Ofgem announces distribution company merger policy

1 May 2002 – UK Energy regulator Ofgem has set out today terms under which any future merger of UK electricity distribution companies can take place in an attempt to ensure that customers benefit from cost savings.

Since 1995, corporate transactions have resulted in some of the original fourteen regional distribution companies becoming jointly owned which means that there are now only nine independent company groups, which are themselves controlled by five groups.

Ofgem is concerned that further consolidation among monopoly distribution companies would reduce its ability to make meaningful comparisons, to ensure they are operating as efficiently as possible, passing on the savings to customers and delivering a good quality of service.

“These steps are aimed at ensuring Ofgem meets its primary objective of protecting customers while helping distribution companies plan for the future,” said Ofgem in a statement.

Ofgem intends to modify the licences of each company affected by a merger to reduce the amount of money they can earn by a total of à‚£32m which will be spread equally across all companies in the merged group over a five year period. Customers will still benefit from the efficiency savings generated by the merger through the price control process.

Ofgem’s Director of Strategy, Joanna Whittington, said, “Regulation should not seek to inhibit companies from taking part in corporate activity which promotes greater efficiency. However, if this activity reduces benefits to customers, we should look at how this can be addressed.

“We believe that mergers reduce the scope for meaningful comparisons between distribution companies which can lead to detriment to customers. Therefore, as part of our ongoing regulation of this sector, we have set a value on that detriment which companies will have to meet through a reduction in their revenue from the time any merger is completed. Customers will, of course, continue to benefit from the efficiency savings brought about due to the price control process.”

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