— Future mergers or acquisitions among UK electric distribution companies could be worth $42.8 million in compensation for customers, the UK’s Office of the Gas and Electricity Markets (Ofgem) said Thursday.
The UK electricity regulator asked for comments on how to compensate customers in the event of future mergers or acquisitions among monopoly electric distribution companies. Based on previous compensation formulas, Ofgem said “it may be appropriate” to pass along £30 million in price reductions for each merger.
Distribution charges are set every 5 years during a price control review. In 1999, Ofgem used comparative analysis to set rates.
But acquisitions have cut the number of independent UK distribution companies to 9 from 14 since the UK deregulated the electricity industry. Units of five US companies, including TXU Corp., Dallas, Tex.; FirstEnergy Corp., Akron, Ohio; MidAmerican Energy Holdings Inc., Omaha, Neb.; American Electric Power Co. Inc., Columbus, Ohio; and PPL Corp., Allentown, Pa.; and Mirant Corp., Atlanta, Ga., own seven UK distribution companies. UK regulators said they anticipate similar transactions will take place in the future.
Mergers can benefit customers, if the successor company is more efficient and improves service, said Joanna Whittington, Ofgem director of strategy. But fewer independent firms makes it harder for Ofgem to compare company performances when setting distribution price controls.
To compensate, Ofgem is asking for comment on whether companies should reduce their charges on completion of a merger or similar transaction by an agreed amount as well as pass on savings brought about by introducing further efficiencies.
“We are seeking views on whether a value should be applied to the loss of comparators which can then be passed on to customers whenever a merger is completed,” Whittington said. “This consultation should result in a predictable framework for dealing with transactions of this nature in the future.”
Ofgem is also seeking comment on the best way to place a value on the reduction in the number of companies on which to base comparisons. The UK regulator said that it wants to develop a clear approach which will help distribution companies’ future planning as well as meet its primary objective of protecting customers.
Ofgem said it is interested in views on various issues, including:
— How the benefit associated with being able to make comparisons between distribution companies can be quantified.
— How the efficiency savings associated with mergers in the electricity distribution sector can be quantified.
— Whether mergers with specific characteristics, for example, covering more than two licensed areas, warrant special consideration.