EN Case No COMP/JV.36 - TXU EUROPE / EDF- LONDON INVESTMENTS Only the English text is available and authentic. REGULATION (EEC) No 4064/89 MERGER PROCEDURE Article 6(1)(b) NON-OPPOSITION Date: 03/02/2000 Also available in the CELEX database Document No 300J0036 Office for Official Publications of the European Communities L-2985 Luxembourg COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, 3rd February 2000 In the published version of this decision, some information has been omitted pursuant to Article PUBLIC VERSION 17(2) of Council Regulation (EEC) No 4064/89 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus […]. Where possible the information MERGER PROCEDURE omitted has been replaced by ranges of figures or a ARTICLE 6(1)(b) DECISION general description. To the notifying parties Dear Sirs, Subject: COMP/JV.36 – TXU Europe/EDF London Investments Notification of 4th January 2000 pursuant to Article 4 of Council Regulation No 4064/89 1. On 04.01.2000, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 4064/89 (‘the Merger Regulation’) by which the undertakings TXU Europe Group plc and EDF London Investments plc intend to acquire joint control of a newly created joint venture company (‘the JV’) within the meaning of the Merger Regulation. 2. After examination of the notification, the Commission has concluded that the notified operation falls within the scope of the Merger Regulation and does not raise serious doubts as to its compatibility with the Common Market and with the EEA Agreement. I. THE PARTIES’ ACTIVITIES AND THE OPERATION 3. TXU Europe Group plc (‘TXU Europe’) is a wholly owned subsidiary of TXU Company (‘TXU’), an American energy company. TXU and its subsidiaries are referred to as the ‘TXU Group’. The principal activities of TXU Europe are the generation and distribution of electricity, energy trading and electricity and natural gas marketing. It operates primarily in the UK, where through its subsidiary TXU Europe Power, it generates electricity, and has interests in ten power stations in England. In addition, Eastern Electricity plc (‘Eastern’), a subsidiary of TXU Europe, is one of the twelve Public Electricity Suppliers (‘PES’) operating in England and Wales. Eastern’s Rue de la Loi 200, B-1049 Bruxelles/Wetstraat 200, B-1049 Brussel - Belgium Telephone: exchange 299.11.11 Telex: COMEU B 21877. Telegraphic address: COMEUR Brussels. principal activities are the distribution of electricity in Norfolk, Suffolk, Bedfordshire, Essex, Cambridgeshire, Hertfordshire, parts of Oxfordshire, Buckinghamshire and North London and the supply of electricity to customers in England and Wales. 4. EDF London Investments (‘EDFLI’) mainly distributes electricity in the London area and supplies electricity in England and Wales through its wholly owned subsidiary London Electricity plc (‘LE’), one of the twelve PES operating in England and Wales1. It also owns the electricity supply business acquired from South Western Electricity plc, one of the twelve PES operating in England and Wales2. Additionally, EDFLI has interests in UK power generation, and operates a number of private distribution networks, supplies gas to end users and carries out electrical contracting work in the UK. EDFLI is ultimately controlled by Electricité de France (‘EDF’), a French wholly state-owned group, whose principal activity is the generation, transmission, distribution and supply of electricity in France. EDF has operations in Italy, Portugal, Sweden and Spain, and supplies electricity to the UK. 5. The JV, the name of which still has to be found, will provide utility network asset management and operation services to utility network asset owners. On completion of the transaction, TXU Europe and EDFLI will transfer to the JV assets previously employed by each in maintaining, managing and operating their own distribution networks. The JV will be established as a limited liability company under English law, […]3. 6. Each parent will, however, retain ownership of its distribution network equipment, i.e. the cables, switchgear, transformers and other associated assets which enable the distribution of electricity. Additionally, each parent will retain its PES licence and continue to have responsibility for carrying out all obligations under it. In particular, meter provision, meter maintenance services, registration services, and billing, connection charging policy (including the right to determine independently the charges for connection to and use of its own network) and the relationships with electricity suppliers will remain separate of the JV and the responsibility of the two parents. The supply businesses of the parents will also remain separate of the JV. 7. From the date of its establishment, the JV will provide services to TXU Europe and EDFLI under the terms of two […] years Network Services Agreement, entered into with each party individually. The JV will be entitled to an annual fee, agreed in advanced and calculated on the basis of predefined criteria. In addition, the JV will also provide services in respect of private networks owned or leased by either the TXU and EDF group in the UK, with the exception of the private networks leased by EDFLI at Heathrow, Gatwick and Stanstead airports. The JV company will, however, be able to bid to provide network asset management and operation services when the airport contracts fall due for renewal. 8. The parties view the emergence of a market for network asset management and operation services as a response to regulatory pressure. Utility networks in the UK are 1 See Commission Decision of 27 January 1999, case IV/M.1346, EDF/London Electricity. 2 See Commission Decision of 19 July 1999, case IV/M.1606, EDF/South Western Electricity. 3 Business secrets 2 regulated by Incentive regulation. Under this approach, the regulator limits the maximum volume of revenue utility networks can earn over a given period (usually five years). Increases in revenues are limited to the Retail Price Index ("RPI") (essentially inflation), less some reductions to reflect expected increases in efficiency. This system aims at providing economic incentives to network owners to outperform the price control during the period. 9. In the electricity sector, PES licence holders, upon proposal of Director General of Electricity Supply (‘DGES’), have accepted an average cut of 23.4% in the maximum distribution network revenues for the first year of the next five year control period, which is due to start on 1 April 2000. In the remaining four years, revenues will be reduced by RPI-3%. Expenditure on asset management and operation is a factor in the price controls imposed by DGES. Companies are also required to improve the quality of electricity supply. Moreover, DGES intends to introduce from April 2002 an additional quality incentive programme under which companies failing to meet standards will be penalised by up to two per cent of their revenues. 10. This regulatory framework has created a strong pressure on the PES licence holders to realise significant efficiency savings and, according to the parties, a favourable environment for the establishment of the JV. The merger of the parties’ respective network asset management and operation activities is designed to enable the parties to achieve the greater efficiencies in network management and operation as required by DGES. The parties consider that economies of scale are a factor in achieving efficiency improvements. Economies arise from: sharing of best practice, better management of workflow, the spreading of fixed cost by obtaining further operations and management contracts, avoidance of duplication, the merger of procurement, control, call handling and development functions. 11. Furthermore, the parties submit that asset management and operation are optimised if planned for the whole duration of a price control period. Over this time, planning can provide savings through the timing of investment, scheduling of maintenance and proper structuring of operations. […]. 12. The parties submit that the two […] year contracts with Eastern and LE will enable the JV to establish itself on the market and give it credibility to raise finance. Thus, they consider these contracts to be essential in order to guarantee the development of the JV during an initial start-up period of […]. Additionally, the JV is intended to expand its activities by obtaining contracts with other utility network asset owners in the electricity, gas and water industries. 13. The parties intend the JV to be completed by 1 April 2000. II. COMMUNITY DIMENSION 14. EDF Group and TXU Group have a combined aggregate world-wide turnover in excess of EUR 5,000 million (EDF, EUR 29,309.35 million; and TXU, EUR 15,469.13 million). Each of them has a Community-wide turnover in excess of EUR 250 million (EDF, EUR 27,949.21 million; and TXU, EUR 5,467.33 million), but they do not achieve more than two-thirds of their aggregate Community-wide turnover within one 3 and the same Member State4. The notified operation therefore has a Community dimension. III. CONCENTRATION Joint control 15. The JV company will be owned jointly on a 50/50 basis by TXU Europe and EDFLI. Each party will have the right to appoint two directors to the joint venture company’s board, which will in addition have a chairman appointed by agreement between both parties. The Chairman is not entitled to a casting vote. Both parties must reach agreement on major decisions affecting the joint venture company, such as, inter alia, changes in the nature or scope of the business, set up a subsidiary, acquire shares in a company, borrow money in excess of £1,000,000, or distribute profits otherwise than in accordance with the JV’s dividend policy. Additionally, the JV's business plan must be approved by both parents. 16. Accordingly, neither parent company will be in a position to determine strategic decisions of the JV without agreement of the other.