A waste of everyone's time, money and energy

The more Ian Lang's decision to block National Power and PowerGen from bidding for regional electricity distribution companies is examined, the more bizarre it appears. Mergers policy and, more particularly, the future of the power industry seem to have been left in a mire of uncertainty; if the Trade Secretary's intention was to calm things down, to put the lid on the frenzy of takeover activity in the sector, what he has achieved is the reverse. His decision may have created more problems than it solves.

Taking it from the top, the first effect is to expose the two distribution companies that National Power and PowerGen were bidding for to the strong possibility of takeover by overseas companies. Since Mr Lang has already allowed foreign takeovers for other distribution companies, he could hardly justify blocking them in this case. Midlands is said to have received a couple of alternative approaches already.

The second effect might be to halt the sale by PowerGen of generating plant to Eastern Electricity, now part of Hanson, since this deal was conditional on PowerGen succeeding in its bid for Midlands. If in turn PowerGen fails to go through with the sale, there is likely to be a fresh Monopolies and Mergers Commission inquiry into its failure to comply with the regulator's demands. That would almost certainly broaden out into an examination of the generating market more generally, undermining the Government's proposed flotation of British Energy, the nuclear power company, on the stock market.

The third effect is to throw Eastern's expansion into generation through the acquisition of plant from National Power and PowerGen into doubt. If vertical integration is not allowed for National Power and PowerGen, why for Eastern?

Mr Lang's own view, which although it may not be shared by his own department is certainly also the view of Number 10 and the Treasury, is that he has acted in an entirely logical fashion, in accord with a vigorous free market approach to competition policy. He argues that if you are going to get proper competition in the electricity market after 1998, the target date, the last thing you should be doing is allowing overly powerful generating companies to gobble up the supply side of the industry now. Once competition is properly developed, well then maybe, but not now, when the generators would be able to use the distributors as a captive market for their own output.

But while there may be something in this argument, there is no doubt that by blocking out the generators he has left the electricity industry in a state of undiluted confusion. By sticking two fingers up at the Monopolies and Mergers Commission, which recommended that the bids should be allowed to proceed if certain conditions were met, he has also in effect assigned that august body to the dustbin of history. What's the point of having an MMC if its recommendations do not carry any weight? You got it wrong, Mr Lang is in effect telling Graeme Odgers, chairman of the MMC.

An overhaul of the competition authorities is long overdue and if that is the upshot of the power shenanigans, then it may be no bad thing. What to do about the electricity industry is a much more difficult question to answer, but certainly ministers need to spell out much more clearly what is acceptable and what is not. Ed Wallis, chief executive of PowerGen, would never have bid for Midlands were he not given some encouragement by ministers to believe it was acceptable. In any case, after Mr Lang's decision to allow vertical integration in the case of Scottish Power's bid for Manweb, it was entirely reasonable to think that it might be allowed in other cases too. If Mr Lang's position is that it is allowable, but only when the generator's share of the market is below a certain level, then he should say so and define what that benchmark is.

By allowing these questions to go unanswered, the Government has wasted everyone's time, money and energy.


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