Affected market: Electricity and gas
The OFT’s decision on reference under section 22 given on 19 April 2006. Full text of decision published 11 May 2006.
Please note that square brackets indicate text or figures which have been deleted or replaced with a range at the request of the parties or third parties for reasons of commercial confidentiality.
Npower Ltd (Npower) is active in the supply of electricity and gas in the UK. Npower is the retail arm of RWE Npower plc (RWE Npower), the UK energy operating company of German multi-utility group RWE AG. RWE Npower is active in electricity generation and trading, the supply of gas shipping and the supply of engineering services in the UK.
Telecom Plus plc (Telecom Plus) provides a range of utility services primarily to domestic customers in the UK. The Telecom Plus electricity and gas businesses comprise the following subsidiaries: (i) Electricity Plus Supply Ltd (Electricity Plus), which is active in the supply of electricity to domestic customers; (ii) Gas Plus Supply Ltd (Gas Plus), which is active in the supply of gas to domestic customers; and (iii) Plus Shipping Services Ltd (Plus Shipping), which provides gas shipping to Gas Plus.
The transaction involves the acquisition by Npower of the entire issued share capital in the Telecom Plus electricity and gas businesses as well as the benefit of the Telecom Plus forward electricity hedge book (purchase contracts).
On 17 February 2006 the parties notified the proposed acquisition to the OFT. The administrative timetable will expire on 19 April.
NPower and the Telecom Plus electricity and gas businesses will cease to be distinct as a result of these arrangements. The OFT believes that the share of supply test set out in section 23 of the Enterprise Act 2002 (the Act) is met with regard to the supply of electricity to domestic customers in the UK (see [Note 1]) and, therefore, it is or may be the case that 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 retail supply of electricity and gas to domestic customers in the UK. To the extent that Telecom Plus does not supply electricity and gas to industrial customers, there is no direct overlap between the parties in this segment. Therefore, the supply of electricity and gas to industrial customers will not be considered further in this decision.
There is also a direct overlap in the supply of gas shipping as RWE Npower and Plus Shipping supply gas shipping to retail suppliers. Since the parties' combined share of supply in gas shipping of less than 5 per cent would not give rise to any competition concerns, this is not discussed further in the decision.
Referring to a previous OFT decision (see [Note 2]), the parties submit that the supply of electricity and gas should be considered distinct relevant frames of reference. Although some customers still purchase gas and electricity separately, market intelligence suggests that this approach may no longer be valid. For example, over 85 per cent of customers who have switched electricity or gas supplier have switched to dual fuel contracts, which represent around two thirds of electricity and gas customers. This figure is predicted to increase due to the costs savings which customers can achieve (see [Note 3]). The supply side has been characterised by entry from former incumbent gas and electricity companies supplying both types of fuel. For example, British Gas, with 53 per cent share in gas supply competes with the large electricity companies in the supply of gas in Great Britain. Suppliers tend to focus on marketing dual fuel (Npower and Telecom Plus have a high proportion of dual fuel customers, [ ] per cent and [ ] per cent respectively). Some third parties support a single frame of reference for the supply of electricity and gas.
The OFT considers that it is not necessary to reach a final view on the scope of any relevant frame of reference because, even when considered on a narrow disaggregated basis, no competition concerns arise. For completeness, we have however considered share of supply data in relation to the supply of (i) electricity; (ii) gas; (iii) dual fuel to domestic customers.
Ofgem grants electricity and gas supply licences that cover Great Britain. While the former regional incumbent suppliers generally still enjoy high shares of supply in those areas, as noted above, evidence shows that customers have been switching to new entrant suppliers. There is further evidence that switching costs are low, switching rates have been steady (around 10-15 per cent per annum), and the rate of customers switching away from the former incumbent suppliers is high (e.g. around 45 per cent of electricity domestic customers are no longer with their former incumbent suppliers).
For the purposes of analysing the competition effects of this case, the OFT has therefore considered the geographic frame of reference for the supply of electricity and gas to be as wide as Great Britain.
The parties’ combined shares of supply (see [Note 4]) in each of electricity, gas and dual fuel to domestic customers in Great Britain will vary between 10 per cent and 20 per cent with very negligible share increments (less than 1 per cent).
In each of the considered relevant frames of reference, post-merger, NPower will still be constrained by other larger suppliers such as British Gas plc, Powergen plc, Scottish and Southern plc, EDF Energy plc and ScottishPower.
Due to the degree of existing competition, the negligible share increments arising from the merger and the lack of third party concerns, an assessment of barriers to entry and buyer power in these segments is not necessary.
Post-merger there will be two vertical relationships between (i) RWE Npower electricity generation business and the Telecom electricity business; and (ii) RWE Npower gas shipping business and Gas Plus.
Given the small share of supply increments and remaining competition in these sectors, no vertical concerns arise as a result of this merger.
THIRD PARTY VIEWS
Ofgem believes that the acquisition does not raise any significant concerns for competition in the electricity and gas sectors, or in relation to vertical integration, having taken into account the level of competition present and the relatively small increase in Npower’s position in these sectors.
No other third parties expressed any concerns about the transaction to the OFT.
The merging businesses overlap in the supply of electricity and gas to domestic customers as well as in gas shipping. Given the parties’ low combined shares of supply, the negligible increments, the level of existing competition and the lack of third party concerns, no competition concerns arise on any of these frames of reference.
Consequently, the 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 United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
1. Npower has an existing share of supply of electricity to domestic customers exceeding 25 per cent in three regions of the UK (Midlands, Northern and Yorkshire) which individually or collectively may constitute a substantial part of the UK. Combined shares of supply in these regions, measured as a share of total households supplied are, respectively, [40-50] per cent, [50-60] per cent and [45-55] per cent.
2. OFT's decision of 30 June 2004 in Scottish and Southern Energy/Atlantic Electric and Gas Ltd.
3. Ofgem's Domestic Retail Market Report, June 2005.
4. Based on number of households supplied 2004-2005.