Centrica/British Energy (OFT)

The Situation

On 11 May 2009, EDF and Centrica announced that they had reached an agreement whereby Centrica would invest in EDF's nuclear power business in the UK, in particular through the acquisition of a 20% interest in British Energy, concluding two power purchase agreements (PPAs), and by entering into a joint venture with EDF in relation to new nuclear build (NNB) activities in the UK. The transaction was examined by the Office of Fair Trading (OFT), which liaised closely with the Office of the Gas and Electricity Markets (Ofgem) throughout its investigations.

NERA's Role

NERA provided economic analysis and advice to British Energy throughout the UK merger control process. While the OFT's market investigation did not raise any issues in relation to standard unilateral effects (and the effective transfer of 20% of British Energy's nuclear electricity to Centrica in fact resulted in lower concentration in the British power generation/wholesale market, both during peak and during off-peak hours), there were numerous third-party concerns over the impact of the transaction on strategic competition and horizontal coordination, as well as the effects on wholesale market liquidity.

NERA had also advised British Energy during the European Commission's review of the EDF/British Energy merger which was cleared in phase I, subject to remedies.

The Result

After a detailed examination of the nature of the links and information flows between the parties, the OFT concluded that there was no realistic prospect of a substantial lessening of competition (SLC) in terms of coordinated effects or a reduction in strategic competition.

In relation to the vertical theory of harm over liquidity, the OFT applied the "net position" framework of analysis that was adopted by the European Commission in EDF/British Energy, as well as a slightly adjusted approach outlined by Ofgem that takes greater account of the economics of hedging electricity generation and supply to different customer types. Under both empirical methodologies, the OFT concluded that there was no realistic prospect that the transaction would lead to a reduction in the volume of electricity traded in the wholesale market.

The OFT's unconditional clearance decision was announced on 7 August 2009.