The development of multi-utilities
176. Since privatisation,
the distinction between suppliers of electricity and gas, and
indeed water, has been eroded. The utility companies have been
exposed to the possibility of merger and takeover. The result
has been the emergence of a number of multi-utility companies.
Eastern Group plc told us "a number of differing multi-utility
models have developed in England and Wales during the last twelve
months ... There are two instances where water companies have
taken over RECs and one in which a vertically-integrated company
(ScottishPower) has taken over a REC and a water company. In
another case, a water company has merged with a water and sewerage
company".[418]
Liberalisation of the supply market at the other end of the corporate
chain will increasingly facilitate the development of companies
selling both electricity and gas to the end consumer.[419]
Consequences of re-structuring for regulation
177. Many witnesses felt
that, provided proper regulatory safeguards were in place, there
was much to be gained from the development of multi-utility companies.
Scottish Hydro-Electric explained that "The move towards
multi-utility operation is being driven by both market and regulatory
pressures. On the one hand, some customers may be attracted to
a `one-stop shop' for all their utility services. On the other
hand, companies may seek to become more competitive by, for example,
pursuing economies of scale through acquisition. Such developments
are likely to benefit customers through reduction in operating
costs leading to lower prices, and also through the development
of innovative products (particularly in combining energy products
such as the purchase by customers of warmth or hot water), with
suppliers free to achieve the result by using gas, electricity
or other fuels or by energy efficiency measures".[420]
Northern Electric suggested that mergers could increase
competition by introducing new, strong players into the market.[421]
178. There are, of course,
dangers as well as benefits arising from the creation of such
multi-utility companies and from mergers. Some of these are not
unique to multi-utility companies. They include the possible
loss of comparative information[422]
risk of cross-subsidy between regulated and unregulated parts
of a business,[423]
the possibility that savings may not be passed on to consumers,[424]
that unfair competitive advantage may be gained by the use of
the database of one part of the new company to sell services provided
by the other,[425]
the possibility of the development of dominant market shares[426]
and the fear that funds earmarked for investment may be diverted.
179. Despite these possibilities,
most witnesses saw no insuperable regulatory difficulties arising
from the changes in the structure of the gas and electricity industries.
According to Scottish Hydro-Electric, for instance, "The
combination of different utility functions does not therefore
introduce a new concept in regulation, but simply increases the
number of separate regulatory businesses incorporated within a
company. While this may increase the complexity of regulatory
compliance, it does not change its nature"[427]
though it does mean that more than one regulator will have an
interest in any one company. The CIA were also of the opinion
that multi-utility mergers should not be opposed, subject to proper
scrutiny, as long as efficiency gains are passed on to consumers,
there is no cross-subsidisation of activities and there is transparency
of costs.[428]
The problem of undue market dominance, it was suggested, could
be dealt with by the general competition law.[429]
180. The regulators were
aware of the problems arising from restructuring but were in general
confident that they had the means, through reference to the MMC
or licence amendments, to overcome them. They can and do impose
stringent licence conditions as a condition of takeovers, in the
case of both single-utility and cross-utility mergers. OFFER
explained "In the cases of takeovers involving Norweb [by
North-West Water] and SWALEC [by Welsh Water], the DGES has put
in place licence amendments to ensure his continued access to
information, and to ring-fence the finances of the electricity
licensee from the rest of the merged group".[430]
The DGWS set out in full the necessary action to be taken to
protect consumers' interests in cases of mergers under the headings
of effective ring fencing, preserving the visibility and independence
of the regulated business, ensuring efficiency gains are ultimately
shared with customers, amended procedures to protect consumers,
stronger ring fencing, and core business independence and visibility.[431]
The emergence of multi-utility companies places greater obligations
on the regulators to co-operate with each other, but they appear
to have done so to good effect, as in, for instance producing
joint consultation papers before each water-electricity merger.[432]
Government policy on mergers and takeovers in the energy sector
181. The DTI believe that
"the development of joint utility companies has been a market-related
response to the opportunities facing the privatised utilities.
As such, it is a commercial matter for the companies involved,
subject to any regulatory or competition requirements; the
Government does not have a blueprint for the development of these
industries"[433]
(our emphasis). As far as proposed mergers involving RECs are
concerned, we were told the Secretary of State had confirmed in
August 1995 that each case would be considered on its merits and
that he would continue to refer proposed mergers to the MMC primarily
on competition grounds. In considering referring mergers involving
RECs, within existing policy, he proposed to pay particular attention
to the extent to which the powers of the DGES to discharge his
regulatory duties may be adversely affected when a REC is subsumed
within a larger grouping; the effect of the possible loss of a
comparator; whether and how much an enhanced degree of vertical
integration might create adverse effects and the extent to which
any adverse effects may be remedied, for example by divestments,
or offset by efficiency gains. The President of the Board of
Trade is advised by the DGFT who takes into account the views
of the relevant Director General who consults as appropriate.[434]
418 Ev. p.208. Back
419 Mem.
p.35. Back
420 Ev.
p.44. Back
421 Mem.
p.35. Back
422 Ev.
p.274. Back
423 Ev.
p.246. Back
424 eg.
Ev. p.235. Back
425 eg.
Mem. pp.21, 54. Back
426 Mem.
p.44. Back
427 Mem.
p.44. Back
428 Ev.
p.117. Back
429 Mem.
p.44. Back
430 Ev.
p.274. Back
431 Ev.
pp.234-5. Back
432 Ev.
p.274. Back
433 Ev.
p.322. Back
434 Ev.
p.323. Back
