AGL takes it to a higher power

The competition watchdog’s decision against AGL's bid for MacGen has significant implications for the future of the energy industry and couldn’t be left unchallenged.

The NSW Government’s decision to withdraw its Macquarie Generation electricity generators from the market gave AGL the option of contesting the Australian Competition and Consumer Commission’s opposition to its proposed $1.5 billion acquisition of those generators. Today it exercised it.

AGL has lodged an application with the Australian Competition Tribunal for authorisation to acquire the MacGen assets, with its chief executive, Michael Fraser, saying the ACCC decision had significant implications for the future of the energy industry and couldn’t be left unchallenged.

AGL could have made that challenge in the courts but felt the more defined and probably shorter timeframe for a Tribunal decision was a commercially more sensible approach. The Tribunal has three months in which to consider an application but can extend that by a further three months if it decides it is necessary.

The NSW Treasurer, Mike Baird, made the challenge possible last month when he said AGL’s bid was the only one he had received that was above the retention value of MacGen to the state. If AGL couldn’t obtain an ACCC clearance, he said, the assets would be withdrawn from the market.

That decision gives AGL the time to challenge the ACCC’s opposition to the purchase, which would enable AGL -- currently purely a retailer of electricity in NSW -- to emulate Origin Energy and Energy Australia as an integrated electricity business in the state and therefore to create a physical hedge against its retail business’ electricity requirements.

The ACCC opposition was predicated on the deal being likely to lead to a significant reduction in the liquidity and availability of competitively priced and appropriately customised hedge products available to second-tier retailers in NSW.

That was despite AGL proffering an undertaking to make 500 megawatts of competitively-priced hedging products available to the market for at least four and a half years. Between those products and an existing contract to supply power to the Tomago aluminium smelter, AGL would have needed to bid more than half the capacity of the main Bayswater plant into the market to ensure its contractual obligations and the undertakings were met.

It was also despite the fact the ACCC cleared a rival MacGen bidder, ERM Power. Like AGL, albeit with a smaller market share, ERM is purely a retailer of electricity in NSW. Had ERM acquired MacGen it would have become, like Origin and Energy Australia, an integrated business in NSW and AGL would have been relegated to ‘’second tier’’ status.

It is difficult to see how the differences in market share alone -- AGL’s 16 per cent to ERM’s nine per cent -- would lead to the conclusion they should be treated differently or that AGL should be denied the ability to replicate the existing Origin and Energy Australia positions and the ability to compete more strenuously against them.

AGL, because it has the mass market customer management systems and platforms in place, would have a lower cost-to-serve than any other second-tier retailer and therefore, with access to low-cost generation to balance its exposure to electricity prices, ought to be better able to compete with the integrated businesses than any other player.

AGL will now be able to gets its day, not in court (where it has winning form against the ACCC from its 2003 action to overturn the commission’s opposition to its proposed acquisition of the Loy Yang A power station in Victoria) but before the tribunal.

One suspects the ACCC’s differing treatment of ERM, and AGL’s conviction it would have a much greater ability to compete with the integrated businesses if it acquired MacGen, will be among the issues that will get an airing.