Scottishpower plc / Damhead Creek Ltd
OFT closed case: Completed acquisition by Scottish Power plc of Damhead Creek Limited.
Affected market: Electricity generation
No. ME/1131/04
The OFT's decision on reference under section 22(1) given on 4 August 2004
PARTIES
Scottish Power 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 £3.1 billion.
Damhead Creek Limited (DCL) owns and operates a 792MW gas-fired power plant in Kent. DCL is owned by Damhead Energy Limited, a warehousing vehicle owned by a consortium of project finance banks, who acquired ownership of the equity from US energy company, Entergy, in December 2002. Its unaudited UK turnover for the calendar year 2003 was £154.6 million.
TRANSACTION
ScottishPower has acquired the entire issued share capital of DCL for a total cash consideration of £317 million, which includes the 792MW power plant and a long-term gas supply contract to fuel the plant.
This is a completed transaction. It was announced on 2 June 2004. The 40 working day administrative deadline expires on 4 August 2004. The 4-month statutory deadline expires on 2 October 2004.
JURISDICTION
ScottishPower has acquired the entire issued share capital of DCL. Therefore, ScottishPower and DCL have ceased to be distinct enterprises. The acquisition satisfies the turnover test as DCL's unaudited UK turnover for the calendar year 2003 exceeded £70 million. The acquisition has therefore resulted in the creation of a relevant merger situation for the purposes of section 23(1) of the Enterprise Act 2002 (the Act).
RELEVANT MARKET
The parties overlap in the generation of electricity in England & Wales and Great Britain.
Product market
On the demand-side, 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 to hedge their exposure to price risk. Prices are likely to reflect the marginal cost of generation which will vary according to the type of plant, its age and operational efficiency, and a host of other factors. An increase in price charged by a particular generator may result in suppliers or businesses switching away from that generator to buy power from a cheaper source, if available. Similarly, an increase in price for electricity generated from a particular fuel source may see switching away to power produced by cheaper alternative fuel sources. This demand-side switching is, however, not likely if suppliers have long term contracts or if they are vertically integrated companies. By comparison, domestic electricity end-customers and small businesses are generally indifferent and/or unaware of location of plant, type of fuel or plant ownership.
On the supply-side, the ability of a plant to respond to increased prices by increasing output in the short term (supply side substitutability) varies according to its input (nuclear power is virtually fixed, wind power is unpredictable as it depends on how strong the wind blows and requires reactive power in reserve for those times when there is no wind, while gas and coal-fired plants are flexible). Most power stations operate below their full capacity so that an increase in demand can be met by the surplus of that same plant by increasing the plant's output.
As a result of the considerations set out above, the relevant frame of reference in this case would appear to be electricity generation.
Geographic market
Electricity is imported into England & Wales from Scotland and France by means of two inter-connectors. Transportation constraints on the electricity grid mean that, at times, market power may accrue to a small player because the geographic market for wholesale electricity is reduced to generators in a particular area (or transmission zone) as a result of transportation constraints.
In England & Wales, electricity is traded by generators and suppliers under the New Electricity Trading Arrangements (NETA) introduced in 2001. These trading arrangements are expected to be extended to Scotland from 1 April 2005 creating the British Electricity Trading and Transmission Arrangements (BETTA) ([see note 1]). In the light of this, and taking into account the increasing capacity of the interconnector with Scotland, it is appropriate at this stage to start considering competition more widely in Great Britain. Therefore, for the purposes of this assessment, the focus of our analysis will be both England & Wales and Great Britain.
HORIZONTAL ISSUES
Market shares
For England & Wales, based on the parties' 2002/03 data, ScottishPower holds a share of supply in electricity generation of 3 per cent by capacity and 3 per cent by output, with post-merger increments of 1.2 per cent and 2 per cent respectively. For Great Britain, ScottishPower's share of supply is higher - 7 per cent by capacity and 6.3 per cent by output. However, the post-merger increment is equally small. Ofgem's data for 2003/2004 shows no material difference in these figures.
These small shares and increments do not appear to raise concerns, in particular as the merged company will face competition from several competitors with shares larger than its own.
Barriers to entry
Barriers to entry in the relevant frame of reference are high. Power stations require large sunk costs to construct, need to be linked to the national grid and must meet increasingly stringent environmental and planning controls ([see note 2]).
Buyer Power
Buyers are likely to be sophisticated, although it is not clear that they have buyer power.
VERTICAL ISSUES
ScottishPower is a vertically integrated energy company, with interests throughout the vertical chain of electricity. DCL is active only in electricity generation.
The transaction probably makes ScottishPower's position in generation and supply more balanced and reduces its need to buy power from its large and small competitors. The modest share increments, and absence of third party concerns, suggest that the transaction gives rise to no vertical issues.
THIRD PARTY VIEWS
Ofgem has undertaken a public consultation exercise on this merger. No responses were received by the deadline. Ofgem believes that the acquisition does not raise any significant concerns for competition in the electricity sector, or in relation to vertical integration, having taken into account the level of competition present in the generation sector and the relatively small increase in ScottishPower's position in this sector.
No third parties expressed any concerns about the transaction to the OFT.
ASSESSMENT
The parties overlap in the generation of electricity in England & Wales and Great Britain.
The acquisition will increase ScottishPower's generation capacity in England & Wales and Great Britain. However, the addition of 792 MW to ScottishPower's portfolio will not give rise to any significant competition concerns. Moreover, the electricity generation sector in England & Wales has become less concentrated in recent years with a number of new entrants.
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 for goods or services.
DECISION
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
NOTES
- This is subject to primary legislation currently before Parliament.
- New power stations require consent under section 36 of the Electricity Act 1989 (as amended) and section 14 of the Energy Act 1976 before construction can begin. They also need local authority planning approval and an environmental impact assessment.