AGL's ammunition against the ACCC

The ACCC's flawed assumptions about AGL's MacGen acquisition reducing competition in the NSW energy market may give the retailer plenty of fodder for a potential challenge in the courts.

Thanks to NSW Treasurer Mike Baird, AGL has options with which to respond to the Australian Competition and Consumer Commission’s opposition to its proposed $1.5 billion acquisition of Macquarie Generation.

The ACCC declared its stance on the deal today, saying that it considered an AGL purchase of MacGen would be likely to lead to a substantial lessening of competition in the market for retail supply of electricity in NSW.

When the outcome of the tender for MacGen was announced last month, Baird said AGL’s bid was the only one of the three he had received that exceeded the retention value of the assets to the state. Therefore, if AGL couldn’t win an ACCC clearance, the government would keep the electricity generator.

That means that AGL has time to consider how to respond to the ACCC and, if it decided to fight the commission in court, time to do so without the risk of losing MacGen to another buyer. AGL has, of course, successfully taken the ACCC on in court previously to get clearance for its 2003 acquisition of Victoria’s Loy Yang A power station.

The ACCC’s opposition to the MacGen purchase is founded on the view that an AGL acquisition would be likely to lead to a significant reduction in both hedge market liquidity and the supply of “competitively priced and appropriately customised” hedge contracts to second-tier retailers in NSW.

It said it did not appear likely that the remaining non-aligned generations in NSW -- Delta Coast and Snowy Hydro -- would be able to adequately service the requirements of second-tier retailers that sought to either enter the NSW retail market or grow their existing position.

AGL had proposed an undertaking to address that issue of hedge market liquidity. Along with an existing contract -- MacGen has to supply 900 megawatts of electricity to the Tomago aluminium smelter -- AGL had undertaken to make 500 megawatts of competitively priced hedging products available to the market for a period of a four and half years.

The ACCC had concluded that the undertakings were not capable of addressing its concerns, even though AGL would have to bid 1400 megawatts of capacity at low prices into the national electricity market to ensure that the contract with Tomago and the capacity committed to the undertakings were covered. That’s more than half the capacity of MacGen’s main Bayswater plant and more than 30 per cent of the combined capacity of Bayswater and less reliable Liddell plant.

One of the ACCC’s concerns -- and a peculiar aspect of its reasoning -- is that if AGL were to acquire MacGen, there would be three integrated electricity suppliers in NSW with a combined market share of between 70 per cent and 80 per cent of generation capacity in NSW.

Origin Energy and Energy Australia already have large retail businesses and generation capacity. While AGL has generation capacity in Victoria and South Australia, it is purely a retailer in NSW.

In its earlier “statement of issues”, the ACCC made it clear that the competition issues were confined to the NSW market because retailers rarely entered into hedge contracts in one region within the national electricity market to cover their risk in another. Therefore, AGL’s generators in other states shouldn’t be an issue.

There are two problems with the ACCC’s stance on AGL. One is that if it acquired MacGen and the natural hedge its capacity would provide for its retail business, it would be in a similar position to Origin and Energy Australia and in a better position to compete with them.

Because it already has the retail customer management systems in place and is able to offer dual-fuel options to customers -- it has a significantly lower cost-to-serve than other non-integrated retailers -- AGL would be better-placed than any other second-tier retailer to compete with the two big integrated retailers.

The other flaw in the ACCC’s reasoning is that it has already cleared one independent retailer, ERM Power, to acquire MacGen. However, it opposes an acquisition by another, AGL, which fits its definition of an independent retailer in NSW. Indeed, relative to Origin and Energy Australia, AGL is a second-tier electricity retailer in NSW,

AGL does have a bigger NSW market share than ERM (about 16 per cent to about 9 per cent). However, it is difficult to see why an acquisition by an ERM or another second tier retailer (without any undertakings to supply hedge products) would have much different competitive outcomes than an acquisition by AGL.

Given that other second-tier retailers would need to invest heavily to build the customer management systems to serve a mass retail market (ERM’s business in NSW has been built mainly on commercial customers), it is likely they would be less competitive with Origin and Energy Australia than AGL.

If AGL were to decide to challenge the commission in the courts, it would inevitably contrast the ACCC’s treatment of ERM with its own. It would argue that its acquisition of MacGen would, rather than substantially lessening competition in the NSW retail electricity market, substantially increase it relative to both the commission’s preferred outcome and the status quo.

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