THE Commission for Energy Regulation (CER) is to review how it controls ESB electricity prices due to flaws in its current model which would have seen domestic prices increased from October.

The increases would have been necessary to make "correction" payments totalling €81m to the state-owned electricity provider, including compensation for falling electricity demand and the loss of customers to rivals such as Bord Gáis and Airtricity.

The CER's data indicates that electricity demand has fallen by 5.8% in the first six months of this year and that the ESB lost over 175,000 customers to its rivals between April and June.

The level of payments involved is so significant that ESB bosses have refused to accept them pending a review of the CER's price-setting model.

"This decision was taken by ESB customer supply against the background of difficult economic conditions for our customers and a rapidly changing market environment," said an ESB spokeswoman.

The issues with the CER's pricing model centre on the amount of revenue that the ESB is allowed to earn per unit of electricity. This currently stands at around €8 per megawatt/hour (MWh) but, based on the CER's current model, it should rise to €20 per megawatt/hour (MWh) next year.

A paper issued by the CER last week recommended that, due to the sharp rise involved, the model should be abandoned immediately.

"The continued application of the present regulatory formula will tend to increase prices to customers.

"It results in customers remaining with [the ESB] having to pay the costs that would have been incurred as a result of servicing those customers which have switched to independent suppliers," it said.

The revelation will be seized by critics of the CER as evidence that its electricity pricing model has artificially inflated the price of power in Ireland. A spokesman said, however, that the flaws exposed in the model this year were due to the rapid change in the country's economic circumstances.

"The current formula was devised in 2005 against the prevailing background at the time. It envisaged steady [annual] increases in customers and did not take account of a sudden and unexpected fall off in demand as a result of the recession," he said.