OFT closed case: Completed acquisition by Scottish and Southern Electric plc of Fiddler's Ferry and Ferrybridge Power Stations.
Affected market: Electricity generation
The OFT's decision on reference under section 22 given on 15 October 2004.
Scottish and Southern Energy plc (SSE) is a vertically integrated energy group, with significant electricity and gas interests in Great Britain. SSE is active in electricity transmission (in Scotland), and electricity generation and distribution (in Great Britain). SSE also has interests in electricity and gas trading and supply; gas storage and shipping; electrical contracting and retailing; and telecommunications. For the financial year ending 31 March 2004, its group turnover was approximately £5,100 million.
Fiddler's Ferry is a 1,989MW coal-fired power station in Cheshire. For the year ending 31 December 2003, the UK turnover of Fiddler's Ferry was £133.9 million.
Ferrybridge is a 1,995MW coal-fired power station in West Yorkshire. For the year ending 31 December 2003, the UK turnover of Ferrybridge was £158.9 million.
SSE has acquired Fiddler's Ferry and Ferrybridge, together with associated coal stocks, fuel in transit and contracts to supply fuel for the power stations. The transaction was closed and announced on 30 July 2004.
The 40 working day administrative deadline for the OFT's decision in this case is 15 October 2004. The four month statutory deadline expires on 29 November 2004.
As a result of this transaction, SSE, Fiddler's Ferry and Ferrybridge have ceased to be distinct. The combined UK turnover of Fiddler's Ferry and Ferrybridge exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. A relevant merger situation has been created.
SSE, Fiddler's Ferry and Ferrybridge overlap in the generation of electricity.
Electricity suppliers and large businesses either negotiate bilateral contracts with generators, often setting prices by means of a formula based on the varying costs of generation, or buy electricity in the forward market (where contracts for electricity can be struck over a time scale ranging from that day to several years ahead of delivery) to hedge their exposure to price risk. Prices are likely to reflect the marginal costs of generation which will vary according to factors such as the type of plant, its age and operational efficiency.
An increase in the price of electricity charged by a particular generator or for electricity generated from a particular fuel source may result in suppliers or large businesses switching to alternative generators or fuel sources. The likelihood of switching will depend, however, on whether, for example, these customers have long-term contracts or are vertically integrated (with generators). By contrast, domestic electricity end-customers and small businesses tend to view electricity as essentially homogeneous. Despite there being a growing awareness generally of renewable fuel types, smaller customers are generally indifferent to (or unaware of) the location or ownership of a plant, or the type of fuel it uses.
On the supply side, a plant is deemed flexible if it can respond to an increase in prices by raising output in the short term. This will vary according to the plant's input (for example, nuclear power is virtually fixed, wind power depends on weather conditions, while gas and coal-fired plants are flexible). Therefore, different fuel sources will be favoured depending on the level of demand.
As a result of the above considerations, the relevant frame of reference for the purposes of this assessment is electricity generation.
Although electricity is imported from Scotland (and France) into England & Wales by means of an interconnector, wholesale electricity market arrangement are different in England & Wales where electricity has been traded by generators and suppliers under the New Electricity Trading Arrangements (NETA) since 2001. Work is underway, however, to extend these arrangements to Scotland with the creation of the British Electricity Trading and Transmission Arrangements (BETTA) in 2005. In light of this, and the fact that SSE has not insignificant generation assets in Scotland, it is considered appropriate to assess this transaction at the level of Great Britain rather than England & Wales (although the overall assessment does not materially differ at either level).
According to SSE, the merged entity holds a share of supply of electricity generation in Great Britain of 13.7 per cent (increment 5.5 per cent) by capacity and12.3 per cent (increment 4.4 per cent) by output (see [note 1]). Although SSE will rank as the second largest generator of electricity in Great Britain post merger, it will continue to face competition from numerous other competitors (including a number of large operators, with shares comparable to its own). The relatively modest increase to SSE's share does not appear therefore to raise concerns that prices will increase as a result of this transaction, particularly in light of the fact that the electricity generating sector is fully open to competition in England & Wales.
Even if flexible generation of electricity is considered on its own, the analysis does not materially differ as SSE estimates that the merged entity has a share of less than 20 per cent of generators with a load factor (see [note 2]) between 16.67 per cent and 66.67 per cent, by capacity and output, in Great Britain.
Barriers to entry and expansion
Barriers to entry appear high: the construction of new power stations necessitates large sunk costs as stations must be linked to the national grid and meet increasingly stringent environmental and planning controls. Third parties have commented that increasing levels of vertical integration in this sector may also hinder entry since it makes it more difficult for new generators to secure the supply contracts they need to underpin their operations. The history of entrants to this sector indicates that any barriers to entry that do exist are not, however, insurmountable.
Customers may have negotiating strength through their ability to switch supplier. Third parties have confirmed that switching for domestic and non-domestic customers is relatively easy, albeit that domestic customers show a higher degree of inertia in relation to switching than non-domestic customers. Although suppliers and large businesses are likely to be sophisticated, being price sensitive, it is not clear whether they have buyer power.
SSE is a vertically integrated energy group, with interests throughout
most of the supply chain. It estimates that it has a share of around 14
per cent of electricity supply to domestic customers in Great Britain. A
few third parties raised the concern that post-merger the output of
Fiddler's Ferry and Ferrybridge would no longer be traded at the
downstream wholesale level, being used instead by SSE to fulfil its
customer supply commitments, with potentially negative knock-on effects
on wholesale liquidity and transparency. SSE has submitted that it
intends to sell approximately three quarters of the output of the power
stations at the wholesale level. Even if this were not the case,
however, taking into account in particular the relatively small
increment to SSE's share of generation, there is inadequate basis to
believe that the transaction's impact at the wholesale level would
materially affect competition.
## THIRD PARTY VIEWS
Ofgem has undertaken a public consultation exercise on this merger, to which it received one response, which did not raise any significant competition concerns. Taking into account the level of competition present in the generation sector and the relatively small increase in SSE's position post-merger, Ofgem does not consider that the acquisition will result in a substantial lessening of competition in Great Britain.
A few third parties raised concerns regarding increasing levels of vertical integration in this sector. This issue is addressed above.
The parties overlap in the generation of electricity. The combined shares of supply of the merged entity will be relatively low (less than 20 per cent) on even the narrowest frame of reference, comparable to or lower than the shares of its principal competitors. Therefore, it is considered that the addition of 3,984MW to SSE's portfolio will not give rise to any significant horizontal or vertical competition concerns. This conclusion is supported by the fact that the electricity generating sector in England & Wales is fully open to competition, with a number of large companies present.
Consequently, the OFT does not believe that it is or may be the case that the creation of the relevant merger situation has resulted or, 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 22(1) of the Act.
- The parties based their information on data extracted from the Department for Business, Enterprise and Regulatory Reform's Digest of UK Energy Statistics (July 2004).
- The load factor is the ratio (expressed as a percentage) of the net electricity output of a power plant over a time period to the net amount of electricity output which it could have generated if it were operating at its maximum capacity over the same period.n