The brave new world of competition
31 May 1999
Raymond Cohen, partner, Linklaters
Steven Beharrell, senior partner, Coudert Brothers
Robert Lane, partner, Cameron McKenna
The opening up of the UK electricity market has finally arrived.
This will mean competition will be introduced to the UK energy market, making it the first country in the world to do so.
Sector reform and the prospect of challenging and defending incumbents under European Union competition law offer the richest pickings for City lawyers.
But how long will lawyers have to wait to cash in on the influx of competitors into a notoriously closed and impenetrable sector?
Raymond Cohen, corporate partner at Linklaters, says there are still barriers to new market entrants: "The market is tightly held at the moment.
"Because of the barriers to entry and because opportunities for new players are so limited, transactions tend to be on an auction basis, with many partners and conflicts - the seller is in a controlling position."
But he admits there have been some deals: "There has been a lot of snapping up of regional electricity companies. There are hardly any left and most are in private hands."
Cohen says electricity deals are resource-intensive. He led a 30-strong team to advise Edison Mission Energy on its recent acquisition of PowerGen power stations in Yorkshire.
Steven Beharrell, energy and natural resources partner and senior partner at Coudert Brothers, says the UK has been the testing ground or "laboratory" for the liberalisation of the sector: "The real interest is the European-wide impact under the European directive. This aims to push competition regulation back to national authorities. This means there will be much greater use of competition law."
Beharrell says battles reminiscent of those in the telecommunications sector are due to erupt in a more flexible and aggressive competitive market.
And one area he says should see an upturn is in the project financing of power stations. With 30 utilities in the UK compared with Germany's 100 or so, he argues that a big upturn in electricity mergers and acquisitions is unlikely.
But he says it is significant the sector is opening up against a background of industry reassessment. The Reform of Electricity Trading Agreements (RETA) is reviewing the trading structure and will eventually replace the electricity pool with a new trading regime next year.
Beharrell predicts: "There will be big changes to the Electricity Pool in the UK. There will be a different way of selling power."
He agrees with Cohen that the industry has come full circle to its pre-privatisation structure. He says: "The industry's huge reconstruction has reinvented the vertically integrated structure."
However, Robert Lane, energy projects and construction partner at Cameron McKenna, plays down the impact of an open market on City lawyers. He contends that the primary impact of last week's changes will be on consumers rather than lawyers.
Although Lane was involved in the 1990 restructuring of the sector, he says he now plays less of a role in what he calls "the final stage of deregulation".
But he concedes there may be a change in both market structure and perception of the supply industry. He says: "In a wider sense, the opening up has changed perceptions of the electricity sector - distributors are reconsidering their positions. The industry is reassessing its ownership structure of supply. Electricity is the leader of the pack, but gas has already been innovative in how it works."
For the future, it is the nuts and bolts of electricity competition that will be challenged. And while Offer, the electricity regulator, has learned lessons from competition in the gas sector, there is still a long way to go before new market entrants can make their mark.
"The key to competition is metering and data flow," says Lane. "It's a vast task."