The ESB should divest a power station or cap its generation capacity to foster competition, a draft OECD report says.

An early version of the Regulatory Reform Review of Ireland, to be published next month, says further structural change is required in the power market to meet the objectives of deregulation in the industry.

It also says the entire gas market should be liberalised by 2005.

The report is believed to have been commissioned by the Department of An Taoiseach.

Structured as a peer review, following interviews last June, it assesses the State's performance against international best practice.

It is thought the OECD will finalise the report at meetings next week.

Draft versions are also said to assess the regulatory structures in the legal profession and retail pharmacies industry.

On electricity, the report echoes criticism last year by the EU Competition Commissioner, Mr Mario Monti, who said the structure and pace of deregulation was not conducive to competition.

It says the Commission for Electricity Regulation, led by Mr Tom Reeves, has insufficient resources and powers.

Mr Reeves's remit should include the promotion of competition and consumer welfare as a primary duty, it says.

The OECD says the separation of accounts between ESB business units, some of which operate in the liberalised section of the market, is not sufficient to protect the interests of its competitors.

It says a reduction of the ESB's domination of power generation is an integral part of the liberalisation process.

That could be achieved through a cap or divestiture, the report says. Additions to the ESB's generation capacity should be prohibited in the short and medium term.

However, such developments could not be expected in the medium term as capacity on the national network will be severely constricted next winter. Because of this, the ESB is expected to import emergency generation capacity.

Still, the possibility of standing down a power station in Dublin is thought likely be considered by the ESB.

It is understood such a move could be seen as a quid pro quo to secure the European Commission's sanction for a new power station at Ringsend which is planned by the ESB in a joint venture with Statoil.

The effect of such a development would be to free a firm connection to the National Grid in Dublin for a rival plant proposed by Ireland Power, backed by US businessman Mr Larry Thomas, and ePower, backed by Esat founder Mr Denis O'Brien.

Their project has yet to secure a firm connection, required to feed power into the grid, although Mr Reeves has proposed changing the system.

EPower is known to be giving serious consideration to leaving the market altogether.

The company has made key staff members redundant this month.

It is thought certain industry figures would be unhappy to see ePower leave the market, which was partly liberalised only 13 months ago.

The OECD report says access to the national grid should be cost-reflective and non-discriminatory.

If transmission constraints are not relieved or if there is discrimination in access, it says the divestiture of the ESB's transmission assets from its generation would be required.

The ESB's national grid operation will be formally separated from the State company this year.

Under the terms of a tripartite agreement agreed with its unions, the ESB retains ownership of the transmission assets. That structure was opposed by Mr Reeves and other bodies.