Outlook: London Electric

LONDON ELECTRICITY is about to swop one foreign owner, Entergy of Louisiana, for another, Electricite de France - or at least that is what EdF hopes, for EdF is a foreign bidder with a difference. It is owned by the French state. Under the previous Government, any such takeover would have fallen foul of the "Lilley doctrine" - named after Peter Lilley, the former Trade and Industry Secretary. This dictated that no privately owned British company could be bought by a state owned foreign one, since it would amount to a back door nationalisation, and one by an overseas country to boot.

In some respects this is an eminently sensible approach to mergers policy. It would not be possible to buy EdF, so why should EdF be allowed to purchase part of Britain's electricity industry? However, even if Peter Mandelson, the present secretary of state, shares this view, it is not immediately obvious he would be able to do anything about it. EdF reckons that since the takeover is a cross border one, jurisdiction falls to Brussels, not London, and since there are no competition issues involved and Brussels doesn't recognise the Lilley doctrine, the eurocrats will be obliged to clear it.

To this end, it has slapped an unconditional pounds 2bn bid on the table, so that if there is a regulatory problem, it will be EdF that acquires the risk of it. Against this sort of fire power, British Energy, the privatised nuclear generator which is also bidding for London Electricity, doesn't seem to stand much of a chance.

As a generator, British Energy perhaps faces more serious regulatory obstacles than EdF in buying an electricity distributor such as London Electricity. In the past the British competition authorities have either blocked these combinations or made them conditional on swingeing disposals. It is not apparent British Energy has the money to match EdF in shouldering this risk.

All the same, Mr Mandelson will want his say. Through the interconnector cable between Britain and France, EdF supplies about 7 per cent of Britain's electricity needs. If the Government can force Ed Wallis at PowerGen to dispose of a third of his generating capacity in return for being allowed to buy East Midlands Electricity, it would plainly be a nonsense if the authorities were unable to extract any concessions at all from EdF, which through the interconnector is a sizeable player in the British generator market.

There are three ways in which Britain might be able to get its oar into the regulatory process. Technically speaking, it is not possible for Brussels to vet an unconditional offer. If the EdF bid has to be made conditional on clearance, this might deprive the French of their price advantage over British Energy.

Alternatively, Britain could try and claw the decision back from Brussels on grounds of national security. A more promising route is through the licensing process. The electricity regulator must agree a transfer of London Electricity's operating license to EdF. Potentially this provides quite a bargaining chip.

A bare minimum set of demands would seem to be that the interconnector be made a two way street, so that Britain can sell electricity to France, and that full deregulation of the French electricity market happens on time, with out practical constraints, at the scheduled date next February. In the absence of these guarantees, the licence transfer should be refused on grounds of lack of reciprocity between Britain and France in the sale of electricity.

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