1 January 2019. This National plan is intended to consolidate existing national planning and reporting from more than 50 existing sectoral plans complying with various EU legislation covering energy, climate and other Energy Union policy areas into one comprehensive and integrated plan and report. The Sustainable Energy Authority of Ireland (Ireland) is supporting the DCCAE in reviewing and providing inputs as appropriate with its statutory remit.

The EU Winter Package feeds into a broader EU programme of over 40 planned measures to strengthen, standardise, and integrate the European Union’s energy market. The Winter Package follows the Climate and Energy Package announced in July 2015, and the Energy Security Package in February 2016. Once the European Parliament and the Council agree on a common text and adopt the legislative proposals put forth by the Winter Package, they will become binding EU legislation. Discussions on the new proposals are ongoing as of June 2017.

1. 20% renewables target is binding according to the EU Renewable Energy Directive 2009/28/EC. The 20% targets for energy efficiency and GHG emissions reductions in the EU Energy and Climate Package are non-binding and as agreed at the European Council in December 2008.

Sources: European Commission (2016), “Commission proposes new rules for consumer centred clean energy transition”; Department of Communications, Climate Action and Environment (2017), “Public Consultation on the Clean Energy for All Europeans Package”; Sustainable Energy Authority of Ireland (2017a), “Energy Targets FAQ”; Sustainable Energy Authority of Ireland (2017b), “Joint Oireachtas Committee for Communications, Climate Action and the Environment Opening Statement”, February.

Institutions

Ireland is a parliamentary republic headed by an elected President and an appointed Taoiseach (Prime Minister) who heads the Executive Branch, or the Government. The Government consists of no less than seven and no more than fifteen members (ministers) under Article 28 of the Constitution.

Legislative power is held by the Oireachtas, the bicameral national parliament, which comprises the President and two elected houses: the Dáil Éireann (lower house or House of Representatives), the Seanad Éireann (upper house or Senate).

All Acts of the Oireachtas begin life as Bills, which are proposals for legislation. Bills that are applicable to the general body of citizens are called Public Bills and those that are promoted by local authorities and private bodies or individuals for their own purposes are called Private Bills. Private Bills are very rare and have their own procedures. Before a Government Bill is initiated in the Dáil or Seanad, its contents will have been approved by the Government. A process of consultation with Government Departments and groups likely to be affected by the Bill will have taken place beforehand. Sometimes, the Government will publish a Green Paper, which will be a discussion document in which it sets out its idea and invites feedback from individuals and relevant organisations. Legislation will generally be initiated in either House by the Government, although parliamentary procedures also allow Opposition parties and Independent Members to introduce Bills that are called “Private Members’ Bills”. For the most part, Private Members’ Bills do not succeed in progressing beyond the Second Stage debate, although a few have in fact become law. The President cannot veto Bills passed by the Oireachtas but may refer them to the Supreme Court of Ireland, should questions arise about the Bills’ compliance to the Constitution.

A separate process exists for the development of statutory instruments. Legislation gives powers to certain bodies (such as the CRU) to propose secondary legislation, and sets out a process whereby this type of legislation becomes law. Essentially, secondary legislation may come into force by laying the proposed legislation before the House of the Oireachtas for 21 days, after which the statutory instrument comes into law.

The Supreme Court is the court of final appeal in Ireland and is headed by the Chief Justice. Judges are appointed by the President after being nominated by the Government.

Institutional and regulatory reform

Following the financial crisis of 2008, a New Economic and Recovery Authority (NewERA) was established under the National Treasury Management Agency in September 2011, with the responsibility to provide centralised financial and commercial advisory services and act as a dedicated source of corporate finance advice to Ministers of the Government. NewERA was also tasked with assessing and reforming the state’s management and shareholding arrangements in companies in which the state holds majority stake. In the energy sector, such companies included ESB, Bord Gais (now Ervia), EirGrid, Bord na Mona, and Coillte. NewERA was assigned to carry out corporate governance functions for these companies, including reviewing capital investment plans and potential synergies between them. After the Irish government agreed to the asset divestment programme as part of the EU-ECB-IMF programme, NewERA was tasked with advising on the disposal of state assets and, if appropriate, overseeing any restructuring of state companies in co-ordination with the Minister for Public Expenditure and Reform.

Box ‎1.3. Financial crisis and reform post-2008

Ireland was severely impacted by the financial crisis in 2008, after more than a decade of property-led boom. Ireland entered into an EU-ECB-IMF financial assistance programme in 2008 and, in 2010, received a EUR 85 billion financial support package from EU member states through the European Financial Stability Fund (EFSF) on the condition that it would undertake fiscal policy and structural reforms, including on the energy and water sectors. Ireland implemented a National Recovery Plan in 2011-14, successfully delivering a large number of complex reforms quickly. The Irish government also strengthened its institutional framework with a new independent fiscal council, fiscal rules, reformed public employee service and activation policies, a vocational training authority, a stronger competition authority, a new agency to facilitate knowledge transfer, and increased transparency and openness in government.

Ireland exited the EU-ECB-IMF financial assistance programme in December 2013. Overall, Ireland’s economy has been rebounding strongly after the crisis, recording a GDP growth of 5.2% in 2014, the fastest in the OECD, buoyed by strong export gains and employment growth. This high level of growth continued through 2016, and the unemployment rate dropped significantly to below 7% in early 2017. Wage growth coupled with contained inflation has increased the level of household disposable real income, and going forward, solid domestic demand is expected to contribute to broader economic growth in Ireland alongside export demand.

In 2017 and 2018, the economy is projected to grow at a more moderate pace. Despite improved employment prospects for educated participants in the labour force, long term unemployment remains high, with women over 30 and lower educated segments of the population underrepresented in the labour market. As the labour market tightens, strong wage pressures are expected to fuel higher inflation. While the sustained performance of multinational companies based in Ireland have helped drive the initial stages of post-crisis recovery in the country, small and medium-sized enterprises have lower levels of competitiveness, productivity and R&D spending. Overall, businesses are expected to expand at a slower pace than in previous years, given already high labour costs and high levels of external uncertainty, in part attributable to the ongoing discussions about Brexit.

Source: OECD (2015), OECD Economic Surveys: Ireland 2015, OECD Publishing, Paris; OECD (2017), “Ireland Economic Forecast Summary”, June, OECD, Paris.

In the water sector, as part of the Programme of Financial Support for Ireland (with the EU, the IMF, and the ECB), the Government committed to carrying out an independent assessment of a transfer of responsibility for public water and wastewater services from local authorities to a national water services authority, with a view to commence charging domestic customers for those services. The Government published an implementation plan to reform the public water sector in 2012. Subsequently, a national water service provider – Irish Water – was established as a subsidiary of Ervia under the Water Services Act (amended 2013) and as a company under the Companies Act. CRU became the designated the economic regulator of Irish Water and, at the time, aimed for the utility to become self-financing over time via envisaged water charges for domestic customers.

In 2004, the Department for Enterprise, Trade and Employment launched a Government White Paper on Better Regulation, “Regulating Better”, which outlined six key principles of better regulation (necessity, effectiveness, proportionality, transparency, accountability and consistency) and an agenda of 50 actions under 5 headings:

• The legislative process and statue law revision

• RIA and evidence-based policy making

• Institutional change and review

• Sectoral regulators/sectoral issues

• Regulatory procedures and processes

A progress report published by the Taoiseach in 2007 identified several key challenges faced by Irish regulatory agencies: Regulatory impact assessment; Simplification and accessibility of the law; Administrative simplification; Public consultation; A framework for the effective functioning of regulatory agencies; Stronger framework for the management of EU regulations; and Enforcement and compliance.

In December 2008, the National Competitiveness Council published a Smart Economy Strategy (Building Ireland’s Smart Economy – a Framework for Economic Recovery) which included “Smart Regulation” as one of five key action areas. In particular, this report emphasised the need to reduce the cost of doing business and remove barriers to competition in locally traded sectors of the economy.

Box ‎1.4. Government Policy Statement on Sectoral Economic Regulation

The Government Policy Statement on Sectoral Economic Regulation was published in July 2013, endorsed by then Prime Minister Enda Kenny of the Fine Gael party. The Statement follows a review by Forfás1 to identify ways to enhance the efficiency and cost-competitiveness of sectoral regulators, and the effectiveness of economic regulation in general, The Statement aimed to design a strategic regulatory framework to guide national policy objectives, as well as help sectoral Departments prioritise and balance national and sectoral objectives. The Statement additionally calls on sectoral Ministers to introduce legislative changes that would provide for:

• Setting a hierarchy of objectives that prioritises national objectives

• Requiring policy/mandate reviews of economic regulators at least every seven years, on a statutory basis

• Establishing a performance and accountability framework for regulators and regulated sectors

According to the Statement, Ministers and Departments would lead the implementation of the strategic framework pertaining to their sector. Sectoral Ministers were requested to set out detailed implementation of the framework by October 2013, with the outputs monitored and reviewed continuously thereon by the Department’s annual output statements, annual reports, and the annual Action Plan on Jobs.

1. Forfás was the national policy advisory board for enterprise, trade, science, technology and innovation until August 2014, when its functions were merged into the Department of Jobs, Enterprise and Innovation (DJEI). The DJEI subsequently became responsible for the annual Action Plan on Jobs.

Source: Taoiseach (2013), Regulating for a Better Future: A Government Policy Statement on Sectoral Economic Regulation, July.

Ireland has also taken important steps to enhance the governance and performance of its regulators, including instating a statutory review of economic regulators every seven years, following the Government Policy Statement on Sectoral Economic Regulation published by the Taoiseach in 2013.

Ireland implements a comprehensive Code of Practice for the Governance of State Bodies to enhance governance, accountability and transparency. The Code of Practice was issued in 1992 by the Department of Finance and updated by the Department of Public Expenditure and Reform (DPER) in August 2016. The updated Code of Practice also applies to independent regulatory bodies, with the details of its application to arms-length entities currently being defined. The implementation of the Code of Practice to the CRU is under the auspices of the DCCAE’s newly created centralised corporate governance Division.

Box ‎1.5. Code of Practice for the Governance of State Bodies in Ireland

In August 2016, the Department of Public Expenditure and Reform published an updated set of guidelines on the Code of Practice for the Governance of State Bodies (hereafter “the Code”). The Code serves as a framework for the application of best practices in corporate governance by commercial and non-commercial State bodies. State bodies, all trading subsidiaries and joint ventures of State bodies are required to confirm compliance with the Code or otherwise justify adjusted applications or exemptions to the relevant line Minister or parent Department(s). All regulators in Ireland are therefore required to comply with this Code.

The original Code was established in 1992, and updated in 2001, 2009 before the latest version in 2016. The current Code covers the following topics:

• Roles, Effectiveness and Codes of Conduct for the Board, Chairperson and Board Members

• Business and financial reporting requirements

• Guidance for Audit and Risk Committees

• Relations with the Oireachtas, Minister and parent Departments

• Remuneration, Superannuation, and Official Entitlements

• Customer Service Quality

Source: Department of Public Expenditure and Reform (2016), Code of Practice for the Governance of State Bodies, August.

An OECD assessment of Ireland in the Better Regulations in Europe report showed that the Better Regulations agenda was still active in 2010, albeit incomplete. The agenda had encountered challenges rallying support from different parts of the administration. Communication and awareness-raising on the importance of Better Regulations was lacking and the agenda needed additional support to be mainstreamed into policymaking in Ireland, particularly after the 2008 financial crisis when a number of weaknesses in the regulatory and supervisory frameworks of Ireland were revealed. The review also recommended scaling up the use of ICT tools and further developing e-Government as a supporting element of Better Regulation (OECD, 2010).

The OECD Regulatory Policy Outlook for Ireland (2015c) found that RIA is conducted for all primary laws and all major subordinate regulations. By contrast, stakeholder engagement is only formally required in the development of some primary laws and subordinate regulations; there are no requirements to open consultations to the general public. Ex post evaluations are conducted only for some primary laws; there are no automatic evaluation requirements. In the Outlook, Ireland scores below the OECD average for engagement and ex post evaluations (OECD, 2015c).

References

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