Affected market: Supply of electricity
The OFT’s decision on reference under section 33(1) given on 9 June
2005. Full text of decision published 24 June 2005.
E.ON UK plc (E.ON) is a subsidiary of E.ON AG of Germany, an
international vertically integrated energy services provider. In the
United Kingdom (UK), operating under different brands, E.ON is active in
the generation, distribution, trading and supply of electricity and the
shipping, trading and supply of gas. E.ON's UK turnover for 2004 was
approximately £5,850 million.
Economy Power Ltd (Economy Power) is an electricity supply company
operating throughout Great Britain (GB). It supplies electricity to
around 40,000 non-domestic customers (see [note 1]), mostly
small and medium sized enterprises (SMEs). Economy Power's UK turnover
for 2004 was £84 million.
On 29 March 2005, E.ON announced that it had agreed to purchase Economy
Power. The administrative deadline expires on 10 June 2005.
As a result of this transaction, E.ON and Economy Power will cease to be
distinct. The UK turnover of Economy Power exceeds £70 million, so the
turnover test in section 23(1)(b) of the Enterprise Act 2002 is
satisfied. Therefore, arrangements are in progress or in contemplation
which, if carried into effect, will result in the creation of a relevant
The parties overlap in the supply of electricity in GB.
The UK electricity supply licence regime classifies customers as either
domestic or non-domestic. Domestic customers are defined in the supply
licence as those who use electricity wholly or mainly for domestic
purposes. Non-domestic customers are defined as all other customers and
have in previous merger cases been termed 'industrial and commercial'
(I&C) customers. These may be further classified as very large,
(purchasing in excess of 1MW and who are always metered half-hourly)
large (using between 100kW and 1MW and who are often metered
half-hourly); and small (purchasing below 100kW).
Of the merging parties, only E.ON supplies domestic customers and very
large I&C customers. Electricity supply to these two groups is
therefore not considered further since there is no overlap in these
sectors between the parties (see [note 2]).
The former incumbent electricity suppliers, including E.ON, supply
electricity to all types of I&C customers, but this is not
necessarily the case for new entrants like Economy Power, which have
largely targeted the small I&C niche. The parties predominantly
overlap in the supply of electricity to small I&C customers. Economy
Power also overlaps marginally with E.ON in the supply of electricity to
large I&C customers. Consequently, the supply of electricity to
small I&C customers and to large I&C customers respectively
would form the narrowest product frames of reference, although it is
unnecessary to conclude definitively on this issue as no concerns arise
under any reasonable definition.
Though former incumbent electricity suppliers generally enjoy higher
market shares in their ‘home’ areas, most electricity suppliers are
active throughout GB and, since deregulation, customers are able and
have been switching supplier. Thus, it is considered that the
appropriate frames of reference are GB-wide in scope.
In the small I&C customer sector, E.ON's share of supply
post-merger would be [10-20] per cent, with an increment of [0-5]
per cent. In the large I&C customer sector, the merger will lead to
a very small increment (0-5 per cent) to E.ON’s [15-25] per cent. In
the broadest frame of reference consisting of both small and large
I&C customers, E.ON would have a share of supply post-merger of
[15-25] per cent, with the increment from Economy Power’s share of
[0-5] per cent.
However broadly or narrowly the frame of reference is defined, I&C
customers will continue to have choice of electricity suppliers. The
merged entity will continue to face sufficient competition: in the small
I&C customer segment, from two electricity suppliers with a market
presence more significant than its own; in the large I&C customer
segment, from two suppliers, one of similar and the other with a
significant share; and in the broadest frame of reference of both small
and large I&C customers, from one similarly-sized and two smaller
but significant competitors. Furthermore, in all segments, five smaller
independent electricity suppliers will continue to compete. Although the
market may appear relatively concentrated, Economy Power’s share of
supply is low. Accordingly, the merger would not appear to remove an
important constraint on E.ON or its competitors and does not therefore
raise material competition concerns.
Barriers to entry
Third parties’ comments on barriers to entry referred to regulatory
requirements, which are less stringent in the I&C sector than in
domestic supply and to the shortage of industry expertise. One
competitor referred to high start-up capital required to lock in power
prices from upstream energy suppliers so as to enable the supplier to
provide fixed-price contracts to customers. This was attributed to the
increasing level of vertical integration in the market, in particular
upstream, which resulted in little liquidity in the wholesale
electricity market and an increase in price volatility.
The market assessment has shown that there have been several new
entrants in the small I&C customer sector in the last few years but
also recent exits among smaller electricity suppliers. Given the absence
of concerns (see above), it is not necessary to conclude definitively on
the issue of barriers to entry.
In general, I&C customers are sophisticated purchasers who are
price-sensitive and will switch to reduce their energy costs, although
smaller I&C customers may not have the same degree of buyer power as
larger I&C customers.
Most replies from third parties indicated that switching electricity
supplier is generally easy and can be done at low cost, with contractual
penalties when a contract is broken usually borne by the new supplier.
In the present case, the parties submit that the average remaining
length of Economy Power’s contracts with its customers is around two
years. E.ON estimates that some [0-10] per cent of its SME customers
change supplier each year. Given the absence of concerns (see above), it
is not necessary to conclude definitively on buyer power.
Some third parties raised non-merger specific concerns about the level
of growing consolidation and vertical integration in the electricity
sector. Of the merging parties, only E.ON is vertically integrated with
an estimated share of supply in electricity generation in GB of
[10-20] per cent (see [note 3]). Given this low share and the
low increments in downstream supply represented by Economy Power, the
merger does not raise any vertical concerns in relation to generation.
THIRD PARTY VIEWS
The majority of third parties were unconcerned about the transaction.
One third party raised concerns about the disappearance of Economy Power
as an alternative electricity supplier. After assessing this issue, the
OFT is of the view that there are still sufficient electricity companies
which could supply small I&C customers.
OTHER GOVERNMENT DEPARTMENT'S VIEWS
Ofgem has no competition concerns about the proposed acquisition.
However broad or narrow the hypothetical frame of reference, the
proposed transaction raises no horizontal competition concerns in
relation to supply of electricity to I&C customers. This is because
E.ON will gain a modest increment in shares of supply but will continue
to face competition from several electricity suppliers with a market
presence similar or greater to its own. There will also remain a number
of smaller independent suppliers. Customers will continue to have choice
of electricity suppliers and be able to switch supplier at relatively
low or negligible cost. No substantive competition concerns were raised
by third parties.
Consequently, OFT does not believe that it is or may be the case that
the merger may be expected to result in a substantial lessening of
competition within a market or markets in the UK.
This merger will therefore not be referred to the Competition Commission
under section 33(1) of the Act.
- Source: E.ON
- The parties submit that Economy Power has a negligible amount of
domestic customers even though it has not actively sought this type of
- This figure does not include the interest in Teesside Power Station,
which E.ON recently divested nor its recent acquisition of a further
75.1 per cent interest in Enfield Power Plant, which has not been taken
into account in this assessment and will be assessed separately by the