Public benefits
Australia's competition regulator approves a takeover of the largest energy retailer, signalling what it deems most important when it comes to authorising future mergers and acquisitions.
After a four month review process Australia’s Competition and Consumer Commission (ACCC) announced that it would not block a binding agreement by private equity giants Brookfield Renewable Partners LP (NYSE:BEP) and EIG Global Energy Partners to take over Origin Energy (ASX:ORG) for AUD 18.7 billion.
The ACCC is an entity under Australia’s Department of Treasury, with ultimate ministerial responsibility for the Treasury lying with the Treasurer of the federally elected government. The ACCC’s website defines their role:
“We focus on taking action that most promotes the proper functioning of Australian markets, protects competition, improves consumer welfare and stops conduct that is anti-competitive or harmful to consumers.”
Companies apply to the ACCC for authorisation if they intend to perform an arrangement that they believe may breach competition rules in the Competition and Consumer Act. An authorisation being granted gives the companies protection from legal action as a result of their activity.
In order for the ACCC to grant an authorisation for a merger or acquisition, it must be satisfied, in all the circumstances, that the proposed conduct:
- would not have the effect, or be likely to have the effect, of substantially lessening competition (the Competition Test), or
- would result, or be likely to result, in a benefit to the public that would outweigh the detriment to the public that would result, or be likely to result, from the Proposed Acquisition (the Public Benefit Test).
The ACCC rarely forms the view that public benefits of an arrangement outweigh the effects of substantially reduced competition, although it did so recently for a proposed merger of two of Australia’s largest cash-in-transit companies.
What makes this approval a landmark decision is not just that the ACCC provided more weight to public benefits over the significant effects of reduced competition but the claimed type of public benefits put forward by the applicants seeking the authorisation.
As competition law firm Gilbert and Tobin described the decision:
“It is the first time that environmental or carbon reduction benefits have been determinative in a merger decision in Australia, and one of the first times this has occurred globally.”
At the time of publishing Brookfield’s takeover has finally been rejected by Origin Energy shareholders. Nevertheless, the judgment has important consequences for the future of ACCC approvals. Today, what exactly is viewed as a public benefit for the majority of Australians? What do such trends mean for the Australian consumer?
Let’s dive into the 314 page Reasons for Determination and see what this portends for the future of mergers and acquisitions approvals and ultimately Australian consumers.
Origin Energy is Australia’s largest energy retailer and is part of the Tier 1 group of retailers making up 64% of all market share in the Australian retailer market. It is also an integrated electricity generator and a natural gas retailer. Origin Energy owns Australia’s largest (coal) power station Eraring, which has a combined 2880 MW capacity and is currently scheduled to close by 2025. Origin also has a 27.5% stake in Australia Pacific LNG (APLNG), the largest natural gas producer in eastern Australia.
Brookfield holds a 45.4% equity stake in AusNet. AusNet owns and operates AUD 11 billion of electricity and gas network assets in the state of Victoria including its monopoly electricity transmission network, one of the five Victorian monopoly electricity distribution networks, fifty percent of the electricity distribution network in the Australian Capital Territory and one of the three monopoly gas distribution networks in Victoria. As part of the original proposal EIG was to acquire all Origin Energy shares, then divide Origin into an Origin Integrated Gas business and Origin Energy Markets business. EIG would retain the Origin Integrated Gas business via a special investment vehicle (MidOcean) while Brookfield would acquire the Origin Energy Markets business.
As part of the proposed deal Brookfield provided an undertaking (but not binding commitment) that they would commit between AUD 20-30 billion towards 13.7GW of renewable generation (wind and solar) and storage over ten years, with at least 80-90% of Origin’s customer demand serviced from it by 2033.
In case there was any ambiguity the effect of the takeover would have on consumer prices, the ACCC rejected Brookfield/EIG’s argument that increasing the sources of renewable generation in the grid will place downward pressure on wholesale prices over time and consequently, energy bills. In fact, it concluded that the claimed accompanying economic benefits were unlikely (emphasis added throughout):
“The ACCC does not consider that the other public benefits that the Applicants claimed would result, or would be likely to result from the Proposed Acquisition, including: decreased energy prices or volatility in prices; the earlier and cheaper development and delivery of new technologies in Australia; the development of the Australian renewables industry in the form of local supply chains and on-shore manufacturing; increased direct and indirect employment …”
This was supported by submission from an Origin Energy competitor:
“Renewables alone would not necessarily reduce prices as there are periods where those technologies are not generating sufficient electricity to meet demand so coal and gas assets are required to make up the energy required …”
The promise of additional build-out of renewables by Brookfield, with its financial backing, global renewables expertise and procurement scale advantage, appears to be the primary reason for the approval of the acquisition by the ACCC. It concluded that this would be likely to result in an acceleration of renewable generation and storage build-out in Australia, with projects commencing that would otherwise not be brought into existence.
But many submissions to the ACCC were unequivocal in pointing to network congestion and connection bottlenecks as the major barriers to building generation capacity, rather than access to financing.
ACEN Australia, a developer, owner and operator of renewable projects:
“ACEN notes the key challenges in the overall transition of the NEM [National Electricity Market] to renewable generation is access to transmission.”
EnergyAustralia, an electricity generator, electricity and gas retailer:
“In the short term, connections are a limiting factor to net zero. EA [EnergyAustralia] is seeing delays across the board in getting new connection and interconnectors to bring the energy into the market.”
Alinta Energy, an electricity generator and gas retailer:
“The main delay in the industry, which will continue in the short to medium term, is the speed of connections. This is something the industry is really struggling with.”
The Grattan Institute, an Australian public policy think tank:
“In relation to Brookfield’s access to capital, providing a company (like Origin) with a greater capacity to spend will not help the transition because the problem is not money. There is enough capacity to build the renewable generation required between Origin, Alinta, Snowy Hydro and Energy Australia.”
…
“..the biggest impediment to transitioning the NEM [National Electricity Market] to renewable energy sources is building out the transmission network and connection arrangements.”
Matt Harris, Director of Frontier Economics:
“The biggest barriers to new renewable investment, as identified by renewable investors, are grid connection bottlenecks and network capacity, …”
Submissions were also skeptical of the idea that rejecting Brookfield’s acquisition would in turn result in 13.7GW of renewable generation no longer be built.
Alinta Energy:
“14GW is significant, but the market is already competitive, so if Brookfield doesn’t build it, someone else will.”
“…Brookfield can easily invest in renewables without owning Origin. Additionally, we doubt the renewable transition can accelerate significantly given constraints from the slow pace of transmission network upgrades and shortages of labor and components.”
A new Origin Energy Markets entity with the largest share of the retail market, substantial share of distribution networks and outright ownership of a transmission network is obviously not a recipe for competitive electricity markets.
The new Origin Energy Markets entity could have delayed new connections for competing generators while streamlining its own and scheduled transmission outages to benefit its generation business.
Paul Hylop of ACIL Allen described just one of many ‘benefits’:
“[In the state of Victoria] while AEMO [Australian Energy Market Operator] is the responsible TNSP [Transmission Network Service Provider], AusNet owns and maintains the transmission system. Therefore AusNet would be expected to develop maintenance schedules including taking equipment out of service to facilitate maintenance. AEMO is the authority to approve outages as the TNSP but would be expected to approve AusNet requests unless an outage would put power system security or reliability of supply at risk.
However, AusNet, as the owner of the assets, may be able to influence AEMO’s decision-making, especially concerning maintenance advice that may affect the timing and nature of transmission network outages”
All kinds of behaviour is possible if one entity owns multiple parts of the electricity network. From the Grattan Institute oral submission:
“The boundaries between regulated and unregulated businesses are becoming less clear. One example is battery storage which can be used by both a distribution network and as a generation asset. It would be possible for a business that owns a distribution network, generation and retail businesses to use this knowledge against one of their competitors, for example because network owners best understand where to place batteries.”
A largely unreported submission by Syncline Energy, a renewable energy project development company, called into question the entire focus of ACCC inquiries given the addition of renewables has changed the landscape of the Australian energy market (emphasis added):
Brookfield’s market definition for the electricity sector is missing three critical emerging services:
- System Strength Services1
- Provision of firming services to independent renewable generators and retailers
- Network Augmentation“Over the next decades, it is likely that these services will be more valuable than either wholesale generation or retail margins. From an engineering perspective, these services sit between generation and transmission and can be provided with a range of technologies.
A “grid forming BESS” [Battery Energy Storage System] can support or constrain transmission capacity while also selling energy arbitrage. Or, a synchronous condenser (“synchron”) might be added as ‘transmission’ to an AusNet substation which competes with a grid forming BESS for inertia. [The combined ownership of BESS by Origin and AusNet] … is not central to the analysis of the Proposed Acquisition by others; which is anchored in legacy asset definitions: generation, transmission and wholesale markets.
…
“Vertical Integration of Origin and AusNet would deliver a unique monopoly supplier of these system strength, firming and grid augmentation services. … The resultant monopoly rents would burden customers via less competitive markets and auction processes as Australia’s energy transition accelerates.”
…
“We do not believe that [the provided ring-fencing proposal], or any undertakings will be sufficient to avoid a substantial lessening of competition for electricity consumers in Victoria if the Proposed Acquisition were to proceed.”
…
“Brookfield’s market power from the Proposed Acquisition can be used by Brookfield/AusNet to lessen competition and extract higher prices from consumers.”
…
“Brookfield has framed the debate as a trade-off between competition policy and the energy transition. This is false. The energy transition will only be successful if innovation and new entrants can thrive. And monopoly power is not used to increase prices for the ‘new’ system strength, firming and grid augmentation services. The public detriment outweighs [any] public benefit from the Proposed Acquisition.”
Brookfield’s management of other monopoly assets in Australia has historically not been overwhelming positive for affected parties.
From the Australian Financial Review:
Brookfield was accused by the nation’s biggest grain exporter, CBH Group, as being “ruthlessly driven” in the latter’s submission to the ACCC over Brookfield’s proposed $8.9 billion takeover of rail and ports company Asciano in 2015.
That deal involved a similar vertical integration in rail transportation to the Origin deal for energy, given it combined Brookfield’s rail network and Asciano’s Pacific National haulage operations.
CBH and Brookfield subsidiary Arc Infrastructure subsequently began a stand-off over the use of Western Australia’s rail freight network, only coming to an agreement nearly 10 years later.
The ACCC did acknowledge that the Origin takeover would likely result in “substantially lessening competition, primarily due to the competitive effects of vertical integration between electricity transmission and generation businesses, and other forms of vertical integration involving electricity distribution or smart meters”
The Public detriment section of the Executive Summary provided even stronger language (emphasis added):
“The ACCC considers that the vertical integration … across regulated monopoly assets and contestable markets, would give rise to material competition harms, at a time when there is increased change in the nature of energy markets, and increasing pressure for the connection of new generation to the transmission network. This vertical integration therefore raises the possibility for long-term competitive harm.”
Indeed, Alinta Energy questioned whether the promise of more rapid rollout of renewable projects would come about simply due to Brookfield’s new monopoly position:
“Brookfield has claimed that it has an advantage that will make it more viable to bring renewable generation and storage projects forward. Alinta would question where this advantage comes from. If it is just access to financing, this could come from anywhere … Alternatively, is the benefit due to the inherent anti-competitive benefits of vertical integration of monopoly assets?”
The ACCC’s line of reasoning leading to its decision to approve the takeover (with caveats that a form ring fencing be implemented) only becomes evident once disparate statements are viewed collectively. To the ACCC, greenhouse gas emissions have caused weather extremes at an increased frequency. According to their view, reducing these emissions rapidly is key to reducing the frequency of these events (emphasis added throughout):
“Reducing greenhouse gas emissions is critical to achieving the less extreme warming contemplated under projected climate change scenarios and to reducing the severity of the impacts of climate change on Australia and other countries.”
“The ACCC considers these public benefits to be highly valuable and important to Australians in the context of the need to reduce greenhouse gas emissions to assist in global efforts to avoid the most severe impacts of climate change. Accordingly, the ACCC has given significant weight to these public benefits.”
“Reducing emissions in high emitting sectors, with speed, is critical in addressing the impact of climate change, which has led to increases in the severity and frequency of weather and climate extremes.”
It follows that the ACCC believes high emission generators switching to renewables will have high impact on emissions. In their view, the majority of Australians have a favorable view of the shift to renewable energy (emphasis added):
“The ACCC considers that the Proposed Acquisition will help Australia to mitigate its contribution to climate change and assist it in meeting or exceeding national emissions reduction targets, which will contribute to supporting a global transition to lower emissions.”
“The ACCC considers that these constitute material public benefits, in the sense that they are important and of value, both to Origin’s customers and to Australians more broadly.”
“Transitioning to renewable energy will assist Australia reduce its greenhouse gas emissions and contribute to meeting its domestic targets and international obligations. … The ACCC also understands that there is a high level of support among the Australian public in relation to the transition to renewable energy.”
The term high level of support references a short-run, ‘Mood of the Nation’ survey by SEC Newgate in June. According to the survey “61% of Australians continue to support the energy transition to renewables, although that has slipped from a high of 70% recorded last August.”
It should be noted that the October edition of the same survey recorded that “57% feel positive about the transition to renewables” with this value slipping further.
The above statements shown in this context explain why the ACCC views an acquisition which accelerates the shift to renewables as a significant public benefit, outweighing considerable detriments:
“ … the ACCC has taken into account that without the Proposed Acquisition, both Brookfield and Origin would likely still invest in renewable generation, and that it is only the ‘extra’ investment, arising as a result of the Proposed Acquisition, that the ACCC has placed weight on as a public benefit. …”
“… the ACCC considers that if Origin transitions away from fossil fuels to renewables at a faster pace and/or at a larger scale, that would be of value to the community.”
“Australia may ultimately reach a similar level of renewable generation and storage as is reached with the Proposed Acquisition. However, an acceleration of the build-out leading to earlier investment, is still a public benefit.”
With the ACCC now willing to approve deals that have the potential for long-term competitive harm and conduct that is anti-competitive or harmful to consumers now clearly deemed less important than corporate arrangements which promise lower greenhouse gas emissions, what signal does this send to corporate Australia?
Commenting on the Brookfield-Origin decision Clayton Utz competition law partner Kirsten Webb stated that the ACCC decision “underscores the importance the ACCC places on rapidly advancing renewable energy generation and reducing greenhouse gas emissions.” She predicted there would be an uptick in sustainability or climate-based public benefit submissions in merger authorisation applications following the Origin call.
It is not unfeasible that we will see climate-based public benefit submissions from a range of industries, not just energy or transport sectors. Even monopolies such as the Australian supermarket duopoly or the Big Four banks may find the ACCC is now more receptive to anti-competitive actions - so long as they are justified with a sufficient decrease in predicted carbon emissions.
Lest one believe that such thinking is confined to Australia’s competition regulator, actions by both federal and state ministers continue to demonstrate their view that competitive markets and lower prices for consumers are of lesser consequence than a green-tinted outcome.
Australia’s Federal Transport minister recently provided this explanation as part of an assortment of reasons for rejecting a Qatar Airways request to double the volume of international flights allowed on Australia’s eastern seaboard (emphasis added throughout):
“I want more capacity for people to be able to enjoy travel, but equally I want to be able to decarbonise the transport sector, aviation has a role to play in that as well, so there’s a mix of things I look at,”
Notice the absence of any mention of competition and the minimisation of the importance of affordable international travel. Sadly, it seems like consumers will ultimately be the loser.
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The Australian Energy Market Operator (AEMO) defines System Strength as “the ability of the power system to maintain and control the voltage waveform at any given location in the power system, both during steady state operation and following a disturbance.” It is related to inertia and can be provided by synchronous generators or compensators.