Review of United Kingdom energy network merger policy across both the gas and the electricity sectors.

The UK Office of Gas and Electricity Markets (Ofgem) announced on Tuesday 2 February 2010 that it will undertake a review of its existing energy network merger policy, across both the gas and electricity sectors, to ensure it remains fit for purpose and, if not, will consider how potential mergers should be treated in the future. Ofgem plans to consult market participants on its proposals for the revised merger policy in spring 2010 and publish the revised policy in summer 2010. Ofgem's decision letter can be accessed at the following link: http://www.ofgem.gov.uk/Networks/Policy/Documents1/L-Mergers%20%28Jan10%29%202.pdf

Ofgem have cited the following reasons for the review:

  • A reduction in the number of independent groupings in the power distribution sector
  • Changes in the ownership structure of the energy networks over recent years, which have given rise to a number of questions with regard to the treatment of mergers in the sector
  • Trends such as the de-merger of gas and electricity network companies since merger policy was last reviewed in both 2002 and 2007

Ofgem intends to suspend its existing merger policy for the duration of the review period, and will consider potential mergers on a case-by-case basis. It will take a number of issues into account, including whether potential deals will:

  • Result in a loss in the number of independent comparators in the sector and, if so, the likely impact of this on the results of any comparative efficiency analysis in that sector
  • Significantly change the distribution of market share within the network sector and, if so, whether this raises any relevant issues
  • Result in an entity owning both gas and electricity network licenses and, if so, whether this raises any relevant issues Result in an entity owning both distribution and transmission licenses within either the gas or the electricity industry and, if so, whether this raises any relevant issues

Ofgem's key role in respect of network merger activity is to advise the Office of Fair Trading, which, in turn can approve or reject a merger or refer it to the Competition Commission. In cases where a merger has an impact on other European markets, Ofgem will also advise the Competition Commission on any modifications it considers should be made to the companies' licences, and/or any new conditions that should apply to merged entities.

Ofgem's initial decision to undertake this review was revealed in a consultation letter published on 7 December 2009, which can be accessed at the following link: http://www.ofgem.gov.uk/Networks/Policy/Documents1/L-mergers_Dec09_.pdf .

Responses to the consultation filed in January 2010 can be accessed at the following link: http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=261&refer=Networks/Policy