Affected market: Electricity and gas
The OFT's decision on reference under section 22(1) given on 30 June 2004
Scottish and Southern Energy (SSE) is a vertically integrated energy group with significant electricity and gas interests in Great Britain. SSE is active in the transmission of electricity (in Scotland) and the distribution of electricity in Great Britain. SSE also has interests in electricity and gas trading, gas storage, shipping and supply, metering, connections and contracting services.
Atlantic Electric and Gas Ltd (AEG) supplies electricity and gas to around 330,000 customers throughout Great Britain. AEG was owned by a number of shareholders, one of whom was Sempra Energy, a US energy company. AEG's turnover in the year to 31 December 2003 was £279m.
SSE has acquired the assets of AEG which went into administrative receivership on 28 April 2004, following a failed attempt to sell the business. In the absence of a buyer AEG's customers would have been allocated to alternative suppliers under the industry's Supplier of Last Resort scheme. The statutory deadline for this case expires on 27 August 2004 and the administrative deadline for the OFT's decision on this case is 30 June 2004.
As a result of the transaction, SSE and AEG have ceased to be distinct. The UK turnover of AEG 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.
There are two broad types of electricity and gas customers: domestic and industrial and commercial (I&C). The parties overlap in the supply of both types of energy to both types of customers.
The OFT has previously taken the view that electricity and gas supply are not part of the same product market. Although many customers purchase their electricity and gas from the same supplier, significant numbers still purchase fuel contracts separately and some cannot access both energy sources. For supply of both gas and electricity respectively, demand-side factors including consumption volumes further indicate a distinction between I&C customers and domestic customers.
Gas and Electricity - I&C Customers
Supply of electricity to I&C customers (>100 kW per year) was liberalised in 1994 in England & Wales. Suppliers need to be licensed under the Electricity Act 1989 (as amended). Gas supply in Great Britain has been fully open to competition since May 1998. I&C customers are defined as those who use in excess of 2500 therms per annum, some of whom will be Daily Metered (DM) customers. Several companies supply gas to such customers. Each company is required to hold a Gas Suppliers' Licence under the Gas Act 1986 (as amended).
Gas and Electricity - Domestic Customers
Supply of electricity to domestic customers was fully opened to competition in May 1999. Relative to I&C customers, domestic customers are less well informed, less likely to switch supplier, and enjoy limited if any bargaining power. Similarly, domestic gas customers are generally less price sensitive than I&C customers, perhaps because the transaction costs (real or perceived) of switching outweigh the perceived benefits.
The geographic frame of reference for gas supply (to both classes of customer) is likely to be Great Britain since this is the limit of the gas trading regime: although gas is traded with continental Europe through the Bacton-Zeebrugge interconnector, quantities traded are relatively small.
Although customers have typically bought electricity from the regional incumbent than from a new entrant, regulations have been changed to increase the ability of new entrants to compete in the 12 authorised areas. For the purposes of this case, it is therefore considered that the appropriate geographic frame of reference for supply of electricity (to both classes of customer) is at least England and Wales, although the overall assessment does not differ on other geographic bases.
Gas and Electricity - I&C Customers
Post transaction, the parties' combined shares of supply of gas and electricity to I&C customers will be no more than 5 per cent (2 per cent) and no more than 15 per cent (15 per cent) respectively, with an increment of less than 5 per cent in both cases (2 per cent for gas and 3 per cent for electricity supply). Post transaction, SSE will rank as the joint third largest supplier of electricity to I&C customers (together with Npower) but it will continue to face competition from numerous other providers - including British Gas, Powergen, Npower, EdF and Scottish Power - in a relatively unconcentrated sector.
Gas and Electricity - Domestic Customers
The parties' combined shares for the supply of gas and electricity to domestic customers are less than 10 per cent (7.5 per cent) and 15 per cent (14.5 per cent) respectively, with an increment of less than 1 per cent (0.5 per cent) in both cases. This relatively small increase to SSE's shares will only marginally increase concentration in these sectors and would not appear to give rise to concerns that prices will increase as a result of this acquisition.
One third party regarded AEG as a maverick, having an effect on price disproportionate to its size as it was neither vertically integrated (unlike the six large suppliers) nor had a customer base with an inherent geographical concentration (unlike ex-Public Electricity Suppliers). However, according to Ofgem, AEG's standard prices for new domestic customers are neither significantly lower than its competitors on average, nor the cheapest in any region for new domestic customers. Furthermore, AEG's ability to continue growing independently and exert pressure on prices in undermined by the fact that it has gone into administration.
Barriers to entry and expansion
Previous investigations by the OFT have found that the only physical restrictions on capacity in the energy supply sectors are those imposed by the infrastructure itself. The existence of long term supply contracts may impede the ability of new entrants to gain access to gas or electricity in the primary market and they may be compelled to buy energy from their competitors in the secondary market to meet their customers' demands.
Prices for wholesale electricity in Great Britain have fallen in recent years. The fall in prices has led firms to exit the market and other firms to mothball plants. New entry into the electricity generation sector appears more likely if the entrant has a strong supply base with which to offset lower output prices.
In general, I&C customers are sophisticated purchasers who are price-sensitive and will switch suppliers to reduce their energy costs. I&C customers vary in size and not all will have the same degree of buyer power. As noted, domestic customers are generally less price-sensitive, perhaps because the transaction costs (real or perceived) of switching outweigh the perceived benefits.
There are no vertical issues.
THIRD PARTY VIEWS
One third party raised general concerns about the loss of a maverick competitor. No other third party contacted by the OFT or Ofgem raised competition concerns.
OTHER GOVERNMENT DEPARTMENT'S VIEWS
Ofgem has no competition concerns about this transaction.
This acquisition gives rise to modest increments (below 5 per cent) to SSE's shares of the supply of both gas and electricity to both domestic and I&C customers, with post-merger shares of no more than 15 per cent in any segment. Although one third party raised concerns that the merger would remove AEG as a maverick competitor, the weight of evidence does not appear to bear this out, nor did the OFT's investigation otherwise prompt concerns that the merger will facilitate price increases. In light of these considerations, the OFT does not believe that it is or may be the case that the creation of the relevant merger situation may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom for goods or services.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.