Powergen to bid for East Midlands

POWERGEN will today unveil an agreed pounds 1.9bn bid for the regional supply company East Midlands Electricity along with plans to sell off a fifth of its generating capacity.

But the generator will also warn that if the takeover of East Midlands is blocked by a referral to the Monopolies and Mergers Commission, it will refuse to buy any more British coal, putting miners' jobs in jeopardy.

PowerGen's previous attempt to buy a regional electricity company, Midlands Electricity, was thwarted by the last government. But it is optimistic that the purchase of East Midlands from the US utility Dominion Resources will escape an MMC referral if PowerGen reduces its generating operations.

The sale of one of PowerGen's five coal stations - probably the 2,000- megwatt Ferrybridge plant in Yorkshire - and the disposal of its upstream gas interests could raise about pounds 1.5bn towards the cost of buying East Midlands.

PowerGen will argue that the deal should not face regulatory obstacles because the generating market has beome more competitive since its failed Midlands Electricity bid, while the offer to dispose of more coal-fired capacity will open it up still further.

If the deal is referred, PowerGen will hold back from signing any new contracts with RJB Mining. "If you don't know what the shape of the business is going to be, then the last thing you would do is go out and buy a lot more coal," said one source.

The indications from the electricity regulator, Professor Stephen Littlechild, are that he wants PowerGen and National Power to dispose of substantially more than 20 per cent of their capacity in order to create a truly competitive generating market. He wants to see three or four new coal-fired operators given the opportunity to enter the market.

The two generators account for just under half Britain's power station capacity and set prices in the electricity pool 70 per cent of the time.

Selling off Ferrybridge would reduce PowerGen's generating portfolio to 12,000 megawatts of which about 8,000 would be coal-fired. National Power, which is opposing government attempts to make it sell off any stations, has about 16,000 megawatts of capacity.

The next biggest operator of coal-fired stations is Eastern, which bought 6,000 megwatts of capacity from National Power and PowerGen three years ago. Eastern is not likely to be asked to dispose of any stations.

East Midlands, which Dominion acquired for pounds 1.7bn in 1996, is the country's third largest supply company with 2.3 million customers.

PowerGen will argue that the acquisition will allow it to hedge its generating output, provide a platform to attack the domestic market and give it the expertise in distribution necessary for its strategy of overseas expansion.

The group is separately negotiating a pounds 10bn merger with the Texas-based utility, Houston Industries, although this deal is still thought to be several weeks away from completion.