Communications regulator ComReg will put a one-year freeze on the price that Eircom can charge customers for line rental from the end of September.
When the price freeze lapses in October 2008, Eircom will only be able to seek a price increase in line with inflation, as measured by the consumer price index, for a further two years.
The price cap only affects Eircom as ComReg has deemed it to be dominant in the provision of landline telephone services. In its latest market report covering the first three months of 2007, ComReg found that Eircom had a 70 per cent share of the fixed-line market.
In a statement, ComReg said the move would protect consumers and also "gives Eircom an incentive to deliver services as efficiently as possible".
From next Monday, Eircom's monthly line rental charge will increase by €1.18, including VAT, to €25.36. A range of call costs will also increase by an average of 3.6 per cent.
Ireland has the highest line-rental charges in Europe and, following the latest increase, will be more than 60 per cent more expensive in this area than the average across all EU states.
An Eircom spokesman said: "We agree with ComReg that we want to be as efficient as possible. Although our costs vary across the country, we still have to charge geographically average prices."
In its decision, based on a close examination of Eircom's costs, ComReg has put in place a specific sub-cap for line rental. This means that Eircom cannot cut the price of connections, which are viewed as part of the same basket under EU regulation, in order to be able to increase line rental.
BT Ireland, the second-largest telecoms provider in the State, welcomed the move. A spokeswoman said: "For the benefit of consumers it is important that ComReg drives efficiency improvements where effective competition has not yet taken place."
The ComReg decision will put a further cost constraint on Eircom owners Babcock and Brown.
Last week Eircom agreed to pay staff a 2 per cent increase in line with the national pay agreement without first securing changes in work practices.
The Australian investment house is known to be keen to split Eircom into a retail and network division and sell off the customer-facing unit to reduce its level of debt.
