ACCC Maintains Opposition to AGL Acquiring Stake in Loy Yang Power

To protect Victorian electricity consumers and customers, the Australian Competition and Consumer Commission will maintain its opposition to the proposed acquisition of Loy Yang Power by a consortium including AGL Limited, ACCC Chairman, Mr Graeme Samuel, said today.

"This is despite court-enforceable undertakings being offered by AGL and its partners, the Commonwealth Bank and Tokyo Electric Power Company, which are aimed at mitigating the anti-competitive effects of the acquisition which the ACCC identified", Mr Samuel said.

"The parties and the ACCC had extensive and cooperative discussions on the proposed undertakings to ensure all potential remedies were assessed, however the last version of the undertaking offered did not adequately address some of the substantive competition concerns raised by the ACCC.

"The time the ACCC, AGL, Commonwealth Bank and TEPCO have invested in the talks on the behavioural aspects of the proposed undertaking, with no agreement, shows the substantial difficulties in trying to design effective and enforceable behavioural undertakings to address competition concerns in mergers. This problem was exacerbated when attempting to design such undertakings that could be applied to the operations of a power station in a real-time power pool.

"The ACCC remains firmly of the view that the proposed acquisition creates substantial competition concerns which are potentially in breach of section 50 of the Trade Practices Act 1974.

"It would lead to a less competitive and less efficient market structure in Victoria and, potentially, in the National Electricity Market.

"This is likely to result in higher prices, increased barriers to entry and a resulting substantial lessening of competition.

"Therefore, the ACCC will oppose AGL acquiring an interest in Loy Yang Power".

The proposed acquisition would effectively result in the re-aggregation of AGL's substantial electricity retail and distribution businesses in Victoria with the largest and lowest cost generator in Victoria. AGL is also the dominant electricity retailer in South Australia.

"The ACCC previously said that combining the biggest producer of electricity in Victoria with a major retailer potentially reduces crucial electricity hedges available for other retailers and, in particular, new entrants.

"In addition, the ACCC's extensive investigation suggests the proposed acquisition would create incentives for Loy Yang Power to exercise market power at the wholesale level that it would otherwise not have if AGL were not acquiring the interest in Loy Yang Power. This would have the effect of raising the costs of electricity and electricity hedges bought by AGL's retail competitors and ultimately raising the costs of electricity to Victorian businesses and households.

"The proposed acquisition also raises concerns over flows of market sensitive information between AGL's retail operations and Loy Yang Power's trading operations. AGL would have access to information about its competitor's electricity hedging positions and the bidding strategy of the largest generator in Victoria".

The ACCC reiterates its belief that the Victorian energy sector is becoming more competitive after the Victorian Government disaggregated and privatised the electricity and gas industries.

"Allowing the acquisition of an interest in Loy Yang Power by AGL to proceed would severely limit the further development of a competitive market and would inhibit greater retail competition in Victoria to the detriment of Victorian businesses and households.

"The ACCC is fully committed to ensuring a fully effective, competitive National Electricity Market that delivers benefits to all electricity consumers in Victoria and the other participating States.

"Therefore, all future horizontal and vertical mergers in the electricity and gas industries will be rigorously analysed and assessed against available empirical data.

"Furthermore, the ACCC will investigate any power purchase agreement, derivative contract or management agreement between a generator and a retailer that seeks to replicate the effects of a vertical merger or that may otherwise substantially lessen competition in breach of Part IV [restrictive trade practices] of the Act.

"The ACCC remains strongly opposed to this transaction and will continue to build its enforcement case should AGL, the Commonwealth Bank and TEPCO decide to close the transaction without providing undertakings satisfactory to the ACCC. The ACCC would seek appropriate remedies from the Federal Court, including divestment", Mr Samuel said.

BACKGROUND

While there are a large number of competition concerns arising from this proposal, a key issue is that the ACCC believes combining Loy Yang and AGL will create an incentive for the combined entity to increase pool exposure and raise 'spot' prices using Loy Yang's existing market power in the wholesale electricity market. The incentive of Loy Yang to exercise market power only arises from an acquisition of an interest in it by AGL, otherwise the incentive does not exist and Loy Yang will not necessarily exercise it market power and unilaterally raised prices.

After such an acquisition, the combined AGL/Loy Yang would have a strong incentive to reduce Loy Yang's contract quantity, thereby increasing its exposure to the pool, and raising spot prices due to the new found ability to share the risk of this strategy with AGL.

It is likely that with this increased incentive to raise spot prices AGL's rival electricity retailers costs would in turn be raised, with the accompanying impact on competition.

The ACCC also believes that the effect of the proposal would be to:

• increase barriers to entry and expansion in the retail market;
• severely impact the depth and liquidity of the NEM related financial derivatives market;
• limit the ability of competing retailers to secure the necessary base-load contract cover to operate competitively; and
• provide possible access to information, knowledge of buying and pricing strategies, risk management strategies and encourage strategic signalling.

This matter also highlights the difficulties and risks associated with attempts to overcome longer term competition concerns arising from a merger with time-limited behavioural undertakings. The ACCC has always been reluctant to accept such behavioural undertakings to solve competition issues arising from a change market structure as a result of a merger.