SUMMARY OF PACIFICORP AND THE ENERGY
GROUP PLC: A REPORT ON THE PROPOSED ACQUISITION
On 1 August 1997 the Secretary
of State for Trade and Industry (the Secretary of State) asked us (see
Appendix 1.1) to investigate and report on the proposed acquisition by
PacifiCorp of The Energy Group plc (TEG). We were also asked to examine
whether there was already in existence a merger between PacifiCorp and
TEG: but we found this not to be the case.
The PacifiCorp group is an electricity utility which
operates primarily in the western USA and in Victoria, Australia. TEG
is the parent company of Eastern Group plc (Eastern Group), whose subsidiary
Eastern Electricity plc (Eastern Electricity) distributes electricity
in the east of England, supplies electricity in that area and elsewhere
in the UK and is the fourth largest generator of electricity in the UK.
PacifiCorp currently has no activities in the UK and the merger does
not have any direct effect on competition in the UK.
Eastern would be the eighth regional electricity company
(REC) to be owned by a US parent company, but we saw no reason to expect
adverse effects to result from foreign ownership in itself. Concern was
expressed to us about the effect of the merger on the availability of
information necessary for the effective regulation of the licensed activities
of Eastern Electricity, but we found the existing provisions of Eastern
Electricity's licence sufficient to ensure availability of adequate information
to the Director General of Electricity Supply (DGES). There was also
concern about the extent to which information about Eastern Electricity
would be publicly available: but we concluded that such problems did
not arise from the merger and could be appropriately addressed elsewhere,
for example in the interdepartmental review of utility regulation currently
being carried out.
Our main area of concern was the effect of the intended
financial arrangements for the acquisition, which would be financed to
a large extent by borrowing. The higher the level of gearing (the ratio
of debt to debt plus equity), the greater the likelihood of financial
pressures on a firm in servicing debt in the event of adverse economic
conditions. The gearing of Eastern Electricity itself would not be increased
by the merger, but Eastern Group's new holding company - PacifiCorp Acquisitions
- would initially be almost entirely debt financed, and would rely heavily
on the dividends paid to it from Eastern Group to service that debt.
Although we do not expect financial difficulties to arise, we believe
that, in the absence of adequate controls, the high level of gearing
resulting from the merger would give rise to a significant risk of financial
pressure on the holding companies of Eastern Electricity, potentially
leading to a requirement for higher cash flows from Eastern Electricity
than would otherwise be the case, and to under-investment, poorer service
standards and/or higher prices for electricity in the longer term as
a consequence.
However, Eastern Electricity's existing licence conditions
include a number of provisions designed to `ring-fence' its licensed
activities from those of the group of which it is a member, and to ensure
that it has adequate financial resources to undertake these activities.
In our view, the existing controls, which include the provisions of the
Electricity Act 1989 (Electricity Act) subsuming the enforcement powers
of the DGES, and Eastern Electricity's licence, together with licence
amendments previously agreed in principle between PacifiCorp and the
DGES, are sufficient to address the risk that Eastern Electricity would
be adversely affected by any such financial pressures. The DGES should
therefore be in a position to ensure that investment and service standards
can be maintained, without higher prices resulting from the merger.
We have therefore concluded that the proposed merger
may not be expected to operate against the public interest.
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