Sparks could fly in the AGL-MacGen game

AGL has an obvious strategic need to generate capacity to provide a hedge for its retail business. How it responds to the ACCC's decision on its MacGen bid will reveal the importance of the acquisition.

It wouldn’t have come as a shock to AGL that the Australian Competition and Consumer Commission has “issues” with its proposed acquisition of Macquarie Generation. The questions for AGL are whether those issues are sufficient to knock it out of the bidding for MacGen; whether it is in a position to win the auction; and, if so, whether it considers the NSW generator sufficiently strategic to take on the ACCC.

AGL is one of three bidders for MacGen, along with ERM Power and, it has been reported, Japan’s Marubeni. Given it has a big retail gas business in NSW and is organically building a retail electricity business, it has the most obvious strategic need out of the three companies for generating capacity to provide a hedge for its retail business.

It does, however, have its Loy Yang A power station in Victoria and a permit to build a gas peaking plant in NSW as fall-back options. It also has the knowledge that with a fall in electricity demand, there ought to be excess generating capacity on the east coast to draw on.

For it to fight the ACCC – as it did in 2003, when it successfully took it to the Federal Court after the commission tried to block the Loy Yang A acquisition – it would need to be the highest bidder for MacGen. The fact that the ACCC, at the 11th hour, delayed stating its preliminary view of an AGL acquisition by 24 hours – the day after bids were tabled – might indicate that the commission gained an insight into the initial outcome of the tender process. Therefore, its statement of issues today is an indicator that AGL emerged as the front-runner for MacGen.

Another core pre-requisite for any challenge, of course, would be for the ACCC’s “issues” with the proposed acquisition to harden into a final position of clear opposition to the deal. The commission said today it would make a final decision on March 4.

The issues the commission has with the proposed acquisition by AGL of MacGen’s Bayswater and Liddell power stations – and these are ‘’preliminary’’ views – relate to its potential impact on the retail electricity market in NSW and the wholesale supply of electricity in NSW, Victoria and South Australia.

“The proposed acquisition would remove the largest source of independent generation capacity in NSW,” ACCC chairman Rod Sims said.

“We are considering whether this could raise barriers to entry and expansion for electricity retailers in NSW with the potential result that end-users of electricity in NSW may not obtain the benefits of strong retail competition."

The commission is concerned that the acquisition would give other prospective retailers reduced access to competitively priced and customised hedge contracts. It noted that, if it were to acquire MacGen, AGL, Origin Energy and Energy Australia would control 70 per cent to 80 per cent of electricity generation capacity in NSW and more than 85 per cent of the retail market. AGL would become the largest generator in Victoria, NSW and South Australia.

“The ACCC is considering whether, as a result, AGL would have the ability and incentive to influence wholesale electricity prices in those markets,” Sims said.

Origin and Energy Australia have both acquired large retail electricity businesses in NSW as well as generation capacity.

AGL has been growing its retail business aggressively. It could argue that it is the main source of retail competition to the two integrated businesses, and that it needs access to generation in NSW (where it has none today) to protect that ability to compete as its retail base and its exposure to wholesale electricity prices increase.

While the ACCC might be concerned that an AGL acquisition might raise the barriers to entry to the NSW market for other aspiring retailers (like ERM, which sees MacGen as a transformational opportunity to build a big retail presence in NSW), it is difficult to assert that making AGL a stronger competitor in NSW will lead to a substantial lessening of competition in that market.

The more complex and sensitive issue is whether an AGL which owned baseload capacity in both Victoria and NSW would have the ability to 'game’ the national electricity market. This would be achieved by tactically withdrawing supply from one end of the inter-connect between the Victorian and NSW grids to drive up prices, a practice which the east coast generators have been frequently accused of in the past. It should be noted that Energy Australia has generation capacity across the eastern seaboard.

Because there were multiple bidders for MacGen, the ACCC doesn’t have to rely on creative hypotheses to support a decision to oppose AGL. If ERM or Marubeni acquired MacGen, it would either be a smaller and less-integrated player in the retail market or a pure generator.

There’s nothing hypothetical about the counterfactual as it relates to the alternative owners, although the question of whether AGL would be able to manipulate wholesale electricity prices would necessarily involve conjecture and dispute.

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