Section 7(6) provides that the director may not make an order modifying the Minister's price cap order until five years after the making of that order unless he or she has been directed to review the order by the Minister under the provisions of subsection (5). After that five year period the terms of all price cap orders will be a matter solely for the director. When the initial price cap order or orders are made by the Minister the sole function remaining with the Minister under this section is the power to order a review of that order or orders.
Amendment No. 7 transforms what is in effect a five year price cap, reviewable by the director after two years at the discretion of the Minister into a one year price cap. The price cap is designed to achieve a number of objectives of which one of the most important is the regulatory certainty for this vital period. Under the price cap regime Telecom Éireann will be enabled to position itself to adapt to competition. The price cap is also designed to give incentives to the company by setting a benchmark for the achievement of internal efficiency on a year by year basis.
Additional growth in business and achievement of greater than anticipated efficiencies result in improvement in the bottom line which can in turn feed through to lower prices. The setting of the price cap is of crucial importance to the ultimate success of the mechanism. It is important while offering a real incentive for the company to make improvements in its operating efficiencies that there is scope for reassessment of the contents of the basket and the absolute level of the price cap. The Government is determined that the price cap should work to the long-term benefit of consumers as well as the company.
In that context the first price cap order which will be made by the Minister will provide for at least a reduction in prices of 6 per cent in real terms each year for five years, which over the period of the price cap order will result in a 30 per cent reduction in Telecom Éireann prices to the consumer. It has been determined that the cap may be reviewed after two years by the director at the discretion of the Minister.
The amendment proposed essentially undermines the careful structure which had been set out in respect of the first price cap. It signals a year by year approach to Telecom Éireann's pricing devoid of any longer term strategy designed to introduced significant regulatory uncertainty and, thereby, hamstring the company in the run up to liberalisation. It flies in the face of the philosophy and the practice of any price cap applied internationally of which I am aware. The minimal interval between price reviews makes price control very similar to profit control and destroys the critical incentive properties of the mechanism. Price caps in the UK have tended to last four years. This Bill provides for half this term. By providing for a review at the end of two years, the Government is being consistent given the need to grant the company scope to provide for a flexible pricing mechanism.
This amendment is also incompatible with subsection (5) because it would leave the Minister in a position where he or she had to wait two years before telling the director to review the price cap. Meanwhile, the director could do as he or she liked after one year. I accordingly oppose the amendment.
