ACCC assesssment of Loy Yang A acquisition by AGL

Published On 11/07/2012 | By Simon Cooke | Mergers

Whilst concerns have been raised about the impacts of greater vertical integration in wholesale electricity markets both overseas and here in Australia, the ACCC found enough reasons to think that the markets can cope with the AGL-LYA combination.

In terms of market definition, the latest PCA is very much in line with other recent ACCC assessments regarding the National Electricity Market.  In particular, it found separate regional wholesale and retail electricity supply markets, and that there’s a separate market for the supply of financial (hedge) contracts.  In the case of the latter, this was also found to be a regional market, because the contracts themselves are predominantly based on a particular regional reference price (ie – the wholesale spot price for the Victorian region).

There’s also a solitary paragraph saying the ACCC didn’t feel the need to consider the ‘possibility’ of a broader geographic market for the wholesale supply of electricity.  If that sounds familiar, it’s because they said exactly the same thing in the PCA for the 2010 NSW privatisation process.

With the sale of NSW generation assets now on the horizon, potential bidders in that process may want to take note of the ACCC’s recent consistency on this front.

In terms of the competition assessment, according to the PCA the ACCC examined potential issues in relation to both horizontal aggregation of generation capacity (AGL goes from ~8% to ~27% in Victoria, and from ~14% to ~29% in Vic/SA), and vertical integration (given AGL has a significant retail electricity presence, and LYA was the last ‘standalone’ generator in Victoria).

Although the transaction wasn’t opposed, there’s discussion in the PCA about some of the competition concerns they looked at, including:

  • effects on the market for the wholesale supply of electricity (the concept of economic withholding by generators gets a solid discussion);
  • reductions in both the overall liquidity of the financial (hedge) contract market, and the availability of customised products for standalone retailers (observed by d-cyphaTrade as a problem in South Australia); and
  • increased height of barriers to entry for new generation (primarily as a result of increased vertical integration, an issue the AER noted in its State Of The Energy Market 2011).

Leaving aside some factors unique to LYA’s business (such as an impending long term electricity hedge contract with Alcoa), the decision suggests that the ACCC thinks competition in both the wholesale and retail electricity markets in the Victorian region is pretty healthy, thanks in no small part to the remaining ‘merchant generators’ – Snowy Hydro and International Power.

And for those who were wondering, a word search of the PCA will give you zero hits for the word ‘carbon’.

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About The Author

is a solicitor who specialises in all aspects of competition law as well as financial, energy, and telecommunications regulation, consumer law issues, clean energy and general commercial law. A former tax officer who still speaks fondly of his auditing days, Simon is also part of King & Wood Mallesons’ Agribusiness team because when he’s not in the office, he can often be found spending his ‘holidays’ knee-deep in the cattle yards at his family farm.

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