Green light for a green deal: ACCC authorises Brookfield / Origin acquisition on public benefit grounds
On 10 October 2023, the ACCC authorised Brookfield and MidOcean’s proposed acquisition of Origin Energy Limited (Origin) (Proposed Acquisition).
While the ACCC is yet to release a public version of its full reasons, the publicly released executive summary sets out that the ACCC:
- was satisfied that public benefits would outweigh any public detriments
- was not positively satisfied that there be no substantial lessening of competition, primarily due to concerns arising from vertical integration in electricity markets
- accepted separation and ring-fencing undertakings from Brookfield, MidOcean, and AusNet, which it considered reduced the likelihood of competition impacts (but did not completely resolve them).
The authorisation means that the transaction can complete without risk under Australia’s merger clearance law.
The deal was authorised under the ACCC’s formal merger authorisation regime, and not as part of the ACCC’s informal clearance process (which is the more common route for merger parties seeking clearance from the ACCC).
The authorisation decision has three key takeaways which add to the evolving landscape of Australia’s merger authorisation regime.
Public benefits win the day (again).
The decision was only the second merger authorisation since the authorisation regime was amended in 2017 to be authorised based on net public benefits (the first was the Armaguard – Prosegur authorisation in June this year). The net public benefits test is only available under the merger authorisation process (not the informal clearance process).
The ACCC was satisfied that the Proposed Acquisition will be likely to result in benefits in accelerated and additional renewable generation and storage and a decrease in Origin’s emission intensity, and that together, the benefits will result in a reduction of greenhouse gas emissions in Australia.
The decision contrasts to the ACCC’s authorisation decision in August that it was not satisfied of the claimed public benefits in ANZ’s application for merger authorisation with Suncorp Bank. A high-level takeout is that the ACCC may be more likely to accept public benefits claims where they accrue to Australians broadly and align with public policy objectives.
Vertical integration concerns not wholly solved by behavioural undertakings
The ACCC’s primary competition concern was the vertical integration between electricity generation and transmission assets in Victoria. Brookfield’s 45.4% interest in AusNet, which owns Victoria’s electricity transmission network, will be combined with Origin’s generation assets, leading the ACCC to consider that Brookfield (via AusNet) could discriminate in favour of Origin in connecting new generators to the Victorian transmission network, or in the way that it operates the transmission network.
Both Brookfield and AusNet offered court-enforceable undertakings to the ACCC largely targeted toward this concern through commitments including separation and ring-fencing of employees and information between Brookfield, AusNet, and Origin.
The ACCC has historically been reluctant to accept ‘behavioural remedies’ for ‘structural concerns’. While the ACCC accepted the Brookfield and AusNet undertakings (which are additional to the existing regulatory regime applying to AusNet’s operations), that reluctance remains: the undertakings did not solve the ACCC’s competition concerns but instead were found to “reduce the likelihood” of public detriments occurring through impacts on competition.
Further clarification on the respective advantages of the different merger clearance avenues
Recent ACCC decisions not to authorise the Telstra and TPG proposed deal, and ANZ and Suncorp Bank, raised questions about whether (and when) the formal merger authorisation process offers advantages over the more commonly used informal clearance regime.
The decision adds a new layer of considerations for merger parties thinking about the best avenue for ACCC merger clearance:
- ACCC willing to authorise acquisition on the basis of demonstrated public benefits accruing to the public. This is the second authorisation this year in which the ACCC was not satisfied that there was not a substantial lessening of competition but still provided authorisation because any lessening of competition was outweighed by public benefits. It therefore provides helpful guidance for companies on the types of public benefits that may be accepted by the ACCC, which is an important consideration in determining which merger clearance pathway to pursue.
- Behavioural undertakings considered in the net public benefits balancing exercise In the informal clearance regime, the ACCC will not generally accept undertakings unless they resolve the ACCC’s competition concerns (i.e., they get the ACCC ‘over the line’). In this decision, it appears that the undertakings did not resolve the competition concerns completely, but helped to ameliorate competitive detriments, which may have helped tip the balance in favour of overall public benefits vs detriments.
- Some more certainty on timing. The ACCC’s decision arrived just over 4 months after the parties lodged their application for merger authorisation. While there is a statutory timeframe of 90 days, this can be (and almost always is) extended by agreement. Other recent merger authorisations have extended beyond 8 months, calling into question whether certainty of timing is a true advantage of the formal system. Had this matter been investigated under the informal clearance regime, it is unclear whether the ACCC would have made a decision within 4 months.
- Emphasis on ‘not satisfied’ threshold. The ACCC does not appear to have made a positive conclusion that the acquisition would be likely to substantially lessen competition, even without the undertakings. However, as with the ANZ and Suncorp Bank authorisation decision, the ACCC emphasised the statutory language which provides that the ACCC must be positively satisfied that the acquisition would not be likely to have that effect. This differs from the statutory language in the provision that applies in the informal merger clearance process.
On 27 March 2023, a consortium led by Brookfield LP (Eos Aggregator (Bermuda) LP) (Brookfield) and MidOcean Reef Bidco Pty Ltd (MidOcean) entered into a binding Scheme Implementation Deed with Origin to acquire the issued shares in Origin for $18.7b.
The Proposed Acquisition comprises two interdependent acquisitions:
- Scheme Acquisition: It is proposed that MidOcean will acquire 100% of the ordinary shares in Origin pursuant to a scheme of arrangement under the Corporations Act 2001 (Cth).
- On-Sale Acquisition: Conditional upon the scheme, MidOcean will procure that Origin and its interests are divided into two separate businesses, being (i) the Origin Energy Markets business and (ii) the Origin Integrated Gas Business. The subsidiaries and assets comprising the Origin Energy Markets business will be sold to Brookfield, while MidOcean will retain 100% of the shares in Origin which, following completion of the sale of the Origin Energy Markets business, will consist of only the Origin Integrated Gas business.
Brookfield and MidOcean submitted an application for formal merger authorisation to the ACCC on 5 June 2023. Under sections 88 and 90 of the Competition and Consumer Act 2010 (Cth), the ACCC can authorise an acquisition if it is satisfied that the acquisition would not be likely to have the effect of substantially lessening competition or would result in a net public benefit.
The merger authorisation process has a statutory timeframe of 90 days, but can be extended. The Applicants agreed to two separate extension requests on 3 August 2023 and 14 September 2023, and the total time for the review through to the decision was just over 4 months.
The length of the ACCC’s review in this instance was significantly shorter than the review period for the ACCC’s merger authorisation process for ANZ’s proposed acquisition of Suncorp Bank (over 8 months), Telstra and TPG’s proposed spectrum sharing (almost 7 months) and the proposed merger between Armaguard and Prosegur (over 8 months).
Similarly to the applicants in those matters, a significant volume of submission material and evidence, including witness statements, was provided at the start of and during the authorisation process.
Overview of key competition and public benefits issues
With the ACCC’s full reasons not yet publicly available, this alert is limited to the ACCC’s executive summary released on 10 October 2023 and the position put by the Applicants in the authorisation application.
The ACCC was not positively satisfied that the Proposed Acquisition would not have the effect or likely effect of substantially lessening competition due to the competitive effects of vertical integration between electricity transmission and generation business and vertical integration between electricity distribution and smart meters.
However, the ACCC considered that the Proposed Acquisition would likely result in an acceleration of renewable energy generation and storage build out in Australia, which would provide a net public benefit.
Vertical competitive effects between electricity transmission and generation
The ACCC highlighted concerns that the vertical integration of the transmission network in Victoria (AusNet) with Origin’s electricity generation business could lead to anticompetitive behaviour by AusNet in favour of Origin.
The ACCC acknowledged the factors that may limit the anticompetitive impact of this vertical integration, including the AEMO in the connections process, the significant level of regulation in the sector, the role of minority investors in the relevant entities, and the degree of separation between the Brookfield funds making the investments and the undertakings provided by the Applicants.
However, the ACCC concluded that even “subtle” discrimination, such as applying connection criteria more stringently to a competing connection applicant, has the potential to have a significant anticompetitive effect. While the mitigating factors described above would assist in minimising the likelihood of anticompetitive impacts, the ACCC considered that they could not “completely remove the potential for foreclosure.”
Ultimately, the ACCC was not satisfied that the Proposed Acquisition would not have the effect or likely effect of substantially lessening competition in the markets for the:
- wholesale physical supply of electricity in the Victorian region of the NEM or the NEM more broadly
- supply of hedging instruments to electricity retailers operating in the Victorian region of the NEM
- supply of new renewable and firming generation and storage services in response to government policy incentives and private demand in Victoria
Vertical competitive effects between electricity distribution and retail and between electricity retail and smart meter services
The ACCC was concerned about vertical integration between AusNet’s electricity distribution business and Origin, which is likely to impact competition in retailing, and vertical integration between Intellihub and Origin, which is likely to impact competition in smart-meter and behind the meter services.
Ultimately, however, it considered that the competition impacts are less significant than those arising through vertical integration between electricity transmission and generation.
In relation to these potential concerns, the Applicants had submitted that:
- AusNet is heavily regulated and there is a high degree of transparency over the relation aspects of its distribution network which prevent discrimination against retailers
- AusNet and Origin will remain separate companies and, in any event, will implement appropriate distribution ring-fencing guidelines to limit anti-competitive effects
- Intellihub faces significant competition from other smart meter providers and does not have market power, so vertical competition issues should not arise
- the demand for metering services is expanding, creating opportunity for new entrants, and that purchasers of mass market smart readers are electricity retailers who possess significant buying power and conduct structured, competitive tenders to appoint a company (or companies) for the supply and installation of smart meters.
Net public benefits: the Proposed Acquisition would result in public benefits of a quicker, cheaper and more efficient investment in renewable generation than otherwise would occur
The ACCC’s decision was based on its satisfaction that the Proposed Acquisition would likely result in:
- an acceleration of renewable generation and storage development for Origin Energy Markets
- additional renewable generation and storage development for Origin Energy Markets; and
- a decrease in Origin Energy Markets’ emissions intensity.
The ACCC concluded these public benefits would result in an acceleration of the reduction of greenhouse gas emissions in Australia relative to the future without the Proposed Acquisition.
The relevance of this for the broader Australian economy, society, and environment was highlighted by the ACCC, stating that a reduction in greenhouse gas emissions is critical to reducing the severity of the impacts of climate change on Australia, and that the Proposed Acquisition will help Australia to mitigate its contribution to climate change.
The executive summary of the ACCC’s decisions makes clear that the ACCC rigorously investigated and tested Brookfield’s claims in relation to the likelihood of these benefits resulting, including assessment of Brookfield’s build-out of renewable generation and storage in Australia and the impact of the Proposed Acquisition on the speed of the build-out.
The ACCC’s decision in respect of net public benefits means the ACCC has now reached a positive conclusion in two merger authorisation matters (the other being the Armaguard – Prosegur authorisation in June this year) in circumstances where it was not have authorised on the ‘competition limb’.
Those were weighed against the public detriments, which appear to be limited to impacts on competition. That decision was “finely balanced”, and it appears that the ACCC’s acceptance of undertakings from Brookfield, AusNet, and MidOcean (which ameliorated, but did not completely resolve, the competition impacts) helped to bring the ACCC to a position in which it was satisfied that the competitive impacts were outweighed by the public benefits.
By Caroline Coops, Joe McQuillen and Joe Saunders