The energy sector is very dynamic, in part because of ongoing regulatory reform but also because there are frequent changes amongst players in the sector. Market consolidation is a feature of the sector, particularly involving merger of electricity generation and retail businesses, resulting in the creation of so-called 'gentailers'. As this article indicates, such mergers are not without risk.

On 4 March 2014, the ACCC published its decision to oppose the acquisition of the assets of Macquarie Generation (MacGen) by AGL Energy Limited (AGL). The ACCC believed that the proposed acquisition would likely result in a substantial lessening of competition in the market for the retail supply of electricity in New South Wales (NSW). The ACCC was also concerned that the proposed acquisition would have significant impacts on hedge market liquidity and the supply of competitively priced hedge contracts to second tier retailers in NSW.

AGL has decided to challenge the ACCC's decision by applying for merger authorisation from the Australian Competition Tribunal(Tribunal). In electing to seek authorisation, AGL is required to demonstrate that even if the merger results in a substantial lessening of competition, it has a net public benefit. That is, the acquisition will be authorised by the Tribunal if it is satisfied that the public benefits of the merger outweigh any competition concerns. The public benefits to be considered are broader than just economic or competition factors.

Once authorisation is granted in relation to a merger, neither the ACCC nor any other party may take action in respect of the merger. However, this protection is only effective once authorisation is granted and for the period for which authorisation is granted.

In its application for authorisation to the Tribunal, AGL submitted that following the proposed acquisition, it will:

  • invest approximately $345 million in the maintenance of, and capital expenditure on, the Bayswater and Liddell power stations (Power Stations)
  • apply its technical capability and expertise to the maintenance and operation of the Power Stations
  • capture annual cost savings in labour costs and improve MacGen staff engagement to create value.

In undertaking the three points above, AGL submits that the following public benefits will flow:

  • more reliable, long-term base load supply into the National Energy Market, at a lower cost and with reduced environmental impact  
  • higher levels of likely availability of the generation units at the Power Stations resulting in an increased supply of hedge contracts for electricity retailers
  • increased employment in the Hunter Valley region due to heightened levels of capital and maintenance expenditure
  • vertical integration of AGL with the MacGen assets, meaning significant cost reductions and other efficiencies
  • proceeds from the proposed acquisitions will be paid to the State into the Restart NSW Fund which will be used to fund major infrastructure projects.

Other industries will be keeping a close eye on the results of this application, as authorisation from the Tribunal will effectively grant the three largest retailers in NSW a combined share of 70 to 80 percent of electricity generation capacity or output. While this would seem like an obvious lessening of competition, market share alone is not determinative of market power (being basically the power to raise prices in an unconstrained way) or a substantial lessening of competition. Accordingly, it will be interesting to see how the Tribunal assesses the quantum of the public benefits. 

The hearing is listed for a case management conference on 6 May 2014 and a full hearing of not more than 10 days commencing 2 June 2014. The Tribunal will then have up to six months to decide whether the public benefits identified in the application outweigh the anti-competitive detriments identified in the ACCC decision