Following the ACCC’s announcement that it would oppose AGL’s $1.5b bid for NSW’s MacGen power generation assets AGL successfully applied to the Australian Competition Tribunal for authorisation to proceed. Beneath the surface unanswered questions remain about the ‘competition test’, ‘public benefits’, and the strategic merits of proceeding in the Tribunal rather than the courts.
In February 2014, the ACCC announced its opposition to the acquisition due to perceived anti-competitive effects arising from the vertical integration of MacGen’s NSW generation capacity with AGL’s NSW retail capacity. This will create efficiencies due to the natural hedge achieved by an integrated supplier. However, the ACCC argued that the benefits will not be passed on to consumers, and that the merger will create barriers to potential new entrants to the retail market buying the hedge contracts they need to cover their exposure to fluctuations in the wholesale electricity price. The ACCC’s principal concern is the likelihood of anti-competitive effects in the retail markets and resultant upwards pricing pressure. The Tribunal comprehensively rejected these ‘theories of harm’ for the simple reason that generation capacity exceeds demand and is likely to do so for the medium to long term. This fact suggests that competition in the wholesale and retail markets (including for hedge contracts) will not be harmed by the merger.
Dis-aggregation of electricity markets occurred over 10 years ago as a result of a policy decision to introduce contestability into retail markets and to pave the way for introduction of non-government suppliers, i.e. privatisation. The need for hedging, and associated transaction costs, was therefore a consequence of this policy decision, which is predicated on the private sector being more efficient than the public sector in operating business to supply goods or services. In forming its decision to oppose the acquisition the ACCC noted the increasing tendency in the market to vertical integration. The ACCC’s thinking does not acknowledge that dis-aggregated markets inherently create the hedging problem, and transaction cost inefficiencies, or that market forces have created pressure for vertical integration and that this will continue inexorably.
These factors alone may lead us to question whether it is the ACCC’s role to intervene in the market, which the merger clearance process enables it to do, by virtue of the fact that contested acquisitions are time-sensitive and an announcement of opposition by the ACCC is often enough to dispose of the matter. The ACCC has submitted to the Competition Policy Review that the Tribunal’s role in mergers ought to be limited to hearing appeals from the ACCC in formal authorisation proceedings, i.e. under such a process AGL would not have been able to apply direct to the Tribunal. It seems inappropriate for the ACCC to be both advocate and arbiter under such a process since, on general principles, any person or body having both roles lacks the independence of mind necessary to critically question its own views. In the MacGen case, the ACCC had cleared a rival bid by ERM. The ACCC report to the Tribunal cites evidence from ERM to support the case against AGL’s acquisition. It is appropriate to exercise caution in so doing, as it is well recognised that competition laws may be used in the strategic ‘game’ of competition. This is particularly so when rival bidders are competing for an asset. In this case a powerful vendor, the NSW government, is seeking to sell an asset to the highest bidder through a public tender process. In essence the Tribunal determined that it is better to let the markets decide who shall be the buyer, rather than the ACCC. The predominant weight of the Tribunal’s thinking is that there is a public benefit in the State realising the highest price for the asset, and thus being able to fund its planned infrastructure program without resorting to debt.
AGL is the second intending acquirer in the past year to be attracted by the possibility of obtaining authorisation from the Tribunal, and the present case is the only one to be decided by the Tribunal under current provisions. The Tribunal’s power to authorise an acquisition is stated in the negative, i.e. it must not authorise the acquisition unless it is satisfied that the acquisition would be likely to result in such a benefit to the public that it should be allowed. It is implicit, however, in the ‘public benefit’ test that the acquisition would fail the ‘competition test’ and so the Tribunal weighs up anti-competitive detriment against public benefits.
AGL’s case is that the acquisition would not have the likely result of substantially lessening competition. This case was upheld by the Tribunal and, that being so, there is nothing to authorise (i.e. nothing that would, absent authorisation, contravene the legislation). Whether this may have any legal consequences is unclear. The Tribunal accepted AGL’s undertaking to make available a certain level of hedge contracts for 7 years to give comfort that independent retailers will not be adversely affected. The Tribunal observed that failure to comply with the undertaking could give the ACCC cause to seek to have the authorisation revoked. That would raise interesting issues because what is authorised is not ongoing conduct that could be stopped, but a one- off event, i.e. the acquisition of MacGen that would be awkward to unwind up to 7 years in the future.
As reported in a previous issue (‘Making the case for merger efficiencies’ Competition and Consumer News, November 2013), US thinking about the tendency of merger efficiencies to neutralise perceived upwards pricing pressure has not been thoroughly tested or applied in Australia. The ACCC Merger Guidelines acknowledge that efficiencies may be ‘taken into account’, but the ACCC in the MacGen case argued that benefits will not be passed on to consumers. It is unclear whether an Australian court would take these effects into account when determining whether a merger would contravene the competition test, i.e. would be likely to substantially lessen competition in a relevant market. The Tribunal on the other hand has power to take such considerations into account. The Tribunal in Qantas Airways (2004) was of the view that efficiency gains realised by the merger parties could constitute a public benefit without necessarily being passed on to consumers. The ACCC disagreed in that case, and still does, submitting in its report to the Tribunal that efficiency gains that may be made by AGL are not a public benefit but a private benefit. The contrary reasoning accepted by the Tribunal in Qantas is that efficiency gains contribute to GDP and should be given appropriate weight in the Tribunal’s deliberations. Until ruled on by a court, the ACCC may be unlikely to accept this reasoning, which is fundamental to the purpose and effect of competition laws. How did the Tribunal in AGL/MacGen deal with this issue? The Tribunal ducked it, or in legal language, found it unnecessary to decide the issue, given its view of the over- riding public benefits mentioned above. The Tribunal did, however, stand by the view it had expressed in Qantas and commented favourably on efficiency gains which it accepted would be generated by AGL through vertical integration (i.e. the transaction cost savings due to the ‘natural hedge’), capital expenditure and technological innovation that would not otherwise occur. The Tribunal suggests that these efficiency gains would create a public benefit through ‘more vigorous competition’, i.e. the logical consequence of this finding, in other contexts, is that efficiency gains counteract alleged anti- competitive effects.
There is an impressive array of expert opinion before the Tribunal in MacGen offering opinions on the ultimate issues, i.e. the application of the ‘competition test’ and the identification and weighing of ‘public benefits’. The US Antirust Modernisation Commission, like the Australian High Court, is wary of unduly relying on expert economists’ opinion in applying competition laws, as opinions often differ. Laws applied on that basis can be uncertain and unpredictable for parties, and ultimately differing expert opinions may be of limited assistance to courts and tribunals. The ACCC argued that the merger will give AGL increased market power. The thinking of Australian economists on ‘market power’ derives from a 1955 report to the US Attorney-General, i.e. the power to increase profits by giving less and charging more. US thinking has evolved since 1955 but the impact in Australia is not noticeable. Leaving that aside, we might ask how the power balance (no pun intended) has altered in the electricity markets since dis- aggregation and privatisation commenced. According to the ACCC’s initial decision to oppose the AGL/MacGen merger, it would produce three large vertically integrated suppliers in NSW: AGL/MacGen with 27% of generation capacity and 16% retail load; Origin Energy with 26% of generation capacity and 38% retail load; Energy Australia with 17% of generation capacity and 33% retail load. That would seem to be a more even distribution of market power (if any player has market power) than when generation, distribution and retail supply were under State ownership. The ACCC argued that the merger would create permanent structural change. Importantly, the Tribunal sees nothing inherently wrong with such a market structure, and rejects simplistic thinking that favours a ‘more atomistic’ market structure. It is competitive behaviour that matters, and in the context of a market in which supply exceeds demand it is hard to conceive that AGL would have unilateral power to increase prices without being constrained by conduct of its competitors.
The exercise being embarked upon in a merger case is one of predicting the future. It is clear that regulators and markets alike are not good at this. Current law requires that the ACCC, in enforcing the prohibition on anti- competitive mergers, must prove there is a real chance of an anti-competitive effect (i.e. more than a mere possibility but not so high as ‘more likely than not’). We do not in Australia adopt the US ‘error cost’ approach, i.e. compare the cost of prohibiting an efficient merger (thus denying ourselves efficiency gains to GDP and condemning consumers to the status quo), with the cost of allowing an inefficient merger (upward price pressure adversely affecting consumers). In the US it is generally presumed that markets do not tend to produce inefficient mergers.
The ACCC accepts that the AGL/MacGen merger would produce efficiencies in hedging transaction costs, but does not accept that this creates a public benefit, or that other claimed efficiencies are likely. The ACCC’s public statements shortly before the Tribunal delivered its decision in the MacGen case, and the ACCC’s recommendation to the Competition Policy Review that the Tribunal’s role in merger authorisations be limited, suggest that the ACCC remains unrepentant. Should we err in favour of denying ourselves the opportunity for efficiency gains or in favour of a belief that the benefits for consumers of ‘atomised markets’ will in future outweigh the inefficiencies?