OFT closed case: Anticipated acquisition by SSE Power Distribution Ltd of Aquila Sterling Ltd.
Affected market: Electricity distribution
The OFT's decision on reference under section 22 given on 24 July 2003
SSE Power Distribution Ltd (SSE Power) is active in electricity transmission and distribution in northern Scotland and electricity distribution in southern England. SSE Power is a wholly-owned subsidiary of SSE plc which is also active in electricity generation, electricity and gas supply, electrical contracting, retailing, telecommunications and gas storage.
Aquila Sterling Ltd (ASL) is a wholly-owned subsidiary of Aquila Sterling Holdings which is in turn, jointly owned by US companies Aquila Inc and FirstEnergy Corp. ASL owns Midlands Electricity (Midlands) via its subsidiary Avon Energy Partners (Holdings). Midlands Electricity subsidiary, Aquila Networks plc, is active in electricity distribution in Birmingham and the west Midlands. Midlands Electricity is also active in providing metering and electrical contracting services and has stakes in power stations in Teesside, Pakistan and Turkey. In the year to December 2002 Avon Energy Partners reported a UK turnover of £401.7m.
SSE Power proposes to acquire ASL for a consideration of £1.1bn. Completion is conditional upon bondholders' approval of the offer of £567m for Avon Energy Partners Holdings bonds. Once the sale has been completed, SSE Power intends to sell the overseas generation assets of Midlands to International Power plc. Midlands' gas supply customer contracts have already been sold.
This is a proposed transaction. It was announced on 22 May 2003. The 40-day administrative deadline will be 25 July 2003.
As a result of this transaction SSE Power and ASL will cease to be distinct. The UK turnover of ASL exceeds £70 million, so that the turnover test in section 23(1)(b) of the Enterprise Act 2002 is satisfied. A relevant merger situation has been created.
The parties overlap in electricity generation, distribution, metering and contracting services. Each of these activities is considered separately below.
Electricity generation uses a number of different fuel sources. SSE generates electricity from traditional fuel resources (coal and gas) as well as renewable resources (hydroelectric and wind generators). A range of types and size of plant allow it to operate means that its costs vary and it can sell electricity at different prices as demand varies.
Electricity is transmitted across the high voltage national grid and the low voltage distribution network before being supplied to customers. Distribution Network Operators (DNOs) are licensed to operate in one or more of the 14 distribution network areas in Great Britain and regulated by Ofgem under the provisions of the Electricity Act 1989.
Metering comprises data collection and meter operating services to electricity and gas suppliers. Electricity distribution network companies provide these services to their domestic and small industrial and commercial customers within the regulatory framework of the distribution price control.
Contracting services activities of the parties include the provision of electrical, mechanical and public lighting services to local authorities, Midlands-based industrial and commercial customers, and to Aquila Networks.
Most activities in the electricity supply chain in Great Britain are licensed and regulated by Ofgem. This suggests that Great Britain is the relevant geographic frame of reference for all these services. However, as electricity generated in Scotland is exported to England and Wales via an interconnector rather than directly onto the national grid, there may be a narrower relevant geographic frame of reference for generation of England and Wales.
Midlands Power International Ltd. has a total 26.7 per cent equity stake in Teesside Power Ltd, a 1,875 MW capacity CCGT plant. This takes SSE's combined share of generation capacity in Great Britain to 7 per cent (increment 1 per cent). Much of SSE's energy, however, is generated in Scotland and there are transportation constraints between Scotland and the remainder of the British mainland. In respect of England and Wales, SSE's combined share of generation capacity would be 4 per cent (increment 1 per cent). As a result, the parties' combined share in generation capacity is unlikely to lead to a substantial lessening of competition and is not considered further.
The addition of the Midlands distribution licence to SSE's two other licences would give SSE 21 per cent (increment 8.6 per cent) of distribution customers in Great Britain. EdF, the only other company to hold three distribution licences in Great Britain, have a customer share of 28 per cent. After SSE, Mid American Holdings which holds two licences have the next largest share of 13 per cent of customers. In respect of turnover, SSE would be the largest distribution company in Great Britain with a post-merger share of 23.6 per cent of sales (increment 8.5 per cent).
No market share information is available but Ofgem considers metering a contestable activity and expects to see more competition in this activity in the future.
The parties' combined share of electrical contracting services in Great Britain of 3 per cent (increment less than 1 per cent) is considered to be too small to raise any significant competition concerns.
Barriers to entry and expansion
Since the distribution networks are operated as licensed regional monopolies, entry can only be achieved by acquiring one of the existing networks.
Ofgem sets distribution prices by means of its periodic review and customers have no ability to renegotiate prices. As a result, customers have no buyer power.
The merger raises no vertical issues.
THIRD PARTY VIEWS
Ofgem undertook a public consultation exercise in respect of this merger. It concluded that the regulatory framework under which the parties currently operate would address any possible concerns arising from the merger.
The transaction qualifies in respect of the turnover test of the Act. The parties overlap in electricity generation, distribution, metering and contracting services in Great Britain.
The merger gives rise to small increments on top of small shares in
relation to electricity generation and contracting services. Metering is
characterised as a contestable market within Ofgem's regulatory
framework. Although the parties' increment to share in respect of
distribution is more significant than in respect of electricity
generation and contracting services, each of the distribution networks
is licensed as a regional monopoly and is subject to periodic regulatory
reviews including price controls. Ofgem's view is that the regulatory
framework addresses any concern that may arise from this merger.
The merger therefore does not appear 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 33(1) of the Act.