Australia: AGL fails to acquire MacGen: Where to now for the sale of electricity generation assets in NSW and Queensland?

On 4 March 2014, the ACCC published its decision to oppose AGL Energy Limited's (AGL) proposed acquisition of Macquarie Generation, including two power stations which account for 27% of NSW generation capacity, as it considered it would be likely to result in a substantial lessening of competition in the market for the retail supply of electricity in NSW.

This decision is likely to have implications for the disposal of electricity assets in NSW and other National Energy Market (NEM) states going forward, particularly in circumstances where one of the "big three", AGL, Origin or Energy Australia is a proposed purchaser.


Macquarie Generation is a State-owned corporation and one of Australia's largest energy generators. Macquarie Generation is being offered for sale as part of the broader privatisation of NSW energy assets being undertaken by the NSW government. On 2 December 2013, the ACCC commenced market inquiries in relation to the proposed acquisition and it released a Statement of Issues on 6 February 2014 (SOI).1

In the SOI, the ACCC expressed concern that the proposed acquisition may result in a significant reduction of liquidity in the supply of hedge contracts due to the reduced volume of hedge contract trading, as AGL would be likely instead to support its retail load with a "natural hedge" in the form of its wholly owned generation capacity. The ACCC considered that this may potentially increase the risk of spot price exposure for independent retailers and, in turn, discourage participation in those markets and/or increase risk premiums in forward hedge contracts.

The ACCC was also concerned that the proposed acquisition may result in the increased ability and incentive of AGL (and potentially other vertically integrated generators) to withhold competitively priced and customised hedge contracts from independent retailers.

AGL then offered a section 87B undertaking in relation to the acquisition on 19 February 2014 which was intended to address some of the competition concerns the ACCC had raised in the SOI.

The proposed undertaking stated that AGL would:

  • provide liquidity to the NSW hedge contract markets, by offering to sell a certain quantity of electricity futures and options either directly to retailers, via an electricity broking service, or by placing orders on an electricity futures exchange; and
  • appoint an ACCC-approved independent auditor to conduct compliance auditing and provide reports directly to the ACCC in relation to AGL's compliance with the undertaking.

However, the ACCC has stated that this was insufficient to address its concerns because:

  • the largest source of generation capacity in NSW would be owned by AGL, one of the three largest electricity retailers in NSW. This was likely to raise barriers to entry and expansion for other electricity retailers in NSW and therefore reduce competition; and
  • the acquisition would likely result in a significant reduction in hedge market liquidity and the supply of competitively priced and appropriately customised hedge contracts to second tier retailers in NSW. The ACCC was concerned that the remaining independent generators in NSW would not be able to provide sufficient hedge cover to adequately service the requirements of second-tier retailers that sought to enter into the NSW market or grow their existing retail position.

Finally, the ACCC was concerned about the likely impact of the proposed acquisition on one or more of the wholesale electricity markets in NSW, Victoria and South Australia, as AGL would become the largest generator in each of these states.

The ACCC concluded that the draft undertaking was not capable of addressing the ACCC's competition concerns in relation to the NSW retail electricity market, noting that most of the market feedback received in relation to the undertaking raised concerns about its ability to address the likely competitive harm, as well as circumvention risks.


The ACCC has indicated it will publish a public competition assessment setting out its detailed reasons in due course. However, AGL's Managing Director and Chief Executive Officer, Bill Fraser, has been outspoken in his rejection of the factual and legal basis for the ACCC's decision and there has been a certain amount of speculation that AGL may seek to mount a "challenge".

There is no straight-forward route to challenging the ACCC's decision not to grant an informal merger clearance. This is largely because the informal merger clearance process has no legislative underpinning and is a purely administrative process developed by the ACCC to provide an avenue for merger parties to obtain the ACCC's view prior to completion of a merger. It would be open to AGL to apply for a formal clearance under s 95AD of the Competition and Consumer Act 2010 (CCA) and, if the ACCC declined to provide a formal clearance, seek review by the Australian Competition Tribunal. However, this process may take in excess of six months and it seems unlikely that the NSW government would continue to entertain AGL's proposal for that length of time. It is more likely that AGL would take the course it previously adopted when the ACCC refused to provide an informal clearance in relation to AGL's acquisition of the Loy Yang generation assets in Victoria. There, AGL applied to the Federal Court for, and was granted, a declaration that the acquisition would not constitute a breach of s 50 of the CCA (contrary to the view previously expressed by the ACCC). Whether the outcome would be the same this time around is open to debate.


The ACCC's decision has left the NSW government's privatisation project at something of an impasse and raises questions for Queensland in relation to its preliminary steps towards privatising its state-owned generators.

The NSW Treasurer has ruled out negotiating with the underbidders in the Macquarie Generation tender, ERM Power and Marubeni Corporation, because their bids were below the retention value of the assets. It is not clear how the retention value was arrived at, nor is the figure ever likely to be made public. What is clear is that the ACCC's concerns regarding further vertical integration by the "big three" may ultimately have a significant impact upon the value of generation assets in NSW and elsewhere in the NEM. It is perhaps not surprising that the value of the Macquarie Generation assets is greater to a retailer seeking a natural hedge against spot price volatility (the very issue that concerned the ACCC) than to other potential investors. Going forward, unless AGL is successful in any challenge to the ACCC's decision, it seems likely that the NSW government will either need to re-evaluate its retention value for the Macquarie Generation assets or hold onto them. Alternatively, the NSW government and the "big three" may need to revisit the possibility of selling the Macquarie Generation assets separately (the initial request for expressions of interest allowed investors to bid for one or both of Bayswater and Liddel).2

The Macquarie Generation assets are probably the most significant and strategic generation assets in NSW and it may be that that the ACCC's concerns about liquidity in the hedge market would not be as acute in the context of a smaller acquisition by AGL or another of the "big three", for example the assets owned by Delta Electricity (12% of NSW generation capacity). The ACCC, in announcing its decision, seemed to hold an underlying concern that the "big three" may in some way coordinate to "soak up" the liquidity in the hedge market if AGL were permitted to acquire Macquarie Generation.3 This would surely present less of a concern in the context of the sale of the Delta Electricity assets if, after the transaction, Macquarie Generation remained an independent generator (either because the NSW government has been unable to sell it or it has sold to a non-vertically integrated party). However, until the ACCC's detailed reasons are published, it will remain unclear whether any of the parties who have submitted expressions of interest in relation to the Delta Electricity assets (Origin Energy, EnergyAustralia, Snowy Hydro and AGL) would have any prospect of obtaining merger clearance.

Although the Queensland government has indicated that it will not commence privatisation of its generation assets without first taking the policy to an election, it has taken the preliminary step of commissioning a scoping study for the sale of CS Energy and Stanwell Corporation. The generation market in Queensland is highly concentrated with CS Energy and Stanwell Corporation controlling around 65% of generation capacity.4 On the retail side Origin (38% of the market), AGL (19% of the market), EnergyAustralia (5% of the market) and Ergon (33% of the market) are the major players. While on the bare numbers, the big three hold a substantially smaller proportion of the retail market in Queensland than in NSW, the retail market in metropolitan areas may actually be more concentrated than it first appears because, since deregulation of the retail sector in 2007, Ergon has supplied its services in regional Queensland at regulated prices and is precluded from competing for new customers.5

There has been some suggestion that the sale of Queensland's electricity assets may present fewer difficulties from a competition perspective because of the smaller size of the individual baseload stations and the ease with which the stations could be separately sold.6 However, this may not necessarily address the ACCC's concerns if the "big three" win the majority of the tenders.


The ACCC's decision makes it clear that, in its view, control by the "big three" of 70-80% of the generation capacity in NSW in conjunction with 85% of the retail market would constitute a substantial lessening of competition when compared with the status quo.7 What is less clear is whether some smaller increase in the generation capacity of the "big three" would, in the ACCC's view, leave sufficient liquidity in the in the hedge market to protect the competition offered by second-tier retailers. Precisely where the ACCC draws the line on this question will have far-reaching implications for the privatisation projects in NSW and Queensland. For this reason, it is hoped that the ACCC will give some guidance on this point in its public competition assessment when it is released.


1The SOI can be found here.

2Australian Energy Regulator, State of the Energy Market 2013, p29.

3ACCC, Media Release, ACCC opposes AGL's proposed acquisition of Macquarie Generation, para 3.

4Australian Energy Regulator, State of the Energy Market 2013, p29.

5Australian Energy Regulator, State of the Energy Market 2013, p29

6Australian Financial Review, "MacGen veto puts Queensland power sell-off under a cloud", 5 March 2014.

7ACCC, Media Release, ACCC opposes AGL's proposed acquisition of Macquarie Generation, paras 3 and 6.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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