A combination of the two would create Britain's biggest electricity distribution and supply company, with 4 million customers, sales of pounds 2.7bn and 8,000 employees.
The possibility of a third regional electricity supplier taking part in the merger, such as London Electricity, has not been ruled out. London had been planning to merge its supply business with that of neighbouring Seeboard, which covers Kent, Sussex and part of the London area.
But its plans suffered a setback after the respective US parent companies of Seeboard and Yorkshire announced that they are to merge. American Electric Power, which bought Yorkshire for pounds 1.5bn just over a year ago, is acquiring Central & South West Corporation, the parent company of Seeboard, for $6.6bn in a deal due to be completed early next year.
Analysts have speculated on a merger of their respective UK interests ever since. The prospect of consolidation in the electricity industry has been given further impetus by the Government's Green Paper on utility regulation, which paves the way for the separation of the RECs' distribution and supply businesses.
The electricity supply market is due to be thrown open to competition from September, eventually allowing 20 million domestic consumers to shop around for a supplier. Industry observers speculate that this will produce a series of consolidating mergers, reducing the number of supply companies from 14 to perhaps as few as four or five.
The electricity distribution businesses of the RECs - the network of wires - will remain local monopolies. But there will be pressure to merge these as well to achieve cost savings if the supply businesses have been split off and sold separately.
Mergers between supply companies are less likely to be blocked by the regulators because the market is being opened to competition at the same time. But they may oppose mergers of distribution businesses as this would reduce the number of comparators that can be examined to set efficiency targets and price controls.
"Nothing is being ruled out," one senior electricity industry executive said. "Everyone is talking to everyone about every combination of merger."
The emergence of a handful of large supply companies might cause concerns if it was seen to pose an obstacle to the opening up of the market. But it would give the supply companies greater clout in dealing with the generators. Generation costs account for 50 per cent of the average household bill and although the three big fossil-fuel generators have offered price cuts of up to 15 per cent this year, they are not prepared to offer contracts to the RECs lasting more than 12 months.
n The Government will be urged to give more support to the coal industry in a report tomorrow from a committee of MPs. The cross-party Commons Trade and Industry Select Committee is expected to warn that Britain must not become too reliant on gas for its energy needs.
One option thought to be under consideration is to retain 30 per cent of the electricity generating market for British coal. But this could mean forcing generators to burn more coal than they want to or subsidising them to take extra supplies.
The Government threw the coal industry a lifeline late last year to head off the threat of up to 5,000 job losses and eight pit closures at RJB Mining, Britain's biggest coal producer. Under the deal, the generators agreed to bring forward coal purchases when long-term contracts ended last month. But the lifeline only keeps the pits open until June, by which time the Government is due to complete a review of energy policy.