Policy background Part 7: Market Reform and Consumer Protection Mergers of energy network enterprises
Energy network enterprises are regional monopolies, meaning that each serves different areas of Great Britain exclusively. As such, there is no direct competition between them. The energy regulator, Ofgem 15 , licenses energy network enterprises operating in Great Britain and sets their price controls through ‘comparative benchmarking’, which involves comparing data from all energy network enterprises.
	The price control is the main method that Ofgem uses to regulate the amount that energy network enterprises can charge suppliers, who in turn pass the costs on to consumers. When network ownership is consolidated into fewer enterprises through mergers and acquisitions there is a potential detriment to Ofgem’s ability to carry out effective comparative benchmarking when setting the price control, as there is a reduction in independent entities that can be compared. For example, if the number of independent network enterprises is reduced, then this may reduce the diversity of approaches and data sets available, impacting the way that Ofgem sets efficiencies and requires service quality improvements.
	Section 204 and Schedule 16 amend the Enterprise Act 2002 to enable the CMA to investigate energy network enterprise mergers in Great Britain effectively. The legislation will mean that, where the energy network enterprise acquired has a GB turnover of over £70 million, and it is merging with another energy network enterprise that holds the same type of licence, then the CMA must refer the merger to a CMA inquiry group, comprised of CMA panel members, for investigation if conditions are met. The main condition is that the merger has substantially prejudiced, or may substantially prejudice, Ofgem’s ability to carry out its functions to make comparisons when setting price controls. The CMA may decide not to refer if there is a consumer benefit arising from the merger that outweighs this prejudice or, for mergers that have not yet completed, the merger is not sufficiently far advanced or sufficiently likely to proceed to justify the reference.
	Ultimately, if the CMA group concludes that there has been or may be a prejudicial outcome, the CMA will be required to take action to remedy, mitigate or prevent the prejudice and any adverse impacts which have resulted or may result from the merger. In this instance, the CMA will be empowered to place restrictions on the merger, up to and including preventing it from taking place, if this action is reasonable and practicable. The CMA already has these remedial options under the existing merger regime (which assesses if a merger has or may result in a substantial lessening of competition), but the CMA cannot access/use these remedial options effectively for energy networks due to their unique nature as regional monopolies that do not compete for market share. There are opportunities for the merging enterprises to offer undertakings in lieu of a referral to investigation by a CMA group; for example, the enterprises could offer to guarantee no price impacts to consumers for an agreed period, or ring fence parts of the business to protect operational independence.