Lang steps in to halt power takeovers

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The Independent Online
Ian Lang, President of the Board of Trade, is expected to encourage the establishment of Eastern Group as a major vertically integrated electricity company, despite his decision yesterday to prevent National Power and PowerGen following the same route.

He stopped the takeovers of Midlands Electricity by PowerGen and Southern Electric by National Power, overturning a four to one majority recommendation of the Monopolies Commission and the favourable views of his own specialist officials at the DTI.

But his decision agreed with the recommendations of Patricia Hodgson, the dissenting member of the MMC, Professor Stephen Littlechild, the electricity regulator, and John Bridgeman, the director general of fair trading.

Southern Company of the US, the utility that has been planning a bid for National Power, was yesterday considering its response, but appears unlikely to make any early move and may retreat altogether from the fray.

Mr Lang's decision appears to put a huge obstacle in the way of its plan to bid for National Power unless it disposes of control of its own UK power supply and distribution subsidiary, Sweb.

As electricity shares fell sharply in reaction to the surprise decision, the City and the power industry were left with far more questions than answers, because Mr Lang made clear he was still judging vertical integration case by case and that it will be acceptable for some deals but not for others.

The question marks were underlined when Professor Littlechild, the electricity regulator, hinted strongly that he was happy with the proposed sale of 6,000 megawatts of existing power generating plant to Eastern, the electricity supplier and distributor that is now a Hanson subsidiary.

The sale - 4,000 megawatts of which is by National Power and 2,000 by PowerGen - will make Eastern into a big vertically integrated generating and distribution company just as Mr Lang has stopped the vendors moving in the same direction.

Eastern will eventually have a generating market share of up to 14 per cent, only a few percentage points lower than projections for National Power.

Professor Littlechild said that he had no objection in principle to vertical integration "particularly where it can help to promote competition", but in the case of the National Power and PowerGen bids he believed it was "prudent to prohibit these mergers until competition is more firmly established in the electricity industry".

He added that he welcomed the two companies' agreement to sell the 6,000 megawatts of plant to Eastern and he was "ready to take forward the necessary regulatory arrangements". In the absence of objections by Professor Littlechild there appears little reason for Mr Lang to stop the Eastern purchases.

Professor Littlechild said later: "A distinction must be made between vertical integration of the two largest generators and expansion of output by a regional electricity company that has a very small share at the moment."

Mr Lang said he blocked the National Power and PowerGen takeovers because they would be "detrimental to competition given the current state of the electricity market's development".

He remained of the view that vertical integration was not inherently objectionable, but the remedies proposed by the MMC majority would "not be sufficient to address" the detriments the reports identified.

The majority of members of the Monopolies Commission had said that both deals were against the public interest because they would reduce competition among independent power plants, and cause prices to be higher than otherwise.

The majority also cited adverse regulatory effects, but dismissed one of the main complaints about the takeovers, which was that they would damage competition in the electricity pool, by inhibiting the "contracts for differences" market, where regional companies acquire options on future supplies.

However, having found against the takeovers, the majority said the effects were not sufficiently serious to justify prohibition, and they recommended the bids should be allowed to proceed if the two companies gave a number of undertakings to the Government, including the sale of their stakes in independent power plants.

Mrs Hodgson, in a dissenting note, said the mergers were "likely to limit severely an increase in competition that is necessary and might otherwise be expected to take place; and the detriment could not be sufficiently mitigated by the remedies proposed."

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