SSE and Npower have strong case for merger clearance but no guarantee

15 June 2018 10:39am

14 June 2018. By Victoria Ibitoye.

When SSE and Npower announced plans to merge last year, few expected the tie-up between two of the UK’s biggest energy suppliers to be completed quickly.

The parties themselves said they didn’t expect to finalize the deal until early 2019 at the latest — presumably anticipating a lengthy regulatory review.

The UK’s Competition and Markets Authority has come good on that expectation. After launching a probe in February, it decided in April that the merger could lead to higher prices for some billpayers. In May it referred the case for a phase II review after the parties failed to offer concessions to address its concerns.

On the surface, the decision to refer the deal for an in-depth probe was uncontroversial. A merger of SSE and Npower’s scale would typically warrant a closer look.

But the CMA’s central reasoning for its referral — that the deal could lead to an increase in single transferable tariff prices due to the “loss of a comparator” — was unexpected and potentially presents a stumbling block for the regulator.

The CMA’s case

Central to the CMA’s decision was that the merger could lead to less competition in how the UK’s “big six” energy companies — British Gas, EDF Energy, E.On and Scottish Power, along with Npower and SSE — set their standard variable tariffs, or SVTs. These are supply contracts with an indefinite length and no fixed-term conditions. 

The regulator said that customer reaction is a key factor in how the power companies set their SVTs, and removing part of the comparative constraint could result in higher prices.

It added that it would also consider whether a combined SSE and Npower would have an incentive to raise SVT prices in order to be able to increase its wholesale prices to Utility Warehouse, an independent energy supplier that relies on Npower for its gas and electricity supplies.

The CMA dismissed a number of more “conventional” theories of harm, accepting that SSE and Npower were not close competitors and faced constraints from other large energy providers as well as some small and mid-sized rivals.

The regulator also said the merger wouldn't lead to an increase in prices through reduced competition for new customers, and said it had found no competition concerns in the supply of gas and/or electricity to domestic prepayment meter (PPM) customers.

It also found no evidence of co-ordination, acknowledged low barriers to entry in the market, and, crucially, said the merger would not significantly increase tariffs for those on fixed-term contracts, or FTCs.

Unsurprisingly the CMA's focus on SVTs, given its acceptance of a limited impact on FTCs, drew criticism from SSE and Npower.

Npower and SSE’s view

SSE and Npower criticized the CMA’s decision to refer their merger for an in-depth investigation in a joint submission published last week. They said it had failed to identify merger-specific effects arising from the deal and said its main theory of harm — that the deal could result in the loss of a comparator for SVT pricing decisions — is untenable.

A key flaw, they say, lies in the CMA’s reasoning over the closeness-of-competition theory. This looks at whether the parties are each other's “second choice” from a customer perspective, meaning customers would be forced to stomach any price increases.

SSE and Npower say that since the CMA has accepted that both parties are not close competitors to each other and have a relatively small market share compared to larger rivals, there’s little incentive to raise SVT prices as customers could go elsewhere.

The parties added that most customers do not choose an SVT when they change suppliers but opt for cheaper fixed-term tariffs, and that there is no evidence that the merger could have a marketwide effect on SVT pricing.

They also said the CMA relied heavily on data from its 2016 energy market investigation that was now “outdated” given that initiatives by the sector regulator, Ofgem, have since reduced the significance of SVTs.

The panel system

The case put forward by SSE and Npower is a strong one but is also unusual. While it’s not uncommon for parties to disagree with a CMA decision to refer, it’s rare for them to disagree fundamentally with the regulator’s cited theories of harm.

For example, when last year's merger between Just Eat and Hungryhouse went to a phase II review, the parties disagreed with the CMA's decision to refer but did acknowledge the chance to demonstrate that fast-growing rivals Deliveroo and UberEats presented considerably more competitive constraints to the combined group.

By contrast, SSE and Npower have accused the CMA of not considering their arguments properly after concerns about SVT prices were introduced very late state in the initial review.

The companies have been pushing their argument afresh, MLex understands. As is typical for a phase II probe, their case is being assessed by an independent panel of experts at the CMA who will decide whether the merger has or may be expected to result in a substantial lessening of competition.

The panel — which is not bound by the CMA's first-phase guidance — will assess evidence before publishing its draft findings in mid-August. Here it will decide on whether to provisionally block or clear the merger. It could also issue a remedies notice at this stage if required.

The deadline for the panel's final report is Oct. 22.

Potential risks

While the CMA's panel system gives SSE and Npower the opportunity to have their argument considered once more, the road to clearance is far from certain.

In its issues statement, the panel said the identification of a theory of harm does not preclude another theory of harm being floated on the strength of additional evidence.

Also looming in the background are any implications arising from an asset-swap deal between RWE — the parent company of Innogy, which owns Npower — with E.On, which also has a British retail energy business.

The panel could also uphold CMA concerns about SVT prices and require the parties to sell off a number of their SVT customers, though it’s unclear how that might work in practice.

The political nature of the deal, as it centers on the sensitive social issue of energy prices, also cannot be ignored. With the parties having a low market share and the CMA accepting that they aren't close competitors, it might arguably have been cleared at phase I had it not involved consumer energy prices.

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