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Today we’re joined by Brett Bolton, who is a Special Counsel in the Competition and Trade Practices Group at HopgoodGanim, and he’s here to talk about AGL’s takeover bid for Macquarie Generation; Brett thanks for joining us.
Thanks Kate, thanks for having me.
Now Brett the ACCC has expressed reservations at this takeover bid and released a Statement of Issues, can you run us through some of the potential issues for the ACCC here and I guess where we’re at now?
AGL is looking to acquire Macquarie Generation, now Macquarie Generation or MacGen as I’ll call it, is a NSW state owned corporation, so MacGen’s got about 27% of the electricity generation capacity in NSW, AGL doesn’t have any generation assets in NSW. In addition to being a generator AGL is one of the three big energy retailers in the electricity market and it’s got a big retail customer electricity base in NSW. Now the main competitors are Origin Energy and EnergyAustralia. Now unlike AGL both have generation assets in NSW, when I talk about generation assets I mean power stations. Now at the retail level in addition to competing with the Origin and EnergyAustralia there’s a whole bunch of second tier retailers, now these retailers they don’t have any generation assets of their own but they compete with AGL, Origin and EnergyAustralia for the retailer electricity customers in NSW, now that’s large businesses, small business, and residential consumers like you and me. What the ACCC is concerned about is if this acquisition proceeds it’s going to have an effect on the price – the end price that you and me pay for electricity, well what the ACCC is concerned stems from is this, these generators that I mentioned before and the retailers they trade in what’s called the wholesale spot market for electricity, the wholesale price varies up and down it goes according to market movements and the like, now the difficulty that retailers face is that they have to enter into contracts with their residential and end user customers offering electricity for a fixed term or for a fixed price, so if they’re exposed to the risks of price increases in the wholesale spot market when they purchase their electricity from generators. So they seek to manage those risks by what are called hedge contracts, the ACCC’s concern is that if the acquisition goes ahead it’s going to reduce the incentive that MacGen presently has to enter into these hedge contracts that in itself is going reduce the ability of other electricity generators who don’t have a presence in the retail market to expand and most importantly the ACCC is concerned that the acquisition will reduce the ability of those second tier retailers that I mentioned before competing in the market with AGL, Origin and EnergyAustralia, and as a result the ACCC is concerned that that’s going to reduce the level of competition and reduce the level of price discounting in the retail electricity market.
Well Brett this issue is moving pretty quickly, where are we now?
AGL has offered some undertakings to the ACCC in an endeavour to address those concerns and the ACCC has sent out details of the undertaking to other market participants seeking their views before it finally makes its decision in early March. Now the interesting thing about the undertakings that have been offered by AGL is that the undertakings seek to address the ACCC’s concerns about the retail supply of electricity but they don’t seek to address the ACCC’s concerns about wholesale supplies, so it really is very uncertain at this stage whether those undertakings are going to get AGL over the line.
All right, well Brett I want to look I guess more generally at some of the factors that the ACCC, you know, looks at when they are considering potential competition issues.
There’s a whole range of things but the key ones it seems to me are the ACCC is always concerned about whether or not an acquisition or a merger is going to result in the removal of a vigorous and effective competitor that is taking somebody out. The other issues that the ACCC is concerned about are whether the merger is going to make it more difficult for new entrants or new players to come into the market what economists call barriers to entry. It also looks generally speaking at the size and the concentration and the number of players in the market, generally if you’ve got only two or three big players in the market any acquisition or transaction involving one of those players is going to be looked at fairly closely by the ACCC.
Well it seems there Brett that in some circumstances it seems more likely that the ACCC will jump in and others it might not be so certain, should companies be factoring in these potential competition issues that the ACCC might raise into their deal timetables?
Yes they should for the simple reason that the ACCC has the power to go to the court and ask for orders blocking a merger or unpicking it, if it believes that it has a substantial effect on competition. So for that reason that these informal clearances if you like, the practice of seeking informal clearances from the ACCC has built up and that’s what AGL is doing here. Now the ACCC commenced its review of this acquisition in early December and it proposes to give its final decision in early March, so there’s a three month time gap there and it’s something that companies and organisations do need to factor in. The other point I’d make is that it’s extremely important that companies that are seeking clearance from the ACCC of a merger provide as much information as they possibly can as quickly as they can.
That’s a really good point, it will be interesting see where we end up in March, Brett thanks so much for joining us today.
That was Brett Bolton, Special Counsel in the Competition and Trade Practices Group at HopgoodGanim. Listeners if you have any questions feel free to send them through using the panel on your screen or otherwise via email to email@example.com.