Australian energy company overcomes vertical integration concerns to secure first merger authorisation

On 25 June 2014, major Australian energy company AGL Energy Limited (AGL) secured the first merger authorisation from the Australian Competition Tribunal (Tribunal) since the current regime was introduced in 2007.

AGL retails electricity in each region of the integrated Australian East Coast electricity market, and owns or dispatches generation assets in each region except New South Wales (NSW). The authorisation permits AGL to acquire two major NSW coal-fired power stations from the NSW State government.

In March 2014, the Australian Competition and Consumer Commission (ACCC) announced that it would oppose AGL's proposed acquisition on competition grounds, prompting AGL to seek clearance from the Tribunal. The Tribunal weighs the public benefits of a proposed acquisition against the public detriments (i.e. competition concerns). The ACCC has a statutory role to assist the Tribunal.

A key competition concern advanced by the ACCC before the Tribunal was that the increase in vertical integration would result in reduced competition in NSW electricity retailing. The ACCC argued that the proposed acquisition would permanently entrench a market structure in which three large vertically integrated businesses (AGL and two others) dominate NSW electricity supply. This increase in vertical integration was likely to reduce the availability of hedge contracts (financial instruments used by electricity retailers to manage the financial risks associated with acquiring wholesale electricity) for smaller NSW electricity retailers, and cause a material reduction in the liquidity of NSW hedge contracts. This would reduce small retailers' competitiveness and increase barriers to entry and expansion.

In support of these concerns, the ACCC drew on reports from the UK energy and competition regulator OFGEM as well as the Competition and Markets Authority and Office of Fair Trading. The ACCC submitted that those reports found weak competition in a market structure characterised by a high degree of vertical integration, and that vertical integration results directly in reduced hedge contract liquidity.

The Tribunal rejected the ACCC's concerns with the proposed acquisition. It was satisfied that "after the Proposed Acquisition there will be active competition in the NSW retail market, including by small retailers that will have a substantial and adequate hedge market available to them".

This is the first clearance granted by the Tribunal. As reported previously (see December 2013 Competition Newsletter) there was a previous application for merger clearance through this unusual route, by Australian dairy manufacturer Murray Goulburn. That application however did not proceed to hearing.

Please click on the links below for the other articles in the July 2014 competition newsletter:

• MOFCOM blocks cooperation in shipping sector
• ECJ dismissed Nexans' appeal against geographic scope of dawn raid
• General Court dismisses Intel appeal of abuse of dominance decision
• Commission adopts revised de minimis notice and guidance on object restrictions