OFT closed case: Proposed acquisition of Economy Power Limited by E.ON UK plc.
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 merger situation.
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 customers.
- 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 OFT.