AGL’s victory over the Australian Competition and Consumer Commission in its pursuit of Macquarie Generation would appear to have been resounding and a major and embarrassing setback for the commission. It isn’t, of course, the first time that AGL has taken on the commission and won.
The ACCC had vigorously opposed AGL’s planned $1.5 billion acquisition of the NSW government-owned generator, primarily on the grounds that it would be likely to lead to a significant reduction in the liquidity and availability of competitively priced customised hedge products for second-tier electricity retailers.
That was despite AGL offering an undertaking to make at least 500 megawatts of competitively-priced hedging products available to the market for at least four and a half years which, with MacGen’s contract to supply power to the Tomago smelter, meant more than half the capacity of MacGen’s main plant would have been bid into the market to ensure its contractual obligations were met.
The ACCC’s opposition to AGL as the buyer of MacGen was in contrast to its clearance of a rival bidder, ERM Power which, like AGL, is purely a retailer of electricity in NSW; and the reality that the two biggest electricity groups in NSW -- Origin Energy and Energy Australia -- are already fully vertically integrated.
The tribunal’s finding that the acquisition would not be likely to result in a significant detriment to the ability of independent retailers to compete in the NSW market and, more particularly, that it would produce a “vigorous competitive market” is a direct refutation of the ACCC position.
That position was restated by its chairman, Rod Sims, only this week when he said in a speech to a CEDA conference that if AGL acquired MacGen consumers would pay more for electricity and be offered less choice.
He said electricity companies had a strong commercial motive to have all players vertically integrated because if the retailers could tie up most of the generation they could create a stable oligopoly with high entry barriers, higher prices and higher returns.
He didn’t say that the primary reason retailers acquire generating capacity is to hedge their exposure to volatile wholesale electricity prices.
AGL, which has a far smaller share of the retail electricity market in NSW than Origin or Energy Australia, would be, one would have thought, a stronger competitor to them if it had the generating capacity to hedge a larger share of that market.
Certainly, given that it already has the customer relationship management systems in place for its gas business, it ought to have the capacity to be more competitive than any other independent retailer that acquired MacGen.
AGL went to the tribunal because it wanted to expedite the decision-making process rather than risk being tied up in the courts. That meant it had to argue the case on public benefit grounds.
The tribunal’s finding that the acquisition would produce a vigorous competitive market means the other leg of the public benefit argument -- the net $1 billion that will flow into the NSW government’s “Restart NSW” infrastructure fund -- wasn’t the decisive element of its case.
AGL’s ability to challenge the ACCC position in circumstances when most companies would walk away in the face of its opposition was aided by the fact that its offer was the only one the NSW government saw as acceptable – there was little risk of the asset being sold to someone else and therefore the time to mount a challenge.
The fact that AGL had previously taken on the ACCC in court in similar circumstances – during its 2003 acquisition of a strategic interest in Victoria’s Loy Yang A power station – and won, would also have buttressed its confidence.
Now that AGL has successfully challenged the ACCC in front of the Competition Tribunal and got a relatively quick result – it launched the proceeds towards the end of March and therefore has got a decision in three months – it may well encourage others. The ACCC’s ability to tie up transactions indefinitely, which creates risks and uncertainty and market exposures, tends to deter challenges.
AGL’s was the first completed direct approach to the tribunal (Murray Goulburn withdrew its action after Warrnambool Cheese and Butter fell to Canada’s Saputo before it could be completed).
If the ACCC has its way, it could be the last. In its submission to the Harper Review of competition policy that it lodged today it argues that companies shouldn’t be able to go to the tribunal directly but rather that it should decide merger authorisations, with companies having the right to then appeal that decision to the tribunal.
Given what happened at the tribunal today, one can understand why the commission might want to remove the tribunal as an alternative first port of call for those seeking to make potentially sensitive acquisitions and wanting to avoid being entangled indefinitely in the ACCC’s processes or in the courts.
Had it not been for the tribunal option AGL might well have abandoned the MacGen acquisition and left the generator with the NSW taxpayer.
Instead the tribunal produced a decision that, quite frankly, accords with the logic of the NSW electricity market and the most competitive and financially robust model available to it in a volatile sector -- and at a time of changing and potentially value-destroying patterns of electricity generation and demand.