On 4 March 2014 the ACCC published its decision to oppose AGL Energy Limited’s (AGL) proposed acquisition of Macquarie Generation (MacGen), principally on the basis that it would result in a substantial lessening of competition in the market for the retail supply of electricity in NSW. In our In Brief on the decision, we commented that it raised significant obstacles to the proposed privatisation of state-owned electricity assets in both NSW and Queensland.
Based on outspoken criticism by AGL’s Managing Director and Chief Executive Officer, Michael Fraser, of the legal and factual basis for the ACCC’s decision, it seemed likely that AGL would seek to challenge the ACCC’s decision. However, unlike the approach it adopted in relation to the acquisition of the Loy Yang generation assets in Victoria, when it sought a Federal Court declaration that the acquisition did not breach section 50 of the Competition and Consumer Act, AGL has instead sought merger authorisation from the Australian Competition Tribunal (Tribunal).
Interestingly, AGL applied for authorisation on 24 March 2013, just 20 days after the ACCC announced its decision and before it published its Public Competition Assessment. This suggests that AGL began preparing for a merger authorisation before it received the ACCC’s final decision, and that AGL may have formed the view that its best prospects did not necessarily lie with a straight substantial lessening of competition test.
THE AUTHORISATION APPLICATION
Unlike the formal or informal merger clearance processes, which are based on a substantial lessening of competition test, the authorisation process relies on a net public benefit test. An acquisition will be authorised if the public benefits of the proposed transaction outweigh any anti-competitive detriment.
Consistent with its previous application for informal clearance, AGL contends that no detriment will arise from the transaction as, post-acquisition, AGL will remain effectively constrained by its competitors. In addition, and most interestingly for future sales of state-owned energy assets, it contends that significant public benefits will arise from the sale.
Specifically AGL submits that, post-acquisition, it will:
- invest an extra $345 million in capex and opex on MacGen’s power generation assets, in addition to that planned by current management;
- apply its technical capability and expertise to the maintenance and operation of power generation assets; and
- capture annual savings in labour costs and improve MacGen’s staff engagement to create value.
This, it says, would result in the following public benefits:
- cheaper and more reliable base load electricity supply into the National Electricity Market (NEM), due to:
- greater availability of generation units at the power stations to generate electricity for supply into the NEM;
- lower risk of unplanned plant failure and resulting outages;
- a reduced requirement for AGL to have higher cost generation plant on line as a result of greater confidence in the efficient operation of the MacGen assets;
- reduced environmental impact as a result of operating all generation units at high levels of efficiency and capacity factor; and reduced incidence of start-ups;
- safer operation;
- likely reduced price volatility and lower wholesale prices; and
- potential deferral of further investment in base load generation assets in NSW and cost savings from that deferral;
- higher levels of likely availability of generation units at power stations will increase supply of hedge contracts for electricity retailers;
- increased capital and maintenance meaning increased employment in the Hunter Valley region;
- vertical integration resulting in significant vertical cost reductions and other efficiencies; and
- proceeds from the sale will got to the “Restart NSW Fund” to be used to fund much needed investment in NSW infrastructure.
Importantly, as with a substantial lessening of competition test, the authorisation test also includes a future with and without analysis. That is, both the benefits and the detriments must be compared with those that would occur absent the authorisation. Equally importantly, unless the Tribunal disagrees with the ACCC’s assessment of the likely substantial lessening of competition, these benefits will need to outweigh the anti-competitive detriments identified by the ACCC. This may be challenging in circumstances where many could be characterised as benefits arising from vertical integration (which, although efficient for the firm, may not be efficient for the market in general) and which could arguably arise with an alternative acquirer.
While Murray Goulburn’s recent application for authorisation of its proposed acquisition of Warrnambool Cheese and Butter Factory was ultimately withdrawn, in its Statement of Issues the Tribunal raised similar concerns about whether the posited public benefits were attainable without the proposed acquisition. Interestingly, the majority of AGL’s application focuses on arguments that AGL will continue to be effectively constrained post acquisition, rather than on the public benefits arising from the acquisition.
Like the ACCC, the Tribunal will also be cognisant of the precedent its decision is likely to set, not just in respect of generation assets, but more broadly.