A key contract secured by an ESB subsidiary in 1999 "was a violation" of European law, the European Commission has claimed.

The contract ensured a power station planned by an ESBStatoil joint venture, Synergen, secured a connection to the National Grid. It was awarded in June 1999, before the market was partly liberalised last February.

It is thought the Commission made its view known in a letter last October to the electricity regulator, Mr Tom Reeves, and the Department of Public Enterprise.

The letter was written by an official working for the Competition Commissioner, Mr Mario Monti. It also advised against including the ESB in a competition for gas supplies which was concluded in November.

While industry participants could apply before liberalisation for connections to the ESB's national grid division, EirGrid, which was ringfenced from its parent, only Synergen did. EirGrid will be formally separated from its parent this year.

Grid connections are limited because of constraints on the system, although Mr Reeves wants to change the connection process.

His proposal has been opposed by the ESB and EirGrid, although Mr Monti has said the change is crucial to liberalisation in the market.

Without grid connections, power stations cannot supply the network. EirGrid has said the price of power will rise if another plant is added to the system in Dublin. Only one other plant, to be operated by Northern Ireland firm Viridian, has secured a connection agreement.

Mr Monti said in a letter last month to the Minister for Public Enterprise, Ms O'Rourke, that implementation of Mr Reeves's proposal was crucial to liberalisation in the market.

The gas competition managed by Mr Reeves was necessary because gas-fired power plants require large supplies of gas and capacity on Bord Gais's network is limited.

The successful parties were Synergen, which is building a plant at Ringsend, Dublin, and Viridian, which plans a station at Huntstown.

A smaller Waterford-based project led by Rolls Royce was also awarded gas in the competition, which was decided on Mr Reeves's assessment of which groups would be first to commission their plant.

It is known that Mr Reeves entered dialogue with the competition directorate of the European Commission when making his allocation.

The Irish Times understands he was informed during that process that the ESB "must be excluded" from the competition.

This would reinforce the State company's dominant position in the market, the Commission said.

Earlier last year, when it was proposed to auction the gas allocation, the Commission claimed it would be "unlawful" to include the ESB in that process.

EPower, a group controlled by Esat's founder Mr Denis O'Brien, failed to secure gas. It is a member of a power project at Mulhuddart, west Dublin, which has not yet secured a grid agreement.

Its major partner, BP, is selling its interest in the project, which is backed also by a US businessman, Mr Larry Thomas.