| 14/03 |
8 May 2003 |
CENTRICA/DYNEGY MERGER INQUIRY: REMEDIES STATEMENT
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The Competition Commission (the Commission)
has sent a remedies letter, on a hypothetical basis, to the main
party, Centrica plc, in its inquiry into Centrica's acquisition of
Dynegy Storage Ltd and Dynegy Onshore Processing UK Ltd. |
The Commission has not yet reached conclusions
on any aspect of the inquiry, in particular as to whether the acquisition
operates, or may be expected to operate, against the public interest.
If it does reach an adverse finding on the merger, however, the Commission
will wish to make recommendations to the Secretary of State as to
measures which would remedy the adverse effects. This statement concerning
possible remedies is being made public in order to enable interested
parties to comment on the likely effectiveness and practicality of
the measures envisaged. Any such comments should be sent to the Commission
by Thursday 15 May (see details at the end of the statement). |
The possible remedies are put forward on
the hypothesis that the Commission might conclude that the merger
is against the public interest because of possible adverse effects
on competition of a horizontal and/or vertical nature, as postulated
in the issues statement published on 4 April. |
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Behavioural remedies |
Provision of flexibility to the market
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1. On the hypothesis that the merger, by
giving Centrica control of the Rough gas storage facility and the
Easington terminal, has given Centrica market power (or enhanced
previously existing market power) in the market for flexible gas
and that its control of other sources of flexible gas may lead to
an incentive to withhold flexibility from the market, either by not
supplying existing capacity or by not developing capacity at Rough
where this would be value-enhancing for the asset alone, the Commission
wishes to explore the following possible remedies: |
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| (a) |
That Centrica would give an undertaking
on the following lines: |
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i. |
that the current nominal capacity of Rough
(ie 455GWh/day deliverability, 30300 GWh space, 160GWh/day injectibility)
would continue to be sold as 455 million SBUs |
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ii. |
that a specified minimum percentage (perhaps
80%) of nominal capacity would be made available to third parties.
Centrica would be able to reserve the remainder for its own use -
the level would be set somewhat below Centrica's normal usage of
Rough in order to give it an incentive to expand Rough's capacity.
Centrica would not participate in any primary sales processes but
would be able to purchase any additional requirements in the secondary
market. |
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iii. |
The nominal capacity could be reviewed
after some time - perhaps five years - in order to ensure that additional
capacity was made available to the market after a reasonable period.
In the meantime any such increases in capacity could be reserved
for Centrica's use. |
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| (b) |
That Centrica would undertake
to operate robust 'use it or lose it' provisions in relation to all
Rough capacity. |
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| (c) |
That Centrica would undertake
not to withhold flexibility from the market through its control of
the output of the Morecambe and Sean fields and under its other depletion
contracts with other UKCS producers - this may be achieved by a commitment
to nominate maximum take from certain fields on particular days according
to the demand or forward price in the market. The Group would also
like to examine the possibility of a commitment on Centrica's use
of its own capacity on the Bacton interconnector. |
Non-discrimination between customers |
2. On the hypothesis that the merger might
enable Centrica to discriminate between customers of Centrica Storage
Limited (CSL), which operates the Rough facility, in order to gain
a competitive advantage in the downstream market, the Commission
wishes to explore the following possible remedies: |
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| (a) |
That Centrica would undertake
to sell capacity on non-discriminatory terms, perhaps by reference
to the standard bundled units defined in paragraph 1(a)(i). |
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|
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| (b) |
That Centrica would undertake
to sell capacity in a particular manner. The method of sale would
need to ensure that Centrica could not manipulate the prices for
Rough. The Commission wishes to explore a variety of approaches,
including combinations of: |
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Annual or quarterly auctions |
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Auctions of the whole or a percentage of capacity |
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Different procedures for auctions |
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Freedom to sell bilaterally, backed by
an auction (with no reserve price) of any remaining capacity 30 days
before the start of the storage year |
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| (c) |
As an alternative to (b),
that Centrica would control the method of sale, but publish up-to-date
prices on offer and the prices agreed for individual sales. |
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| (d) |
That CSL should retain the standard Storage
Services Contract (SSC), and alter its terms only with the agreement
of a majority of users. |
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| (e) |
As an alternative to (d), CSL would regularly
review with all users the terms of services offered, with a view
to agreeing amendments to the SSC; and/or developing a choice of
contracts available to all; and/or formulating proposals relating
to other aspects of these undertakings. |
Information available to the market |
3. On the hypothesis that Centrica might
gain an unfair advantage from the use of operational and/or customer
information concerning Rough and Easington; and/or that Centrica
might limit the information available to other companies that would
enable them to operate efficiently within the flexibility and downstream
markets, the Commission wishes to explore possible remedies that
might involve: |
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| (a) |
a strict legal, financial and physical
separation between Centrica's storage operations and all other parts
of its business, perhaps up to main Board level |
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| (b) |
an undertaking from Centrica to ensure that
no privileged information was passed from the storage operation to
other parts of the group, including a code of conduct for staff that
highlighted that breach of the code was a disciplinary matter that
could affect employment |
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| (c) |
in addition to (a) and (b), that there
should be reports to Centrica's Audit Committee, which in turn would
submit a regular report to OFT and Ofgem on: |
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the arrangements for ensuring separation and protection
of privileged information |
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the operating plan for CSL |
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compliance with the full set of remedies |
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| (d) |
publication of the annual audited financial
results of CSL, with disclosure of how Centrica paid for its own
capacity use at Rough |
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| (e) |
an undertaking from Centrica that CSL would
obtain its own shipper's licence (or that CSL would use a shipper
independent of Centrica) to conduct trades necessary for operational
purposes associated with the management of the storage facility -
but would be prohibited from engaging in any other trades; this would
replace the present situation under which CSL engages the trading
arms of the Centrica group to conduct trades on its behalf |
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| (f) |
an undertaking from Centrica to make any
disclosure relating to the operation of Rough to all market players
simultaneously |
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| (g) |
an undertaking that Centrica would disclose
more information on the operation of Rough, such as |
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daily level of gas in store |
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within-day, perhaps hourly, injection / withdrawal
quantities |
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operational limitations |
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| (h) |
an undertaking that Centrica would disclose
the level of capacity at Rough held by it for each storage year |
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Certainty provided to competitors and
potential entrants |
4. On the hypothesis that Centrica's competitors
and potential entrants to the market may face additional risks and
uncertainty stemming from Centrica's enhanced position in the market
for gas flexibility, the Commission wishes to explore the following
possible remedies (in addition to 1 (a) and (b)): |
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|
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| (a) |
an undertaking from Centrica
that a specified minimum proportion of capacity should be offered
on staggered long-term contracts and a specified minimum to be offered
on annual contracts. For example, Centrica would offer at least 50%
of capacity for terms of between 3 and 7 years, and reserve at least
20% for annual contracts. The purpose of such an undertaking would
be to offer customer choice, ensure that new entrants were not excluded
and facilitate traders' involvement in the market, and to ensure
that control of a significant proportion of long-term Rough flexibility
was controlled by parties other than Centrica. The Commission has
provisionally decided that prohibiting indexed contracts would not
be appropriate as this would reduce customer choice, but it would
like to explore the possibility of an undertaking from Centrica to
offer both fixed and indexed long-term contracts. |
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|
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| (b) |
an undertaking from Centrica
to facilitate the efficient operation and development of a secondary
market in Rough capacity, perhaps by: |
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i. |
ensuring injectibility, space and deliverability rights
are defined in ways to allow them to be traded separately |
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ii. |
maintaining arrangements that allow for the transfer
(not unreasonably restricted) of all or part of the rights purchased
in the primary market |
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iii. |
publishing regularly updated information on prices offered
and attained in the primary market. |
5. The Commission is inclined to the view
that it would not be appropriate to prohibit Centrica from buying
capacity in the secondary market, although some measure to provide
reassurance for competitors may be appropriate-see 3(h). |
Duration of any undertakings |
6. The Commission's provisional view is
that the duration of any package of undertakings should not be limited
to a specified period but that Centrica could request that they be
reviewed if it could demonstrate that there has been a material change
in the circumstances which had led to the undertakings being put
in place. |
Structural remedy |
|
7. The Commission also wishes to explore whether complete divestment
of the assets acquired would be a more appropriate response to
any combination of the hypothetical adverse effects that the Commission
has identified, particularly if it appeared that the extent of
the undertakings needed to address any adverse effects would itself
have a negative effect on the market.
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8. The Commission has provisionally decided
that partial divestment, so that the assets were operated as a joint
venture, would not be a suitable remedy because of the complexity
and intrusiveness of the provisions that would be needed to ensure
that such a remedy was effective in addressing the possible adverse
effects of the merger. |
Responses |
9. Comments should be sent to the Inquiry
Secretary (Room 613), Competition Commission, New Court, 48 Carey
Street, London WC2A 2JT (telephone 020-7271-0282, fax 020-7271-0367),
e-mail centrica@competition-commission.gsi.gov.uk by Thursday 15
May. |
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Notes to Editors: |
| 1. |
The reference concerning the completed acquisition by Centrica
Plc of Dynegy Storage Ltd and Dynegy Onshore Processing UK Ltd
was made under the Fair Trading Act 1973 on 25 February 2003 (see
DTI press notice P/2003/115).
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| 2. |
The issues statement for the inquiry was set out in the Commission's
News Release 10/03, dated 4 April 2003.
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| 3. |
The inquiry is being chaired
by Denise Kingsmill, a Deputy Chairman of the Commission. The other
members of the Group conducting the inquiry are Dr John Collings,
Professor Bruce Lyons and Nigel Macdonald. |
| 4. |
Further information can be
obtained from the Commission's website http://www.competition-commission.org.uk/inquiries/cent.htm |
| 5. |
Enquiries should be directed
to: Francis Royle, Press Officer, tel: 020 7271 0242 |
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