In particular, a reduction in the number of independent companies in the energy networks sector could potentially impact on the regulator’s ability to push for further efficiencies and improvements in quality of service for customers. Ofgem supports legislative change to require the merger authorities to take this factor into account when assessing mergers, as is the case in the water sector.
Ofgem considers that legislative change will not prevent all energy network mergers, but it will also allow the merger authorities to weigh up all the relevant factors when making their decisions.
Ofgem’s policy is that customers should automatically receive a share of the efficiencies and other benefits that arise from mergers – all benefits should not be kept by shareholders. However, the regulator will not take a predetermined amount of money from the newly merged companies (as previously applied in the electricity distribution sector, referred to as the ‘merger tax’).
Instead, for the remainder of the existing price control any merger benefits will be shared with customers at the same rate all other cost savings are shared. For electricity distribution this is around 50%, so customers stand to gain half of all benefits from efficiencies in that sector, whether these are created by a merger or other initiatives.
The energy regulator will set new sharing rates for gas distribution and transmission at the beginning of the next price control review period in 2013. At the end of the price control period all of the benefits go to customers as cost allowances are reset, Ofgem said.
Ofgem’s role in network merger activity is to advise the Office of Fair Trading, which can clear a merger or refer it to the Competition Commission.
Ofgem may need to advise the European Commission where a merger has an impact on other European markets. The energy regulator is also able to propose conditions on merged entities through modifications to the companies’ licenses.
