The ACCC, AGL and the power lines of duty

The NSW government ultimatum on AGL’s MacGen bid puts the ACCC in a pickle, and AGL will be up for a fight should it hit a regulatory roadblock.

Mike Baird has created an interesting challenge for the Australian Competition and Consumer Commission and a dilemma for its chairman, Rod Sims, by anointing AGL Energy as its preferred, and only, buyer of Macquarie Generation.

In announcing the outcome of the New South Wales Government’s tender for MacGen the NSW Treasurer said AGL’s $1.505 billion bid was, when added to the $220 million of cash held by MacGen which would transfer to the government, the only one of the three bids received that exceeded the retention value of MacGen to the state.

“Should the ACCC not provide clearance to AGL Energy the government will not proceed with the sale of Macquarie Generation at this time,” he said. ERM Power and Marubeni were the other bidders.

The ACCC, which had previously cleared ERM as a potential purchaser of MacGen, last week issued a “statement of issues” in relation to an acquisition of MacGen by AGL which, as discussed yesterday (A dim view of AGL’s MacGen bid, February 11), revolved around the implications for retail competition in NSW and, in particular, access by independent retailers to hedge contracts in the state.

The logic underpinning those issues was arguably shaky and could certainly be challenged by AGL.

In most contested auctions certainty is critical and vendors will normally accept a lower offer with certain settlement rather than run the risk of a conditional offer with uncertain outcomes and timelines.

Conventionally, the NSW Government should have been deterred by the question marks ACCC’s “issues” posed over AGL’s ability to compete and the prospect that any AGL court challenge of a final determination by the ACCC that its purchase of MacGen would substantially lessen competition in a market would, even if it were ultimately successful, take a long time to play out.

Given the government has concluded MacGen is worth more to the state than other bidders were prepared to pay, however, it isn’t going to be overly concerned if it takes time for AGL’s ability to compete, or not, to be determined.

That gives AGL the option, if the ACCC’s “issues” with its acquisition harden into outright opposition, of challenging the commission in the courts.

It has demonstrated previously – in 2003, when the ACCC opposed its acquisition of a stake in Victoria’s Loy Yang A power station – that it is prepared to take the commission on.

AGL won that earlier legal stoush and the acquisition of MacGen is so central to its strategy of building its retail electricity presence in NSW in competition with the two existing vertically integrated players, Origin Energy and Energy Australia, and has such apparently attractive financial metrics, that it is probable it would be prepared to head off to the courts again.

For ACCC Chairman Rod Sims, the NSW Government’s ‘AGL or nothing’ stance would create a dilemma, given that it was only last month he was publicly urging governments to sell assets – and, in particular, state governments to privatise their energy companies – to boost national productivity. Privatisation of state-owned energy companies would, he said, improve performance and bring down electricity prices.

AGL would – and does – argue that, by building a 16 per cent retail electricity market share in NSW through organic growth, it has been the major source of competition to Origin Energy and Energy Australia, and that in acquiring a natural hedge via MacGen’s capacity its ability to compete would be enhanced. MacGen is the largest and lowest-cost of the key baseload generators in NSW.

Apart from its desire to hedge its exposure to electricity prices and better manage the risks in its NSW business by acquiring generation capacity, there is a compelling financial incentive to pursue the purchase.

AGL said today that the acquisition would be immediately earnings-per-share accretive and the returns from it would substantially exceed its cost of capital and hurdle rate for investment.

If it can get competition law clearance for the deal, it will raise $1.2 billion of equity from shareholders through an underwritten renounceable rights issue and borrow $350 million to fund the acquisition.

The solid spike in AGL’s share price today would suggest that the market likes the deal – and thinks there is a strong chance that it will be consummated.