Leading Article: Pulling the plug on competition

The lights of most of southern England may soon depend on decisions taken in the far south of North America. The Southern Company from over there already owns South Western Electricity over here, and now they have admitted they are interested in a merger with Britain's largest power generator, National Power. At the same time, the Monopolies and Mergers Commission (MMC) is set to clear National Power's bid for another electricity distributor, Southern Electric.

The stage is set for a substantial concentration of the electricity supply industry - leaving much of it in the hands of foreigners. Why worry? Not because the owners might be foreign but because of the threat it poses to competition.

The fact that Southern Company is American shouldn't make any difference to its bid. US shareholders will be no more ruthless and profit-hungry than their UK counterparts. The management of Southern should be judged on its merits, not on its country of origin.

The real objection to Southern Company's possible merger with National Power is the threat to competition that it poses. When the electricity supply industry was privatised, power generators and electricity distributors were deliberately kept separate, so that generating companies would have to sell their electricity to regional electricity companies. The wave of proposed mergers and takeovers is threatening to pull the generators and the distributors together again.

National Power already has more than a quarter of Britain's generating capacity. Joining up with South Western Electricity and Southern Electric would give it a regional distribution monopoly for the power it generates, covering several million customers. The rest of the industry is consolidating fast. Scottish Power, the generator north of the border, already owns Manweb, the Chester-based REC, while Hanson's Eastern Electricity is moving into generation, and the MMC is about to give the go-ahead for PowerGen to bid for Midland Electric.

Optimists argue that this consolidation will not pose a problem. The markets to provide electricity for domestic and small business customers are supposed to start opening up after 1998, weakening the local monopolies of the newly consolidated generating and supply companies. A UK electricity industry populated by five or six vertically integrated companies competing across a national market for customers might not be a bad thing.

Perhaps. But the MMC, in a leaked copy of its report on two of the pending mergers, concedes that even after 1998, competition to supply households is unlikely to be "vigorous". So families will still rely on the electricity regulator rather than competition to keep their prices down. But when suppliers and generators are all tied up together, it will be even easier for companies to pull the wool over the regulator's eyes.

Allowing the industry to consolidate so quickly now may choke the development of competition. National Power and PowerGen own almost 90 per cent of Britain's generating plant. Giving these dominant companies captive customers will make them stronger than ever, making it harder for new companies to enter the generating market.

Sadly, creating strong, dominant companies does not appear to trouble the Government, or even the MMC, the competition watchdog that has chosen to take out its own teeth. In the leaked report, the MMC justifies its relaxed attitude to vertical integration on the grounds that it will promote national champions. Shielding companies from the rigours of domestic competition is bad for UK consumers, and won't make them tough enough to flourish in foreign markets. If the Government allows these bids through it will be turning its back on competition and once again turning its back on consumers.