OFT closed case: Completed acquisition by Scottishpower plc of the remaining 50% shareholding in South Coast Power Limited.
Affected market: Electricity generation
The OFT's decision on reference under section 22 given on 23 November 2004.
ScottishPower plc (ScottishPower) is an international energy company active in the UK in electricity generation, transmission, distribution and supply, and in gas supply. It also provides a range of energy support services. Its UK-wide turnover for the year ended 31 March 2004 was approximately £3.1 billion.
South Coast Power Limited (SCPL) owns and operates a 400MW combined cycle gas turbine (CCGT) power station in Shoreham, West Sussex. SCPL's audited turnover for 2003/4, entirely generated within the UK, was approximately £120.5 million.
On 28 September 2004, ScottishPower announced that it had acquired the remaining 50 per cent of the share capital of SCPL, adding to the 50 per cent it already owns, together with associated contracts (including a long-term gas supply agreement).
The 40 working day administrative deadline for the OFT's decision in this case is 23 November 2004. The four month statutory deadline expires on 27 January 2005.
As a result of this transaction, ScottishPower and SCPL have ceased to be distinct for the purposes of section 26(4)(a) of the Enterprise Act 2002 (the Act). As SCPL's UK turnover exceeds £70 million, the turnover test in section 23(1)(b) of the Act is satisfied. A relevant merger situation has been created.
ScottishPower and SCPL 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 arrangements 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 expected implementation of the British Electricity Trading and Transmission Arrangements (BETTA) in April 2005.
In light of the creation of BETTA, and the fact that ScottishPower 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 ScottishPower, the merged entity holds a share of supply of electricity generation in Great Britain of 8.1 per cent (increment 0.3 per cent) by capacity and 7.6 per cent (increment 0.3 per cent) by output. These modest increases do not appear 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 and so ScottishPower will continue to face competition from numerous other operators (including a number of large competitors with shares comparable to its own).
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. However, the history of entrants to this sector indicates that any barriers to entry that do exist are not insurmountable.
Customers may have negotiating strength through their ability to switch supplier and third parties have confirmed that the switching process for domestic and non-domestic customers is relatively easy. Although suppliers and large businesses are likely to be price sensitive and sophisticated, with the ability to negotiate bespoke contracts, it is not clear whether they have buyer power.
ScottishPower is a vertically integrated energy group, with interests throughout most of the supply chain. It estimates that it has a share of around 11 per cent of electricity supply to domestic customers in Great Britain.
A couple of third parties raised a general concern about increasing levels of vertical integration between electricity generators and suppliers, with potentially negative knock-on effects on wholesale liquidity and transparency. Taking into account the small increment to ScottishPower's share of generation, there is inadequate basis to believe that this transaction could have a material impact on competition at the wholesale level.
THIRD PARTY VIEWS
Ofgem does not consider that the acquisition will result in a substantial lessening of competition in Great Britain given the small increase in ScottishPower's position post-merger.
A couple of third parties raised a concern regarding the trend for vertical integration in this sector. This issue is addressed above.
The parties overlap in the generation of electricity. The combined share of supply of the merged entity in Great Britain will be relatively low (less than 10 per cent), comparable to or lower than the shares of its principal competitors. Therefore, it is considered that the addition of 200MW to ScottishPower's portfolio will not give rise to any significant horizontal or vertical competition concerns, in particular taking into account the level of competition present in the electricity generating sector in England & Wales.
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.