On 25 June 2014, the Australian Competition Tribunal (Tribunal) handed down its decision on AGL’s proposed acquisition of Macquarie Generation, deciding to grant conditional authorisation for the proposed merger, provided the merger is completed within 12 months.  The Tribunal considered that the proposed acquisition would be likely to result in such benefit to the public that it should be allowed to proceed. 

On 24 July 2014, the ACCC confirmed that it will not seek a judicial review of the Tribunal’s decision as there is no scope for a merits based review under the merger authorisation process.

Possible public detriments

The Tribunal considered the ACCC’s view that the proposed merger is likely to inhibit the capacity of other retailers, particularly smaller retailers, to participate in the retail market given AGL would be in a much stronger position to seek to extend its share of the retail market as a vertically integrated entity with the efficiencies that carries with it, including the “natural hedge”.

The Tribunal determined that the pre-acquisition “market” for hedge contracts available to retailers in NSW was liquid.  The Tribunal held that retailers of electricity in NSW, including small retailers, would still have a significant competitive “market” available in NSW for the acquisition of hedge contracts post acquisition.

Additionally, the Tribunal determined that that acquisition was unlikely to result in a significant detriment to the ability of retailers, including small retailers, to compete in the retail market for the supply of electricity in NSW as there will be four “gentailers” competing post acquisition for a share of the business of selling electricity to end users, resulting in a competitive market.  In reaching that view, the Tribunal accepted conditions proposed by AGL that it would continue to make available not less than 500 MW of hedge contracts per year to small retailers for a period of seven years.

The counterfactual

The Tribunal considered that without the merger the NSW Government would either:

  • retain and maintain Macquarie Generation as a generating entity from now and for the medium to long term; or
  • more likely, sell or endeavor to sell the Macquarie Assets within 2 to 5 years, either to a pure generator, an existing retailer, or to a new retailer entering the retail market.

The Tribunal considered that none of the above scenarios would, compared to a future with the merger, cause small retailers to be significantly assisted or impeded in competing in the NSW retail electricity market. 

Possible public benefits

AGL submitted that the public benefits of the proposed acquisition were:

  • benefit to the NSW government and the public of NSW derived from the proceeds of the merger;
  • AGL’s proposed investment in the efficient operation in Macquarie’s assets which would result in cheaper electricity to the wholesale market; and
  • benefits arising from AGL being able to operate the assets more efficiently, and to invest significantly in their upgrading to ensure they operate more efficiently and effectively in the medium to longer term.

The ACCC argued that these benefits existed regardless of the identity of the acquirer.  However, the Tribunal considered that there was no other potential acquirer in a position to acquire the assets in the short term, and no other acquirer that would be able to acquire those assets at a price reasonably equivalent to the price offered by AGL in the short to medium term.  On this basis, the Tribunal accepted that if the NSW Government retained the assets and sold them to another bidder at a later date, the assets were likely to be worth less than at present.

Ultimately, the Tribunal determined that proposed acquisition should be allowed to occur as it was likely to result in substantial public benefits and that the public detriments identified by the ACCC were unlikely to arise.