Ofgem to force price cuts on merger partners

Click to follow

The energy regulator, Callum McCarthy, is set to force London Electricity and Eastern Electricity to cut bills for five million customers as the price for allowing the merger of their distribution networks to go ahead.

Mr McCarthy, the director general of Ofgem, is due to announce the move at the end of this month. His ruling will in effect set the regulatory framework for future mergers between regional electricity companies.

London, which is owned by Electricité de France, and Eastern, part of the US-controlled TXU Europe, said when the deal was announced last December that customers would not see reductions in their bills even though they anticipated substantial cost savings.

The merger will lead to 800 job losses across the two distribution businesses - a quarter of the combined workforce. At the time, the public service union, Unison, condemned the merger announcement as "a shocking blow to staff just before Christmas and a cut too far for customers".

Under Ofgem's latest price caps, Eastern must cut domestic bills by £20 a year from next month while London's domestic customers will see charges fall by £13. However, the price cuts do not take into account the benefits that will arise from the merger.

Announcing the new price curbs, Mr McCarthy said that should there be mergers between companies that created extra value then it was "appropriate that customers should share in that additional value". He also said that mergers could cause detriment to competition and reduce the number of comparator companies the regulator could examine when setting price limits and efficiency targets.

Ofgem calculates that a merger between two distribution companies should yield savings worth at least £12.5m but London and Eastern estimate that their efficiency gains will be much larger than that.

Meanwhile, it has also emerged that Mr McCarthy is unhappy with some elements of the Government's Utilities Bill, particularly the power it gives him to levy unlimited fines on companies which fail to meet certain performance standards.

Mr McCarthy is lobbying ministers to amend the Bill so that a finite limit is set on the size of fines. The new Competition Act, for instance, gives regulators the power to fine companies up to 30 per cent of their turnover for abuse of a dominant position or acting as part of a cartel.

The gas and electricity industries are the only two sectors affected by the Utilities Bill, following the Government's decision to drop telecoms and water from the scope of the legislation.

Ofgem believes that the power to levy unlimited fines will make it unnecessarily unpopular with gas and electricity companies. Mr McCarthy is already under attack for the sharp increase in his budget, excessive intervention and alleged lack of expertise in dealing with electricity affairs.

Since the merger between the Birmingham-based electricity regulator Offer and the gas regulator Ofgas, only 20 per cent of the 100 or so staff at Offer have opted to relocate to the new headquarters in London.