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Allens Arthur Robinson

Focus: Competition Law – December 2003

Federal Court declaration in AGL proceedings against ACCC

In brief: The Federal Court's declaration that AGL's acquisition of a 35 per cent stake in the Victorian Loy Yang A power station is unlikely to substantially lessen competition has immediate implications for the electricity industry and broader relevance for the Australian business community. Partner David Brewster (view CV) and Senior Associate Beth Griggs report.

Background

The Australian Gas Light Company (AGL) is a member of the GEAC consortium that proposes to buy the Loy Yang business (Loy Yang). The consortium members and the Australian Competition and Consumer Commission (ACCC) had engaged in extensive negotiations in relation to the proposed acquisition. The ACCC rejected the undertakings offered by the consortium, publicly stating that it believed that the acquisition would lead to a less competitive and less efficient market structure, resulting in higher prices and increased barriers to entry. AGL instituted proceedings seeking a declaration that the proposed acquisition would not contravene section 50 of the Trade Practices Act.

The arguments and the decision

At trial, the ACCC asserted that the acquisition was likely to substantially lessen competition on the following grounds:

  • The acquisition would provide AGL with a 'natural hedge', such that it would reduce the level of hedging contracts acquired from baseload generators in Victoria. The ACCC alleged that Loy Yang has market power, and that because of the likely reduction in the level of hedging cover acquired by AGL, Loy Yang would have greater incentive to use this market power to increase prices in the market. The ACCC relied on a complex econometric model and economic evidence to support this argument, but did not present any industry evidence to support this theory.
    Justice French found that the market was considerably broader (both in geographic and product terms) than alleged by the ACCC. His Honour did not accept that Loy Yang had market power, nor that AGL would obtain a 'natural hedge' as suggested by the ACCC. His Honour considered the ACCC's economic evidence in detail, comparing it with AGL's economic evidence and, in particular, industry evidence. Justice French concluded that the scenario forwarded by the ACCC was not likely.
  • The acquisition was equivalent to vertical integration, because AGL and Loy Yang would contract more with each other less with other market participants. The ACCC said this would lead to other industry participants vertically integrating (the so-called 'bandwagon' effect), which would in turn result in a decrease in the availability of hedge contracts and increase barriers to entry at both the generation and retail levels of the market.
    Justice French indicated that he believed the transaction had the commercial character of an investment, rather than a vertical integration. In any event, even if it was a form of vertical integration, he found that retailers exhibited a natural tendency toward vertical integration. His Honour concluded that the practical considerations that create commercial pressures to vertically integrate would not be affected by the acquisition, and would continue, irrespective of whether this acquisition took place. Therefore, the acquisition could not have the likely effect alleged by the ACCC.
  • Notwithstanding that AGL's 35 per cent interest in the GEAC consortium would only be a minority interest, the acquisition would give AGL a significant degree of control over Loy Yang's dispatch and contracting functions. This degree of control would mean that the anti-competitive effects outlined above (the natural hedge and vertical integration) would be exacerbated. Further, even if the court did not accept that AGL would effectively control Loy Yang, the anti-competitive effects would be exacerbated by the natural tendency of Loy Yang management to consider the interests of AGL.
    Justice French held that the presence of other shareholders on the GEAC board meant it was unlikely that the AGL directors on the board would act in the interests of AGL, and not in the interests of Loy Yang. His Honour also found that AGL's shareholding would not allow it to control or influence detailed marketing decisions of Loy Yang, and it was unlikely that Loy Yang would become 'hostage' to AGL's interests, as suggested by the ACCC. Further, there was no reason to believe that that management of Loy Yang would naturally accommodate AGL's perceived interests.

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Lessons from the case

The process followed by AGL in obtaining Federal Court 'approval' of the transaction is significant. The ACCC had made public statements opposing the acquisition, but did not propose to seek an injunction if the deal proceeded. Rather, it threatened to seek divestiture if the transaction was completed. The ACCC contended that the court did not have jurisdiction to make a declaration in these circumstances, as there was no real matter at issue, only a hypothetical transaction.

Justice French said that each case had to be decided on its own facts, but a declaration can be made in circumstances where the proposed acquirer has approached the ACCC in respect of the proposed transaction and the ACCC has stated its opposition and its intention to act against it. His Honour also indicated that a declaration might be made where a third party indicated opposition to a proposed acquisition.

Also of broader relevance to the business community is the way in which Justice French considered the relevance of vertical integration, the significance of partial shareholdings and the appropriate approach to determining market definition and market power. Further, his Honour indicated that he did not consider the complex economic evidence to be of practical use in the absence of supporting 'real life' industry evidence.

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