Global Policy Forum

By Terry Macalister

The two monopolies which carry wholesale gas and electricity around Britain have proposed a merger to ward off competition from mainland Europe and further their ambitions in the US.

National Grid Group, which operates the electricity power pylons, has made a £6.3bn agreed offer for Lattice, which runs the nation's gas pipes under the Transco banner, to form a new "national champion". The combined firm, worth £15bn, would provide a defensive bulwark against utility predators such as RWE and Gaz de France but the deal is still subject to regulatory approval.

National Grid and Lattice have promised to make £100m a year of savings by combining offices and backroom services, while selling off local gas distribution networks. The two firms downplayed competition issues or opposition from government - which holds golden shares in both - but consumer groups said customers should gain from any benefits rather than just shareholders, and one lawyer questioned whether it might be challenged on public interest grounds. The deal was well-received in the City with Lattice shares up 12% and NGG up 3%, with few expecting a third party to table a rival bid.

Lattice has been seen as vulnerable to a bid, having been without a chief executive for months and just having accepted a punitive price regime from regulator Ofgem which threatens dividend growth.

NGG is happy to promote a positive story at a time when its Latin American business has suffered major setbacks and its remaining stake in telecoms group Energis has lost much of its value. The electricity provider, which has made a number of recent acquisitions of similar suppliers on the US east coast, is offering 0.375 of its shares for each Lattice share.

The senior directors of both companies gave an upbeat message at the announcement of the merger, which will be owned 57.3% by NGG and 42.7% by Lattice and called National Grid Transco. Roger Urwin, the chief executive of NGG and proposed chief executive of the new grouping, denied the tie-up was defensive, insisting it was motivated by growth. "We shall deploy the combined resources and financial capacity of National Grid Transco to take advantage of the opportunities in the liberalising energy markets abroad, in particular extending National Grid's successful US strategy," he said.

The companies said both electricity and gas businesses were separately regulated and early talks with Ofgem led them to be "confident" the deal would be cleared by autumn. "In principle we are not against it. But it is early days and we will have to look at it in a lot more detail and go out to consultation," an Ofgem spokesman said later.

Alistair Gorrie, a competition expert at law firm Coudert Brothers, raised the prospect that the combination of two such utilities might raise regulatory concerns on "public interest" grounds.

Consumer group Energy Watch said it supported moves towards greater efficiency but wanted everyone to benefit. "We will be asking Ofgem to look again at current price controls."

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