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Interest grows for Midlands

31 October 2002 – Aquila has received numerous enquiries for its UK electricity distribution business Midlands Electricity, after it invited indicative bids by this week.

YTL, the Malaysian conglomerate which is under investigation for the way it acquired Wessex water earlier this year, said it was interested, but it is thought that as many as a dozen firms may have expressed interest.

Interest may partly arise from the fact that utilities with a distribution arm in the UK have best weathered the collapse in wholesale power prices, whilst those without, like British Energy, have not been able offset the impact.

Interest in Midlands Electricity has come from vertically integrated electricity companies, pure distribution players and even financial companies. “This throws up a number of interesting scenarios for the development of the UK electricity market,” commented Iain Bosbery, Utilities Research Manager at market researchers Datamonitor.

Bosbery expects that one of the big, vertically integrated incumbent big players will win out as usual. “A purchase by a vertically integrated company would reinforce the
continental model adopted by companies such as E.ON as having a large presence across the industry sector. Despite regulatory impositions, it could fundamentally change the horizontally separated structure that was envisioned at privatization. It could also see the exit of pureplay
distributors, who may be left unable to gain critical mass,” said Bosbery.

Vertically integrated electricity companies thought to have expressed an interest are Powergen (owned by E.ON), Scottish Power and Scottish and Southern. Pure distribution players such as WPD and United Utilities may bid or financial companies such as the Royal Bank of Scotland and AMP.

“A bid by WPD or one of its peers would breathe more life into the sector. The most interesting outcome will be if a financial institution buys the assets: almost certainly the operation would be outsourced but would be maintained by asset operators. This will create a new market dynamic and may open up the industry to a further disaggregation, separating asset ownership and asset management,” said Bosbery