Jurisdiction - Australia
Australia – AGL Determination Shines A Light On The Merger Authorisation Process.

24 July, 2014


Legal News & Analysis – Asia Pacific – Australia – Competition & Antitrust


In Brief


  • On 25 June 2014, the Australian Competition Tribunal (the Tribunal) granted AGL Energy Limited (AGL) authorisation to acquire the assets of Macquarie Generation from the NSW Government.1
  • The process and the result is a further indication that an alternative to the usual Australian Competition and Consumer Commission (ACCC) informal merger review process is ‘alive and kicking’. With the Murray Goulburn application in the recent ‘cheese wars’ takeover battle,2 this is now the second time in recent months that the previously untried Tribunal merger authorisation process has been used – and on this occasion to a final decision.
  • The Tribunal application arose after the ACCC refused AGL’s informal clearance application primarily due to the concern that the concentration in the NSW retail market for the supply of electricity would limit opportunities for rival retailers and that AGL would have an ability to spike prices in the wholesale market for electricity.
  • The Tribunal disagreed with the ACCC’s view and concluded that there would continue to be vigorous competition in the NSW retail market, as well as significant public benefits following the proposed acquisition in terms of efficiency and State Government revenue.
  • This decision emphasises the advantage of taking a merger authorisation approach, as well as demonstrating the importance of ‘real world’ evidence over economic theory.




The NSW Government, as part of a broader privatisation plan, offered the assets of Macquarie Generation (the largest generator in NSW) for sale.


The three large retailers – AGL, Origin and Energy Australia – together supply 96% of the retail market in NSW. Origin and EnergyAustralia are both vertically integrated and hold generation assets in NSW. AGL presently has no generation assets in NSW. The proposed acquisition would mean that it too would become vertically integrated in NSW.3


AGL sought ACCC approval to acquire these assets, however, following a three month informal review, the ACCC announced that it would oppose the proposed acquisition on the basis that it was likely to have the effect of substantially lessening competition.


On 24 March 2014, AGL filed an application with the Tribunal for authorisation.


The Tribunal may grant authorisation if it is satisfied in all circumstances that the proposed acquisition would or likely result in public benefits. In assessing the net public benefit, the Tribunal considers the world ‘with and without’ the proposed acquisition.


The process for bringing merger authorisations directly to the Tribunal (and not the ACCC) is new, being part of reforms implemented in 2007. Until the recent application by Murray Goulburn4 the process was untried, largely because of concerns about the formality of the process. Prior to those reforms merger authorisations went to the ACCC with interested parties having a right to bring the matter to the Tribunal for review. As we have previously noted, the recent Murray Goulburn experience demonstrated that, for the right matter, the Tribunal process can be viable, efficient and effective.5


AGL’s Case


AGL argued that the proposed acquisition would give rise to three public benefits:


  • the benefits to the State and the public of being able to dispose of the assets at a price which reflects their retention value, providing the State immediately with about AUD 1bn,
  • the investment by AGL of AUD 345m in the efficient operation of the assets, which is likely to result in cheaper electricity,
  • the public benefits arising from AGL being able to operate the assets more efficiently and effectively.6


The ACCC argued that those benefits might be obtained whether the acquirer of the assets is AGL or some other entity, which may not be a substantial existing retailer.


The ACCC’s Concerns


Consistent with its view following the informal review, the ACCC argued that the proposed acquisition would result in significant anti-competitive effects. In particular, it argued that AGL would be in a much stronger position in the retail market because it can reap the advantages of vertical integration, particularly the so-called ‘natural hedge’.


Retailers use hedging to limit their exposure to price fluctuations in the wholesale market for electricity. A range of derivative contracts are available, including directly between retailers and generators, or through intermediaries. In contrast, a vertically integrated firm (or ‘gentailer’) has a ‘natural hedge’ because it does not need such contracts to the extent that its generation capacity meets its share of the retail market.


The ACCC argued that, post-acquisition, AGL’s demand for hedge contracts would be replaced with a ‘natural hedge’ and the volume of hedge contracts available for trading in NSW would be significantly reduced because Macquarie Generation would not be hedging its generation capacity. It was argued that this would have the consequence of reducing the ability of smaller retailers to acquire hedge contracts, or at a sufficiently low price, thereby raising barriers to entry and expansion.


The ACCC also argued that the proposed acquisition would give AGL the ability and incentive to spike wholesale prices.


The Tribunal’s Findings


The hearing to consider the application for authorisation commenced on 2 June 2014. Following careful consideration of the proposed acquisition and its effects on the relevant markets,7 the Tribunal was satisfied that


  • the public detriments identified by the ACCC were unlikely to arise, and
  • the proposed acquisition would result in material benefits to the public.


In arriving at this view, the Tribunal considered two counterfactuals:


  • the State retaining and maintaining Macquarie Generation for the medium to long term, or
  • the State would, within two to five years, sell or endeavour to sell the assets.


It was satisfied that neither scenarios would affect its assessment of any detriments to competition. The Tribunal concluded that there was no other potential acquirer that would be in a position to acquire the assets in the short term. Moreover, no other acquirer would be able to purchase those assets in the medium term at a comparable price to that offered by AGL.


Consideration Of Public Benefits


The Tribunal accepted AGL’s assertions as to the public benefits. In particular, the public benefit arising from the proceeds of the sale was found to be sufficient on its own to warrant the grant of the authorisation.


The Tribunal was also satisfied that there would continue to be competition in the NSW retail market. Indeed, it concluded that the market is likely to evolve in a similar manner as the Victorian market following deregulation – the latter being one of the most competitive retail markets for electricity in the world.


The Tribunal also considered that AGL would only be able to materially increase its market share through vigorous competition. The Tribunal noted that smaller retailers in Victoria have been able to increase market share through competition against the same three gentailers. Indeed, after acquiring Loy Yang A power station, AGL lost market share to smaller retailers.


Consideration Of Public Detriments


The Tribunal dismissed the ACCC’s concerns regarding possible detriment. Firstly, it concluded that the proposed acquisition is not likely to result in a significant detriment to retail competition in NSW. Retailers will still have a competitive ‘market’ for the acquisition of hedge contracts in NSW. The Tribunal found that, contrary to the ACCC’s view, the rivalry between AGL, Origin and EnergyAustralia would ‘produce a vigorous competitive market’.8


Second, in relation to concerns that AGL could spike wholesale prices, the Tribunal was satisfied that there is no real risk of AGL being able to engage in such conduct in NSW or elsewhere.


Accordingly, the Tribunal was satisfied that the proposed acquisition would not result in material detriment to the public. Although not a critical element of its decision, the Tribunal also accepted a number of conditions proposed by AGL, including to continue to make available not less than 500 MW of hedge contracts per year to small retailers for a period of seven years.


Implications Of The Tribunal’s Decision


The Tribunal’s determination is significant for a number of reasons:


A New Route For Obtaining Competition Approval

The determination marks the first instance that a merger authorisation made directly to the Tribunal has reached a concluded decision. As with the earlier Murray Goulburn experience, the Tribunal was efficient and showed that it could finalise an application within a tight 3 month time period. The formal nature of the Tribunal process means that most mergers are better suited to the ACCC’s informal merger review process. But, once again, the AGL experience reinforces the viability of merger authorisation for obtaining competition approval for complex or contentious mergers that involve public benefits.  



Dealing with confidential information presented practical challenges for the Tribunal and the parties. The Tribunal has indicated that it will reconsider its approach to confidentiality in order to make the process more efficient.


‘Real World’ Evidence Over Economic Theory

The determination is the third straight ‘defeat’ for the ACCC in a merger context, following AGL v ACCC9 and ACCC v Metcash Trading Ltd10. Those judgments identified the difficulties facing the ACCC in relying heavily on economic theory. The Tribunal’s determination similarly highlights that competition analysis involves looking at the behaviour of firms, not just a consideration of the static and structural aspects of a market.


Assessing The World ‘With Or Without’

While the ACCC expressed skepticism about the public benefit arising from the proceeds from the proposed acquisition, the Tribunal was clear that its role was not to second guess how the State would make use of the proceeds of the sale.


Room For Improvement


In its submission to the Competition Policy Review, the ACCC has argued for reform of the merger authorisation process.11 In particular, the ACCC asserts that applications should first go to the ACCC, submitting that this would result in lower costs and facilitate participation by third parties, assisting in evidence gathering. The ACCC has also argued for more information gathering powers for the assessment of mergers, as is common in other jurisdictions.12


It is clear that the Tribunal merger authorisation process imposes substantial burdens on the ACCC and the applicant. However, balanced against these concerns is the major concern (that led to the 2007 reforms) that an ACCC merger authorisation process with Tribunal review was too slow, uncertain and commercially unattractive. These balancing considerations will be usefully considered during the Competition Policy Review.


End Notes:


  1. Application for Authorisation of Acquisition of Macquarie Generation by AGL Energy Ltd [2014] ACompT 1 (AGL). The full decision is available from the Federal Court of Australia here.
  2. Application by Murray Goulburn Co-operative Co. Limited for Merger Authorisation, ACT 4 of 2013.
  3. AGL would become the largest generator with 29.4% of generation capacity in NSW and the third largest retailer with a market share in NSW of 24%: AGL, at 16.
  4. Lodged on 29 November 2013.
  5. More detail of the merger authorisation process in light of the Murray Goulburn experience was set out in an earlier article.
  6. AGL, at 36.
  7. The focus was on two relevant markets – a national market for the generation and supply of electricity, and a retail market for electricity in NSW. A separate ‘market’ for hedge contracts was not considered though the proposed acquisition’s impact on the ability of retailers to acquire hedge contracts in NSW was a key consideration.
  8. AGL, at 30.
  9. AGL v ACCC (No 3) [2003] FCA 1525.
  10. ACCC v Metcash Trading Ltd [2011] FCA 967.
  11. ACCC, ‘Reinvigorating Australia’s Competition Policy, Australian Competition & Consumer Commission Submission to the Competition Policy Review’, 25 June 2014 (ACCC submission).
  12. ACCC submission, p83-85.


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For further information, please contact:


Chris Jose, Partner, Herbert Smith Freehills

[email protected]


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